Guiding the Deal – The Role of a Corporate Finance Adviser

London has long been a leading destination for companies, particularly growth companies, looking to go public. In this five-part series, we explore why US-incorporated and US-operated private companies would consider an initial public offering (“IPO”) on the London markets and the key considerations they need to evaluate when planning and preparing for such a listing.   

Co-authored by David Hignell, Director, Corporate Finance, at SP Angel Corporate Finance LLP.

For a company seeking admission to one of the markets operated by the LSE, one of the key adviser appointments is the corporate finance adviser (“CF Adviser”). The CF Adviser guides the company through the listing process, ensuring that the relevant rules and regulations are complied with and liaises with the relevant LSE and other regulatory teams as needed. Following the listing, the CF Adviser will continue to advise the board, ensuring that they are aware of their ongoing obligations and are compliant with the relevant rules. 

The overarching role of the CF Adviser during the initial public offering (“IPO”) process is to project manage the transaction through to completion, working alongside the company’s other key advisers. This article focuses on the role of the nominated adviser (“Nomad”) on an AIM IPO, and touches on the role of a Sponsor (the key CF Adviser to Official List companies) where this is different. Details of the roles of the other advisers are covered later in the series. 

The Nomad role is unique to the AIM market - as well as guiding the company through the listing process, the Nomad is responsible to the LSE for assessing the appropriateness of the company for the listing. As a general rule, many of the responsibilities of the Nomad and the Sponsor are similar, although a Sponsor is not required to make a final assessment on eligibility for listing as this is done by the Financial Conduct Authority (“FCA”). AIM-listed companies are required to maintain a Nomad at all times.

Choosing the right adviser

Choosing the right CF Adviser is of fundamental importance to each public company applicant. Within the ecosystem of CF Advisers, there are a variety of firms with different sector specialisms and levels of expertise. There are also distinctions between CF Advisers who are independent, and only provide advisory services, and those who are ‘full service’, offering sales, broking and research services in addition to the advisory services. Which CF Adviser is the right option for a particular company will be influenced by the size and scale of the company, their funding requirements and the complexity of the transaction. 

“Effective communication and understanding between the CF Adviser and the Board is essential from the outset”

Effective communication and understanding between the CF Adviser and the Board is essential from the outset, as there will inevitably be challenges to face together during the IPO process - things will not always go as planned - and these challenges need to be worked through in an environment of mutual trust and respect. 

When choosing the company’s CF Adviser, the board might consider the following factors: 

• The CF Adviser’s sector specialisms and recent experience advising companies in the same industry;
• Whether an independent CF Adviser is preferred or a ‘full service’ integrated house and the costs involved with the appointment of each;
• The typical deal size that the CF Adviser advises on, the client base and the investor relationships that they have (which is likely to be linked to the typical deal size acted on); and
• The experience of the research analysts associated with the CF Adviser (if working with an integrated house).

The culture of the CF Adviser may also be a consideration, particularly noting that a strong working relationship between the company and its CF Adviser is essential. Culture may be difficult to assess before making an appointment but introductions to existing clients of the CF Adviser can help to give an insight into the working practices of the CF Adviser and how they may approach any challenges that arise. 

Early-stage discussions

During early discussions with the company, the CF Adviser will consider the suitability of the company for listing on the LSE. Open and frank discussions between the parties are vital at this stage to avoid complications during the process and potential delays and costs further down the line. 

Aside from general market conditions and investor sentiment towards IPO transactions, the most common initial discussion is whether the company is ready for life on the public markets. While the London markets welcome early-stage companies and many have thrived having listed at an early stage, there may be reasons that the CF Adviser suggests it is be too soon for a company to list. If this is the case, the most common advice is for the company to raise additional funds as a private company and/or seek to demonstrate the achievement of additional milestones in order to ‘de-risk’ the ‘equity story’ before revisiting IPO discussions. 

For the purposes of this article, we have assumed that market conditions are supportive of an IPO on AIM and the candidate company has elected to appoint an integrated house as CF Adviser. If an independent adviser had been selected, the advisory workstreams would be identical, but the CF Adviser would be liaising with the sales, broking and research teams from another firm. 

What makes a good US company IPO candidate?

There are certain traits that will make good IPO candidates stand out from the crowd. These characteristics include: 

• Strong financial fundamentals – Ideally this means a proven track record of revenue growth and profitability. For earlier stage companies a clear path to profitability, which can be achieved as a result of the IPO fundraise, is required. 
  
  
• Unique selling points – These will always be subjective, especially as the majority of growth companies operate in highly competitive markets. However, examples include developing a technology that has the potential to be particularly disruptive or, in the life sciences sector, owning a drug that is already in clinical trials and targets a clear unmet clinical need. For resources companies, the CF Adviser will look for exceptional results from initial drilling programmes and scoping studies. 
  
