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Not all listings are winners

Apr 11 2019 08:41
Simon Brown

I recently wrote about the current spate of local delistings, coupled with a dearth of new listings. 

In this issue, I want to expand on a listing trend I am seeing in the US which may come to our market when we see the next listing boom.

But first let’s refresh on why a company lists. 

Primarily there are three reasons. Firstly, it is to raise cash to grow the business. 

The current owners sell new shares in the business to be listed, with the proceeds going into the business to grow it. 

Existing shareholders end up owning a smaller slice of the business, but if all goes well it will be a more profitable and valuable business.

The second reason is an exit (partial or total) by the founders or current owners of the business. 

They sell shares they hold to new shareholders, taking the cash raised for themselves. 

This is typically how private equity lists a business, such as we saw last year with Libstar. 

A new listing could of course also be a combination of these first two reasons; both a raising of cash and an exit by the current owners.

The third reason is as we saw recently with MultiChoice whereby Naspers* unbundled its ownership of the company to existing shareholders in Naspers. 

This can be done to achieve a value unlock or for strategic reasons. 

The MultiChoice listing was a value unlock and it has worked. 

Imperial’s unbundling of Motus, on the other hand, was more about strategy as the car business was large enough to operate on its own and was directly aligned with the logistics business.

What I’ve been seeing in the US is new listings coming to the market much later than usual. 

Back in the last listing boom preceding the 2008/09 financial crisis and the dotcom boom, a business would list fairly early in its life cycle. 

Most often they were not yet profitable and were fairly new at what they were doing. 

Initially a business is funded by founders and then by venture capital (VC), with the VC market potentially having a number of rounds of cash raising. 

At each round of VC funding, new or existing funders will take up shares in the business at an agreed (and ideally higher) valuation. 

But, ultimately, these VC funders want to take their profits and exit, so the business lists.

But the new trend is to list later and later. 

This means the new listing is much larger in terms of market capitalisation. 

But it also means there is a lot less upside for the new shareholders who buy into the listing. 

This delay in listings is being driven by the availability of money that the VC funders have access to. 

There are a few key reasons. For example, due to low interest rates, they have access to cheap capital. 

Also, a number of large exits in the first decade of this century made a lot of tech entrepreneurs very wealthy. 

These entrepreneurs are sitting on millions (if not billions) of dollars and are able to fund these businesses for longer. 

We also have a number of global VC funds moving into the space, such as Soft Bank with its $100bn VC fund.

What does this mean for investors? 

In short, it means that investors should be very careful of these new listings. 

We’ve seen a number of poor performances in the US (think of SnapChat, Blue Apron) and many are trading well below the initial listing price. It also means we need to remain, as always, sceptical. 

Especially when it comes to “exciting” new listings. Who are they exciting for? 

The current owners who are exiting, or to the new shareholders buying into the story and hoping for profit? 

*finweek is a publication of Media24, a subsidiary of Naspers.

This article originally appeared in the 18 April edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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