Pre-IPO fundraising

Many companies unaware of alternative methods to raise capital
Pre-IPO finance can be a cost efficient way of preparing a company for a listing

Companies that list on AIM and raise less than £2 million, spend on average a quarter of this money on professional fees relating to the listing, reveals joint research conducted by our London office corporate finance department and City law firm Trowers & Hamlins.

UHY Hacker Young comments: “Whilst listing on AIM is ideal for companies looking to raise £5m or more, for smaller capital raisings, companies should seriously consider pre-IPO funding.”

“If a company is looking to float on AIM early in its development then they should examine how they can control their professional fees.”

Total amount raised	Average costs	% average costs to funds raised per company
£0-2m	£0.35m	24.9%
£2-5m	£0.68m	17.4%
£5-10m	£1.15m	14.7%
£10m +	£3.82m	8.2%

Pre-IPO finance is privately raised capital invested in a growing company likely to list on AIM within four to 18 months.

It is typically raised from individual business angels, smaller private equity specialists, Venture Capital Trusts (VCTs) and Government backed regional venture capital funds.

There are also an increasing number of institutional funds which are actively seeking out pre-IPO companies to invest in. In January, Panmure Gordon and HBOS announced the launch of a £30m fund targeting late stage pre-IPO opportunities.

UHY Hacker Young says the average fees for raising pre-IPO finance are about 7% of funds raised. The fees for raising capital on AIM are higher because there is a minimum level of due diligence needed for an AIM listing regardless of the amount of capital being raised.

UHY Hacker Young says: “The costs of raising pre-IPO finance are typically lower because the company is not producing public documents, so professional advisers are not taking on the same level of responsibility or depth of due diligence work as they do for an IPO.”

Pre-IPO finance a stepping stone for an AIM listing

UHY Hacker Young explains that pre-IPO finance is not an alternative to listing on AIM but rather it can be a cost efficient way to prepare a growing company for a larger and ultimately more successful AIM listing.

Comments UHY Hacker Young: “If a company can prepare itself well in the pre-IPO stage then it can significantly reduce the time it needs to invest in the float, therefore the management team is not distracted from the day to day running of the business for too long.”

Charles Wilson, Senior Corporate Finance Solicitor at Trowers & Hamlins, explains that pre-IPO funding can also help make companies a more attractive investment when they list.

Wilson says: “Often companies planning to list on AIM are set certain revenue and profit targets by nominated advisers/ brokers that they have to meet before they can embark on a listing. Pre-IPO finance is often used to provide the working capital for companies to meet these targets.”

Wilson adds: “The funds may be used for a variety of other reasons including to buy out legacy shareholders, to pay professional fees in preparation for a listing and often simply to allow other shareholders to realise some of their investment in the company.”

UHY Hacker Young says: “Investors attitudes are definitely changing. They are now much happier to give owners some equity release.”

Pre-IPO market is growing

Charles Wilson explains that in the past some companies have found it hard to attract pre-IPO funding and the most common source has always been family and friends. Sometimes though this source has not been available or has been limited in the amount it can provide.

He comments: “The opportunities for companies have grown considerably in the last five years and there is now an active market of professional business angels, VCTs, listed companies and other funds seeking out companies to invest pre-IPO.”

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