  
• An international growth strategy - For a US company, a London listing can be a springboard into Europe; giving access to UK or European-based revenue earning opportunities or acquisition opportunities in these markets. 
  
  
• Mature corporate governance structure – US based companies that already have mature corporate governance structures, experienced management teams and transparent reporting practices and procedures will have a smoother transition to life as a public company. 
  
  
• Investor relations (‘IR’) focus – Ideally, the IPO candidate will already have an established IR function capable of regular engagement with both analysts and institutional investors in UK and Europe. The importance of IR will be covered in more detail in article 5.

What is the CF Adviser’s role at each stage of the IPO Process?

An IPO process typically comprises four phases which are completed over a period of approximately four to six months once the advisers have been appointed. However, timing will be dependent on the company’s initial readiness. Typically, the process kicks off with an ‘all parties’ meeting and culminates in an intense marketing period, or ‘IPO roadshow’. The key phases of the process are as follows:

Phase I – Preparation

• Assessing the suitability of the IPO route and the preparedness of the company:
  The company’s founders and/or key shareholders may have different views on exit strategies, e.g. IPO versus a trade sale. It is important to ensure all key stakeholders are aligned on the goal of a public listing before advisers are engaged and costs are incurred. 
  The CF Adviser will also consider the candidate’s commercial traction, their track record, milestones already reached, and the individual and collective experience of the board. Other suitability considerations are often closely linked to preparedness, so the CF Adviser will consider the factors that make a good IPO candidate, as above. 
  
  
• Test marketing or ‘pilot fishing’: 
  Article 1 made reference to the importance of early-look or ‘pilot fishing’ meetings with a handful of institutional and/or sector specific investors. Arranged by the CF Adviser’s broking team, they provide both the company’s board and the CF Adviser with invaluable feedback on investor appetite and the feasibility and likely success of an IPO. This exercise will also frame early discussions regarding valuation (see below). 
  
  
• Preliminary valuation discussions: 
  At an early stage, the company and the CF Adviser will need to have an open discussion around the company’s valuation expectations along with the target IPO fundraise and use of proceeds. If a pilot fishing exercise has been undertaken, the feedback will be considered alongside research analyst views. General macroeconomic conditions, investor risk appetite and sentiment towards the company’s sector may also be considered. 
  It is important that these discussions on valuation are open and honest, realistic, and that the company understands and accepts the rationale for the proposed valuation. If the process is to continue, the expectations of the company and the CF Adviser need to be aligned, otherwise there is a potential for difficult discussions at a later stage, once significant costs have been incurred.
  
  
• Appointment of advisers and timetable:
  If feedback from the test marketing is positive and the company wants to proceed with the IPO process, the appointment of the CF Adviser will be finalised, along with the appointments of the other key advisers including lawyers, reporting accountants, financial PR advisers, share registrars and any technical experts. 
  Once the transaction team has been finalised, the CF Adviser will prepare a transaction timetable tailored to the company’s state of preparedness, with input from the company and the other advisers. In each IPO process there will be challenges and workstreams, such as accounting conversions or corporate reorganisations, that take more time than they might in another company’s process. Each IPO is unique, and the CF Adviser will seek to guide the company through to a successful listing.
  
  
• Other considerations:
  The CF Adviser will consider the transaction as a whole to determine whether there are any other considerations that need to be assessed at an early stage. This may include:
  
  • Secondary sell downs – The opportunity for existing/founding shareholders to sell down at IPO was covered in article 1. If the company may have ‘selling shareholders’, even if this is not yet confirmed, it is important that the CF Adviser is made aware so that this is factored into the overall transaction strategy. 
  • Employee incentivisation – The CF Adviser will assess the company’s existing share incentive arrangements and make recommendations on whether an appropriate share incentive plan should be adopted at the time of IPO. 
  • Investor expectations – These will largely be understood following the pilot fishing exercise, although the CF Adviser will keep a close eye on any changes to macroeconomic factors that could influence the feasibility of the IPO. 

