By all measures, 2021 was a blockbuster year for US initial public offerings (IPOs).
- There were more special acquisition companies (SPAC) IPOs than traditional IPOs in 2021.
- It is possible to build a diverse board and have a women-led company and be successful.
- Finding the right path for your company comes down to board dynamics, the investor profile and your message to the market.
Thanks to high valuations, an extended low interest rate environment and strong investor appetite for equities, 2021 was the most active year for IPOs in the past 21 – in both number of deals and proceeds.
In total, 416 companies raised proceeds of $155.7 billion, with the healthcare (162 IPOs) and technology (128 IPOs) sectors leading the way.
Interestingly, there were more special purpose acquisition companies (SPAC) IPOs than traditional IPOs in 2021, with 583 SPAC IPOs raising $152.5 billion. This represents more SPAC IPOs by number and proceeds than in the preceding decade combined. In addition, more than 200 SPAC mergers were announced in 2021. In spite of record activity levels in the traditional IPO market, 31% of newly listed public companies in 2021 have come from SPAC mergers.
Advice on preparing to be public
Private companies considering an IPO should stay current on market and sector trends and maintain structural flexibility to preserve their options. Preparing to be a publicly held company requires time and a great deal of effort in terms of strengthening internal policies and processes and expanding the talent base, but much of that can be achieved while still evaluating the optimal path to going public.
Companies considering a public offering would also do well to take advice from two distinguished speakers at EY’s November 2021 Strategic Growth Forum, one of the country’s most prestigious gathering of CEOs, high-growth entrepreneurs, C-suite executives representing global market leaders and professional investment fund managers.
At that event, Xtreme Solutions CEO and co-founder of Athena Technology Acquisition Corp. Phyllis Newhouse and Flywire CEO Mike Massaro – both former winners of EY’s Entrepreneur Of The Year award – joined EY Americas Vice Chair Sam Johnson for a discussion on the evolving capital market landscape and taking a company public. The input from these highly respected entrepreneurs and leaders was especially impactful given that both of their companies had undergone IPOs during 2021.
Here’s a brief recap of some key lessons from that question-and-answer session.
Building out a board of directors and group of advisors
Sam: Phyllis, you spent a lot of time focusing on your board, advisors and people around you when planning Athena, your special purpose acquisition company – also known as a SPAC. How did that help you in the process and what would be your advice around that?
Phyllis: When Isabelle Freidheim¹ and I founded our SPAC, we wanted a diverse board and an incredible management team that had experience across industry. And we also wanted to be very intentional about the target company that we were going to merge with. That company had to be very open to having diversity on its board; it was a line in the sand for me. Another thing that I learned quickly is that the women we brought on board as we were building our team just had an amazing level of expertise that was so valuable in this market. The lesson is that it is entirely possible to build a diverse board and have a women-led company and be successful.
Sam: What makes for a great advisory team?
Mike: It’s important to first understand what skills you already have on your board and your management team, and then to identify the gaps that need to be filled. And then to consider other factors, such as diversity. If you’re an international business or you plan on international growth, do you need someone with that experience? If you don’t have anyone who understands the capital markets, you probably want someone who does. Do you need someone who has public market board experience, or someone with specific committee experience, such as audit committee or comp committee? If you do an evaluation of the company’s leadership, you’ll see those gaps, and that will inform the type of advisory team members you should seek out. On considerations for operating companies when considering a merger with a SPAC
Sam: Phyllis, how did your SPAC Athena do its due diligence? How much rigor did you put around making sure you merged with the right company, both in terms of its technology and its leadership?
Phyllis: Our leadership was very tech-savvy and so we knew we wanted to merge with a technology firm. We had teams of individuals that did our initial calling to narrow the field so we could quickly go through, look at each management team, talk to them and really understand what they had to offer. We were quickly able to assess whether each firm’s technology would be disruptive. Was it able to scale? Did they have a plan to scale? And so, once we went through that process, we easily narrowed down our list to our top five candidates, and from there, to our No. 1 choice, the energy technology company Heliogen². At that point, we had our due diligence team create a roadmap of what the due diligence would look like on the financial side and then the tech side. Some might say, “Wow … you really overdid the due diligence on Heliogen”, but we wanted to make sure as an all-women lead SPAC that we got it right the first time.
Sam: Phyllis, what were the attributes that your SPAC team was looking for in a merger target?
Phyllis: We were constantly building the strategy to develop great deal sourcing capabilities. And develop a process for narrowing those companies down. We started with about 200 companies, and it was really about the power of our network. We started to look at the types of companies that would be on our radar from the beginning. And we quickly narrowed it down to 25. We had a “red flag” assessment that knocked out companies that didn’t fall into this category, but what differentiated us from other SPACS is that we were all women – the board, the management team and every advisor, all women. Also, we decided early on to bring in third-party firms to do the due diligence on both the financial side and the tech side. So, it was easy for us to look at the 25 firms. But when we went public, our phone started ringing off the hook. Targets were calling us because they saw the credibility of the team and they saw that this was a very different looking SPAC. And so, that 25 grew quickly, but we were still able to narrow it down and then find a target company.
Leading through an IPO
Sam: Mike, what led you to the decision to choose the path of doing an IPO?
Mike: You really have to find the right path for your company and a lot of that comes down to the board dynamics that you have, the investor profile you want and your message to the market.
Sam: What would you say was the most difficult part of navigating the IPO?
Mike: This was the first IPO for me, and my president and COO had never done an IPO directly, my CFO had never done an IPO directly. So, we were really figuring it out together. What I was most surprised about were the actual schedule impacts once the IPO was done. There’s also this odd dynamic that as a private company, your investors ask you questions, and you answer them. I spent a lot of time with my private investors. I would text them when we signed a new account or when we hit a revenue record. When you transition to a public company, investors don’t want that level of detail. I often joke that no one wanted to talk to me when we went public. They didn’t want to put themselves in a position to get non-public information about the company. It was quite an unusual transition.
Sam: Mike, how has being public changed the culture of the organization?
Mike: There hasn’t been much day-to-day culture shift because we’ve worked at it. As you make that transition, you really have to over-index, right? Because people have an expectation of how the culture is going to change. They almost know it’s going to change. And so, if you’re not really dedicating time and effort to over-indexing, you’re bound to have people say it’s going to change. For me, that meant taking a Zoom link and dropping it in a public channel in Slack and saying, “I’m on Zoom for the next 20 minutes. Anybody who wants to join from around the world can do so.” And doing that at different times throughout the day, right? Making sure that you’re not getting put into a bubble because you are an executive.
What can we expect in 2022?
It remains to be seen if the IPO market will be as strong this year as last. There is still the spectre of new COVID-19 variants, supply chain disruptions and labor shortages all impacting the national economy. And we saw some slowing of both IPO activity and stock market gains in the fourth quarter. But if equity markets and economic growth remain healthy, we are optimistic about seeing a healthy pace of activity throughout 2022. We see continued strength in the traditional IPO market with a full pipeline of promising companies, especially in the tech and health/life sciences sectors. And we see opportunity for continued evolution in the non-traditional paths to public markets. Privately held firms have more avenues available to them than ever before to reach the public market. Those paths will likely continue to evolve, to meet the needs of both issuers and public investors.
(Courtesy EY By Rachel Gerring. EY Americas IPO Leader)