There are other options besides an IPO when it comes to raising capital – and when market conditions get choppy, exploring alternatives is key

When it comes to IPO alternatives, the most popular routes were debt finance or self-finance (using company cash reserves), according to 60% of all companies (see figure 1.7).

Private placements were also high on the list of alternatives, with 57% of all respondents considering them. As the CFO of a Finnish consumer business comments: “A private placement is quick and will allow us to continue to function as a private company – free from public and regulatory scrutiny.” 

Yet private placements don’t suit everyone, and, indeed, over half of respondents not likely to undertake an IPO in the next three years said they are unlikely to consider one as an alternative. Reasons for not following this strategy include the expense. “Private placement issuers will frequently have to pay higher interest rates to attract investors,” says the CEO of a UK retailer. “Private placements can be more challenging because valuations are more difficult, there is greater risk because there is no liquidity and they usually involve debt or preferred stock that can be more expensive than equity.”

While a sale to a strategic buyer was much lower down the list overall, with 37% of all respondents citing this as a possible alternative, this route was much more popular among those not considering an

IPO (56%) than those who were (32%). A sale to a private equity sponsor is the fourth most popular alternative (cited by 36% of all respondents), although much more so among those considering an IPO (42%) than not (12%).

Reed Smith on alternatives

Giving consideration to or taking the initial steps towards an IPO can in some instances produce a different outcome – a strategic sale may be an easier option for those seeking an exit. Prospective buyers may seek to close an acquisition before an IPO when public company valuations kick-in and early stage investors may find that a sale of the company – and immediate liquidity – is preferable and avoids the uncertainty of undertaking an IPO.

James Wilkinson, Reed Smith corporate partner, London

Companies always need to be considering alternatives, and being flexible becomes even more important in volatile times. If raising capital is the key consideration and the public markets are closed, companies will have to pursue other capital raising strategies in the meantime, even if an IPO is still the long-term goal.

Aron Izower, Reed Smith corporate partner, New York