July 2, 2019

IPO in Australia: A Solution to Raising Working or Expansion Capital for US Companies?

As discussed in this blog, there are multiple risk factors that may prevent a company from achieving sustainable profitability. Exit risk is one that many startup entrepreneurs do not consider nor completely understand. Yes, if you are focused on your exit plan, you are not focused on your business. Founders, however, must address two key questions: How will your investors receive a return on their investment? As your business scales, how will you raise large amounts of working or expansion capital?

Common types of exit strategies include strategic acquisitions, management buyouts, liquidation, and initial public offerings (IPO). Investopedia provides a good explanation on business exit strategy:
Which exit strategy an entrepreneur chooses depends on many factors, such as how much control or involvement (if any) he wants to retain in the business and whether he wants the company to continue to run in the same way or is willing to see it change going forward as long as he is paid a fair price for his ownership share. A strategic acquisition, for example, will relieve the founder of his or her ownership responsibilities, but will also mean giving up control. IPOs are often seen at the holy grail of exit strategies since they often bring with it the greatest prestige and highest payoff.
On June 18, 2019, I attended an event, "IPO in Australia - an Alternative to Series B and Beyond," which presented the the option of a U.S.-based company listing its shares on the Australian Securities Exchange (ASX). The panel featured the following individuals: Kate Galpin, Business Development Manager, Listings of ASX Limited; Daniel Hutchinson, Executive Director of Moelis Australia; and James Posnett, Senior Manager, Listings Business Development at ASX Limited; and David Ryan, Partner with Australia DLA Piper. While the PowerPoint presentation may be viewed here, there are a few points that I found of particular interest.

With 2,200 listed companies and issuers, the ASX is home to some of the world's leading resource, finance and technology companies. It is a highly active capital market handling over 120 public listings annually and $4.5 billion of equities traded daily. And with a total market capitalization of around $1.5 trillion, its $47 trillion interest rate derivatives market is the largest in Asia and among the biggest in the world. Interestingly, the ASX hosts the fourth largest pool of pension funds globally.

As reflected in the chart to the right, the ASX is an active market for both early stage and mature companies. And barring 2009, the ASX has seen an annual increase the number of listed technology companies from 2007-2018 and ranks #3 globally in tech IPOs of companies with a market capitalization of $500 million and below. This statistic should be of particular interest to founders of American tech businesses and their investors as an option of listing its shares on an exchange other than the New York Stock Exchange or Nasdaq where listing companies typically have much larger market cap.

With respect to size and track record requirements to list on the ASX, the panel explains how the issuer must generate a minimum of $1 million aggregate profit over the past three years and $500,000 consolidated profit over the past 12 months. The assets test provides an alternative to the profit test where a company must have a minimum of $4 million in net tangible assets or a $15 million market cap. As reflected in the slide to the left, the ASX also obtain a minimum requirement to the number of shareholders (300) an issuer must have in order to list its shares in an IPO.

Addressing the connection U.S. companies must establish or maintain with the Commonwealth of Australia, the panelists noted it is not necessary for a company to setup operations in the country, a desire to access the substantial pool of capital in Australia is a sufficient business reason for listing on the ASX. In addition, an issuer must register as a "foreign company" in Australia and Australian resident directors are expected. Conveniently for American issuers, they report in Generally Accepted Accounting Principles (US GAAP) and US dollars (USD).

Lastly, I appreciated the way the panelists explained how ASX investors frame their decisions:
  • Focused on business strategy;
  • Large, addressable market;
  • Solves market need or product validation;
  • Track record of growth and execution;
  • Backing and reputation of existing investors;
  • Quality and incentivization of senior management;
  • Investible size and a pathway to profitability;
  • Growth funding vs. quantum of sell down by existing investors.
An insightful article, "Why IPO Is an Entry Strategy and Not an Exit Strategy?" lists five reasons why an "IPO can make for such a great entry strategy":

An IPO opens you up to the world

"When you make a public offering, you are essentially opening yourself up to the investing world, which can be a great thing. This will bring you added marketing opportunities, clients and even business deals across the world."

It brings stature

"A company that has gone public is usually seen as a larger company. Of course, there are a number of small companies that have gone public but they still seem more reliable and trustworthy than a regular company. There is a psychological effect to public companies, and it can only do you good."

Helps you get rid of financial bottlenecks

"It is always easier to rise funding when you go public. Whatever financial bottlenecks you might have, you can easily solve them when you have access to investors of all kinds. Public investors tend to be safer than other kinds, as there will be transparency from all sides."

Easy publicity and credibility

"There is nothing better than being able to gain some free publicity and credibility. When you go public, your name gets splashed across investment sites and stock news channels, which helps you to get more publicity."

Thank you to the four panelists for taking the time to present their valuable information to a group of entrepreneurs and investors in Seattle. The information presented should be given serious consideration to mitigate a company's exit risk. In addition to the aforementioned presentation, "Capital with confidence: A launch pad to accelerate your growth" contains additional information about listing with the ASX. An IPO on the Australian Securities Exchange may be a viable solution to expose issuers to a whole new world while bringing stature and resolving financial bottlenecks.

Is your business considering listing its shares in an IPO? If so, would you consider an IPO on the ASX?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

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