Ownership strategies - Aiming high

The reasons often given for floating a company, which are not specific to any particular industry sector, are to raise money: to make the company's shares a currency with a known value for use in acquisitions; to provide a mechanism for employees or other stakeholders to participate in the equity; to provide a route-to-exit for existing shareholders; and lastly to provide profile for the company, or maybe its chief executive officer.

Yet, do you really have to float to get these benefits? The answer is no, not necessarily. A company can raise money through private equity or bank debt, while a private company can still use its shares to buy another company; it is just a question of relative valuation. It is also possible to set up an internal mechanism to enable employees to buy and sell shares if that is important. Finally, private equity can provide an exit route for original shareholder and often does.

So is it true that the only thing you achieve from floating, which you cannot get by staying private, is 'profile'? Put simply, no. There are real differences between the expectations of private equity and public market investors and this can lead to differences in management style, strategy and valuations. For instance, a private equity investor may want a seat on the board of directors, a shareholders agreement circumscribing what the company can do without express shareholder consent and preferential distribution rights on a sale of the business, otherwise known as liquidation rights.

By contrast, public market investors typically do not expect any of these. In a public market it is the company's responsibility, together with its advisers, to appoint independent non-executive directors and establish appropriate standards of corporate governance. If an investor does not like the board composition then it will not invest. The board's powers are set out in the articles of association and are guided by public market norms, not by a shareholder's agreement. Very importantly, all shareholders have the same class of share typically, so new investors and existing shareholders are all 'in it together'.

Assuming that the decision has been made to go to the AIM market specifically, how in practice should it be undertaken? The two key relationships for delivering success from the AIM market are with the nominated adviser (responsible for the regulatory side of life) and the broker (which raises the money and manages a company's communication with investors).

Most companies will already have a relationship with a firm of accountants and lawyers and many companies first meet their nomad and broker through an introduction from one or the other. A full list of which firms act in these capacities is maintained on the London Stock Exchange website.

Nomads

The nominated adviser relationship is key because the way the LSE regulates the AIM market is to devolve the role of regulator to the nomad. It is the nomad that, as the last step in the process of admission to AIM, confirms to the LSE that a company is appropriate to be admitted and that all the relevant AIM rules have been complied with, one of the significant rule requirements being the publication of an admission document.

Behind the admission process lies a very significant amount of planning, document drafting and commercial, legal and accounting due diligence, co-ordinated by the nomad but involving the company, its accountants and lawyers as well. The whole process, from first co-ordination meeting to admission, usually lasts three months.

Sometimes, these crucial associations are taken to be synonymous but the broker's role is quite distinct and some companies choose to appoint different professional advisers for each role. While the nomad has the regulatory role, it is the broker that undertakes fund-raising (assuming that there will be any) and manages the relationship between a company and its external investors. A hugely important tool in managing these relationships is the research on the company that a broker will publish.

Some companies believe they are better served by getting financial advice independent of the broker (whose clients are not only the company raising the money but also the institutional investors buying the company's shares). Other companies believe that they get better co-ordinated advice by having one professional firm delivering both nomad and broking services.

There can be other parties involved in the AIM admission process. Many companies choose to use professional public relations firms to get newspaper coverage in the period leading up to admission. One area often ignored is presentation coaching for the directors who present the company's story to prospective institutional investors. Surprisingly often, this subject becomes one of embarrassment or hurt pride to a director who believes he is a natural leader and communicator. Presenting is a key skill in fund-raising: it is not only what you say but also how you say it that conveys the message.

Let us assume now that you have made it to the market and raised your money. Congratulations are due but this is not the conclusion, it is just a milestone marking the point in a company's development where it becomes responsible to external shareholders that it may not know and with whom it may communicate only indirectly using public announcements. This has implications that will resonate throughout the entire company, starting with the board of directors and requiring new approaches to corporate governance, planning and communication.

A company's share price reflects not what the company did last year but what the market expects it will do this year and beyond. The market, therefore, has an expectation of a company's future performance and a proactive company management will make it its business to manage those expectations to ensure they are realistic.

As part of this process, a company's relationship with its broker continues to be key: the broker publishes research on the company, including forecasts of future financial performance. For this research to convey a sensible picture, a company's management must have a clear idea of where its business will be in one or two years' time and must be able to communicate that to the broker.

- Matthew Robinson, corporate finance director, FinnCap

AIM AND THE FINANCIAL SERVICES INDUSTRY

The AIM market of the London Stock Exchange offers a public market for a very wide range of companies, both in size and industry sectors.

- Total number of companies on AIM: 1,694

- Financials services sector*: 219 (13%)

- Market capitalisation range for financial services sector*: Largest: £713m

- Average: £52m

* December 2007 financials excluding real estate, equity investment instruments, non-equity investment instruments and banks

Insurance sector companies on AIM: Market Cap

- Brokers:

Jelf Group (£128m)

CBG (£21m)]

Cobra Holdings (£35m)

- Brokers and IFAs

Lighthouse (£19.7m)

Sumus (£12.3m)

Prestbury (£1.1m)

- Insurance and other

Personal Group (£90m)

Gable Holdings (£6.8m)

Market cap' ratings accurate at 18 March 2008.