While the market for initial public offerings (IPOs) is essentially on hold, many of the companies that went private during the booming buyout period that began a few years ago will begin preparing to get themselves in shape for a public offering at sometime in the future. Here’s a look at what they will need to consider. PEQ sat down with some private equity experts to talk about what is needed in the run-up to taking a private firm public, including Charles Weinstein, managing partner of Eisner LLP; Robert McCooey, senior vice president, Capital Markets Group, NASDAQ; and Drew Lipscher, a partner at Greycroft Partners.
PEQ: When you were working with companies that are planning on going public, explain the process. When do you start to approach them in terms of being a listee? What services are most important to them? And are the CEOs, in your opinion, generally ready to lead public companies, or do some of them need to be replaced by a more seasoned executive?
McCooey: It certainly goes the whole spectrum. We approach companies early on, and there are a number of things we do. For example, in my capital markets group we are out talking to the different private equity and venture capital firms and we’ll talk to them about their portfolio and try to find out about where they are in the process, which companies are five years out, three years out, 18 months out, and get their blessing to begin to work with them and introduce us to them so that we can talk about the suite and proxy services that we have here at NASDAQ because the capital markets have changed very dramatically over the past half a dozen years and what we’ve recognized is that as granular as the market share trading between us and out major competitor has changed.
We begin to talk about those with a private company 18 to 36 months before, so that they can avail themselves of the tools we have available as they become public, as they need them and walk them through that process. We’re much more consultative, we’re another advisor to them and we end up, to a certain extent, being a one stop shop. And we work with all their advisors too, their owners, being the private equity, venture capital firms, we work with the accountants, the lawyers, and I spend a lot of my time in an education process as to the way that things have changed within the capital markets today versus just a few years ago.
PEQ: Charlie, your firm is actually the instument bringing new compliance and regulation to the attention of your clients as they move from the private arena to the public markets. What are some of the things you see that companies need to do as they consider a move to go public?
Weinstein: We havebeen working with companies that have gone the route of going public for many,many years, and we’ve seen a lot of tendencies inside the management teams,companies going through the IPO process, and it’s been just thelast number of years that the IPO process has been dominated byprivate equity funded companies, at least from our firm’s experience.
Oviously the IPO market, unfortunately, is absolutely closed forthe moment, but it will open back up. But what we’ve seen prior to this recentphenomenon, there were a number of smaller IPOs. You had $10 million IPOs, $15million, $20 and $25 million IPOs and the management teams of those companies tendedto be very inexperienced, tended not to have a lot of guidance from a board ofdirectors. Most of them didn’t form a board of directors until just before theywere going public, so in some ways they looked to their professionals, theirlawyers, their accountants for guidance in the IPO process as they grew fromentrepreneurs to business managers, as they accepted the capital and theresponsibilities of going public.
When that trend changed to private equityfunded companies using the IPO as an exit strategy, the entrepreneurialmanagement team of these smaller companies had the benefit of a veryexperienced board. I think everyone has mentioned that private equity, whenthey invest in these companies, they generally add a tremendous amount of focusand targeted board expertise. And the management teams tend to be different inthat they get guidance, in terms of running the business, they get guidancefrom their board of directors if they’re private equity funded.
Public offerings in the smaller range that $10-$25 million dollarpublic offerings—they disappeared a number of years ago. The companies going public now are much larger, and as aresult, they tend to be a little more seasoned. So we’re seeing quite adifference and don’t know what the next IPO marketplace will look like if we’llhave a tech boom like the dotcom years. I really don’t know if you’ll ever beable again to go public on a napkin, but I don’t think so. I think the marketshave been through that cycle—although they tend to repeat themselves—I tend tobelieve that more experienced management teams with better boards will becomethe better candidates for IPOs going forward.
McCooey: There’s been an argument made over thepast year or so that one of the reasons why there isn’t the $38 million dollarIPO, which is the average in the 1990s, anymore is the disappearance of thefour horsemen. And because all of the big banks want larger deals and there’sno one to bring a number of these companies public. I was in a panel discussionwith Paul Deninger, who is the vice president of Jeffries and Co. recently andhe was making this case that—and obviously Jeffries wants to be one of thosefirms that fill in that void—but that companies want the empremateur of thelarge investment banks. But when they go there, the banks say, you’re not bigenough. Maybe the deals don’t get done or maybe that’s one of the reasonswhy some are complaining about the lack of venture capital IPO so far this year,might be because of the lack of the middle market investment banks.
PEQ: I want to turn it to the private equity investors here. The criticism of private equity is that they are great at taking companies up to the level of and becoming public or some other exit strategy, but they don’t stay around for a long time to take the company well into the process of being a young public company. Is that a fair criticism? Is it not your job to be with a company once they’re public?
Lipscher: On average I would say no, it’s not our job. I think that if you talk to people that invest, whether they’re individuals or institutions in these kinds of funds, their returns—and ultimately they are our shareholders—their returns and their shareholder interests are better served by us spending our time where we are going to continue to return capital to them at the exit. And if we exit well on average, that’s great, we’ll raise our second fund and continue to repeat that process. Long term it doesnt provide any value to the shareholder base of that fund, unless there was a liquidity event during the public offering, unless they were only able to sell a small portion, and they were locked up for awhile, there was some real incentives to remain on the board—there are exceptions—but I think on average, I think there is no reason to stay on a public board. It’s not serving your shareholders.
McCooey: I think that’s right and I think that the point—as a venture capitalist, a private equity investor—you only have so many hours in the day. Where do you want to spend the time? You want to spend it the process of helping to manage the governance of a public company or do you seek the earliest possible liquidity for your limited partners?