Phase II – Due Diligence

• Assessing corporate fundamentals: 
  Once the preparation stage has concluded, the transaction will enter the due diligence phase. First, the CF Adviser must review and assess some key corporate metrics which will impact the ‘scoping’ of the legal and financial due diligence workstreams. The following areas are not exhaustive, but we would expect them to be considered as a minimum: 
  
  • Corporate structure – Assessing whether the existing group structure, potentially with a US-incorporated ‘topco’, is the most appropriate for the listing or if a reorganisation is required. We will discuss this question in more detail in article 4.
  • Board composition and efficacy – Discussing the composition of the listed company board, focussing on any key appointments needed to ensure the board is appropriately constituted and adheres to UK Corporate Governance guidelines. The CF Adviser will make recommendations regarding the number of UK-based NEDs that may need to be appointed and they can often introduce appropriate candidates. Also, if there are any obvious gaps on the board, such as the lack of an appropriately qualified Chair or a chief financial officer, the CF Adviser will assist the company in filling these roles well in advance of the marketing phase. The CF Adviser will also undertake due diligence checks on each proposed director to ensure they are suitable candidates to serve on the board of an LSE listed company. 
  • Financial requirements – Reviewing the company’s financial requirements and discussing how the proceeds of the IPO will be deployed to enhance the company’s growth strategy. The motivations and support from existing shareholders will also be considered and factored into the marketing of the transaction. This workstream is linked to the working capital review, which will form the basis of the reporting accountants’ working capital report, and will be covered in more detail in article 3. 

What are the key due diligence workstreams and why are they needed?

Due diligence allows the CF Adviser to confirm that the company is suitable for admission to the LSE. On an AIM IPO, the Nomad must make the assessment and give confirmations to the LSE and on a Main Market listing the Sponsor must make representations to the FCA so it can determine whether the company meets the eligibility criteria. 

“Due diligence allows the CF Adviser to confirm that the company is suitable for admission to the LSE”

To enable the CF Adviser to fulfil its obligations, it will oversee the due diligence process and ensure that all material issues arising from the workstreams are resolved. During this phase, in conjunction with the review of the key due diligence reports, the CF Adviser will form a view of whether the company has appropriate systems, procedures and controls and make recommendations to the Board where they see any areas of weakness. 

The key due diligence workstreams which apply to all companies listing on the LSE are: 

(i) the legal due diligence report, prepared by the company’s lawyers; and 
(ii) the Long Form Report and the Working Capital Report, prepared by the reporting accountants. More information on what each of these entails will be provided in articles 3 and 4.

Depending on the company, a technical diligence report may be required. For example, natural resources companies would need to obtain a third-party Competent Persons Report, which provides technical information on the company’s assets, and an early-stage healthcare company, would require a third-party technical report covering the company’s scientific projects, the key work programmes and their technical feasibility. Similarly, an IP orientated company may need to commission a separate Patent Attorney’s report. These reports will be incorporated into the company’s listing document (see below). 

The CF Adviser may also undertake a site visit to the company’s key areas of operation. They will spend time with the executive management team and gain a thorough understanding of the business’s key operations and growth strategy. For example, for a US based healthcare business that SP Angel floated on AIM a few years ago, the site visit consisted of two days spent with management at the company’s head office, as well as visits to two university campuses where the company was undertaking clinical trials. 

Phase III – Documentation

The documentation phase will run in parallel with the due diligence phase and will be coordinated by the CF Adviser. This phase involves the preparation of the key documents for the transaction, including: 

• Prospectus (or admission document for an AIM IPO): This is the comprehensive transaction document that provides details about the company’s background, business model and growth strategy, board and governance, historical financial information and material contracts. Preparation of this document will be a team effort, with various advisers involved in the drafting of key sections. The CF Adviser coordinates the process and will be particularly concerned to ensure that it has been prepared in compliance with the AIM Rules or the UK Listing Rules (as applicable), as well as accurately explaining the company’s development to date along with its growth prospects, so that it works as an effective marketing tool. 
• Investor Presentation: This is the company’s key marketing document, which will be used on the IPO roadshow. The CF Adviser (in conjunction with the company and the PR advisers) will play a key role in the preparation, ensuring the key elements of the prospectus/admission document are included, along with details of the ‘use of proceeds’. 
• IPO research note(s): The research analyst from the broking side of the CF Adviser will prepare an IPO research note that will also be provided to investors ahead of the IPO roadshow (see below).

The contents of both the prospectus or admission document (as applicable) and the investor presentation will be verified by the company’s lawyers and the CF Adviser must be satisfied that this work stream has been undertaken in sufficient detail prior to the IPO roadshow. The verification process will be covered in more detail in article 4. 

Interactions with the LSE and other regulatory bodies

Throughout the IPO process, the CF Adviser will liaise with the LSE and other regulatory bodies in relation to the company. This is a normal part of the IPO process for all companies and ensures that everything is prepared for the new issue. 

