Family Offices Say IPOs Are Nothing But An Exit Strategy

Initial Public Offerings (IPOs) and the liquidity they create have become an increasingly popular way for UHNW Individuals to generate wealth, diversify their investment portfolios and establish a Family Office to manage both.

They have become particularly prevalent post-pandemic with companies looking at vehicles such as SPACS to raise capital, decentralise risk or create an exit strategy, increasing public awareness in the process. But while we hear of companies establishing Family Offices to manage all of the above and more, what is the primary objective?

According to our Family Office Network, it’s all about an exit.

There are four common objectives given in any academia published around the topic of IPOs. They include Raising Capital – to fund anything from debt to research and development, Diversification – the move to incorporate more opportunity, Decentralising Risk – by spreading vulnerability and an Exit Strategy – cashing in on investments after meeting predetermined objectives.

We asked our network at Agreus to list what they believed to be the primary driver behind the push to go public and overwhelmingly, it was the latter.

64% said the majority of companies go public in order to facilitate an exit strategy, 18% said it was to raise capital, 13% said it was to decentralise risk and the remaining 5% said it was to raise public awareness. Something often thought to be a by-product of an IPO rather than a driver.

But isn’t an IPO a bit of an overcomplicated way to say farewell?

2020 witnessed the highest IPO capital raising activity in more than a decade, generating $331BN across 1,591 listings. This was an overall increase of 42% and led by the USA and China whose capital increased by 118% and 77% respectively.

Perhaps unsurprisingly, the industries which saw the most growth during the pandemic include Financial Services, Technology and Healthcare with Tech companies raising more than $55BN alone.

While there is an undoubtedly incredible amount of wealth to be made through the push to go public, it can be expensive and time-consuming, invite more scrutiny and reduce control.

The cost attached to comply with heightened regulation can be extraordinary when calculating all financial reporting and auditing related fees. Then of course, you must consider the potential loss of control caused by public mistrust and come to terms with the fact that the success of the IPO, like the future of the company leader, sits with the market and its appetite for risk.

Is the risk worthy of a reward or even, an exit?

Arguably so. IPOs create enhanced capital which can be utilised to fund research, development and expansion or to simply to pay-off debt. They can increase access to opportunity for those who choose to invest and of course for the owners of the company who are left with extraordinary wealth and more places to invest it.

In fact, 44% of Family Offices say the single biggest benefit of an IPO is the greater access to opportunity as a result of the capital created followed by 36% who said it was the by-product of increased public awareness. A further 26% said they enjoy the idea of increased credibility while 26% said the biggest benefit of an IPO is lower interest rates on future capital. 8% also listed advantages such as attracting talent, better managers and improved investor relations.

As I touched upon earlier however there are some disadvantages to consider and according to Family Offices, in number one position is the increased scrutiny and regulation required, something 71% list as the key disadvantage of an IPO.

A further 47% said the process was expensive and time-consuming, 36% were apprehensive about the potential loss of control of the company while 35% said the cost attached to comply was the single largest negative followed by the fact that success is dictated by the public. Something one in five Family Offices also list as the biggest drawback.

The knock-on effect in recruitment

As I introduced earlier, IPOs and the liquidity they create have become an increasingly popular way for UHNW individuals and those with family businesses to generate wealth, diversify their investment portfolios and establish Family Offices to manage both.

They are very keen on creating robust corporate governance structures which presents both a challenge for their Family Offices and great opportunities for businesses like ours with the demand for talent outweighing the supply in areas such as China and Saudi Arabia where IPOs are most prominent.

We have witnessed a surge in the number of legal and financial professionals required to manage the ongoing regulatory side of newly-public businesses as well as within the Family Offices established to manage this wealth. While the businesses require experienced leaders to oversee the heightened regulation, we have seen an even greater demand for Family Office Leaders and Investment Specialists to both implement strategy and manage the newly diversified investment portfolios.

IPOs come with an added recruitment benefit for businesses too.

Having a publicly-listed company allows business owners and Family Offices with controlling stakes in their respective businesses to be more competitive with their hiring as they are able to use stocks as a means of payment. Not only can stock options act as a long-term incentive plan (LTIP) something we spend a lot of our time discussing but it can allow companies to save on some of the 60% of costs usually spent on Family Office hiring and staffing. Stock options can be an incredible way of aligning Family Office interests over a longer-time period with employees of the Family Office in extraordinary cases being offered stock in exchange for tenure.

Ultimately, the push to go public brings a whole lot of risk and a whole heap of rewards and something I will be certainly keen on watching is the creation of Family Offices as a result of the push over the next few years.