• LSE – The CF Adviser will interact with a variety of teams at the LSE, including the Admissions Team and the Stock Situations Team, in advance of the listing. If the company is seeking an AIM admission, there is a specific ‘Early Notification Process’, where the CF Adviser will liaise with the AIM Regulation team and answer any specific questions the LSE has regarding the company’s business plan, the proposed board of directors and the due diligence process to date. Once the Early Notification Process has concluded, the CF Adviser will liaise with AIM Regulation to ensure the requisite documents, including the ‘Schedule One’ (see below), are provided ahead of listing. 
• Takeover Panel (the “Panel”) - Assuming the company that will be listed (‘topco’) will be a public company limited by shares which is incorporated in one of the UK jurisdictions, the CF Adviser will also be required to liaise with the Panel ahead of the proposed IPO. Specifically the CF Adviser will be responsible for preparing a submission to the Panel setting out the composition of the ‘Concert Party’ in the topco. The UK Takeover Code defines persons ‘acting in concert’ as those who, pursuant to an agreement or understanding (whether formal or informal), co-operate to obtain or consolidate control of a company or to frustrate the successful outcome of an offer for a company. Defining the concert party is a subjective exercise and will depend on the relationship of the existing shareholders in the IPO candidate. The composition will need to be agreed with the Panel to ensure appropriate disclosures are included in the admission document (or prospectus) ahead of the IPO roadshow.

Phase IV – Marketing, Admission and Completion

This phase, which is the culmination of months (sometimes years) of hard work, is perhaps the most exciting phase for both the company and the advisers. This is where the aspirations of the company are realised and it begins life as a listed company, usually with the backing of new investors. During this phase of the process, the CF Adviser is responsible for coordinating the company and other advisers to ensure a successful completion of the transaction and a smooth transition to life on the public markets.

Investor Roadshow

The investor roadshow is at the heart of this phase of the IPO process. The roadshow will be organised by the sales and broking teams of the CF Adviser and can last for several weeks and span various jurisdictions, depending on the size and nature of the fundraise. 

Ahead of the roadshow, the IPO research note will have been published and sent to investors along with a ‘pathfinder’ version of the prospectus/admission document. The latter is a substantially complete version of the document, without the specific information regarding the fundraising. 

Bookbuild and Pricing 

Towards the end of the IPO roadshow, the bookbuilding process will begin in earnest. The CF Adviser will communicate investor feedback and indications of interest to the company and a firm placing price will be agreed. 

When the CF Adviser and the company have a high level of confidence that the IPO fundraise is going to successfully conclude, the CF Adviser will work with the company and the PR advisers to publish an ‘Intention to Float’ announcement and (in the case of an AIM IPO) the LSE will publish a ‘Schedule One’ announcement, a regulatory announcement which summarises the key particulars of the transaction which is issued by the LSE, at least ten clear business days prior to Admission. These announcements signal to the wider market that the IPO transaction is nearing a successful completion. 

Completion

Once the IPO fundraise has successfully concluded, allocations have been confirmed and funds have been received from each investor, the company’s shares are almost ready to be admitted to trading to the LSE. At this stage the CF Adviser will be responsible for overseeing the completion meeting and applying for the company’s shares to be admitted to trading. The CF Adviser will submit a Nomad Declaration to the LSE, which is a confirmation that the Nomad believes that following the completion of the IPO process, the company is both suitable and ready for admission to AIM. When admission is confirmed by the LSE, the company will release a First Day of Dealings announcement to the market. More details on the announcements a company is required to make will be set out in article 5.

“The IPO is only the start of the journey and the role of the CF Adviser certainly doesn’t end on the first day of dealings!”

What happens next?

Once listed, the role of the CF Adviser is to act as the company’s primary adviser with regard to the AIM Rules or the Listing Rules. Because of the ongoing nature of the CF Adviser role for AIM companies and the continued interaction between them and the company for any LSE listing, the requirement for effective communication and understanding between the company and the CF Adviser remains essential. 

The role of the CF Adviser is much broader than just being a quasi-regulator post-listing. The relationship flourishes when a company views its CF Adviser as its key commercial sounding board, especially when considering funding options (and timing), possible value accretive transactions and key messaging to the market in order to ensure investors are fully appraised of new developments. Life as a listed company will present hurdles that the company needs to work through and the guidance of an experienced adviser who knows the company and its board can be invaluable. The relationships where the CF Adviser is one of the first calls the board makes when issues arise are often the most successful. 

For the first article in this series, ‘Crossing the Pond: Why US Companies Should Consider London Listings’, please see here.

About SP Angel Corporate Finance 

SP Angel is an independent partnership providing creative, capital markets solutions to growing and ambitious companies. Formed in 2006, SP Angel currently act as adviser and broker to over 50 companies listed on AIM, the Main Market and Aquis Stock Exchange, as well as for a number of private companies. SP Angel supports clients with a full range of expertise and services covering ongoing regulatory advice, IPOs and secondary placings, M&A transactions, corporate structuring and private capital raising. With an established reputation for market reach and successful execution of mandates, SP Angel has a strong track record across many key sectors including, Mining, Oil & Gas, Healthcare, Technology and Special Situations.