For private equity companies, a listing on the stock market has become a significant alternative to selling the company to an industrial player or to another private equity company.
Many private equity companies have brought the Finnish companies they own to the stock market during the past couple of years.
“An active stock exchange is very important for PE investors. An IPO enables them to raise capital to develop and grow the portfolio company. A stock exchange also offers a path for exiting,” says Samuel Saloheimo, Investment Manager at Finnish Industry Investment.
For example, the listing of the accounting company Talenom on the NASDAQ OMX First North market in Helsinki last summer gave it the opportunity for faster organic growth. FII continues to own a significant stake in the family-owned company, even after the IPO.
“We invested in Talenom in 2013. Shortly after the investment, we started talking with the owners about the possibility of an IPO as an alternative source of funding to accelerate growth. A stock exchange listing gives investors the possibility to sell the shares they own without having to sell the entire company’s and the family’s shares,” Saloheimo says.
In the past two years, two of FII’s portfolio companies – pharmaceutical research company Herantis Pharma and medical technology company Nexstim – have also been listed on the Helsinki stock exchange’s First North market.
“First North is a market suitable for smaller companies. Its rules and requirements aren’t as heavy as those for companies on the Main list,” Saloheimo says.
Three years of preparation
One of the big events on the Helsinki stock exchange’s Main list this year was the IPO of Pihlajalinna Oyj at the beginning of June. With a 51 percent stake in Pihlajalinna, Sentica Partners’ managed funds sold some of its shares in the IPO, but retained an approximately 26 percent holding in the company.
“We shared Pihlajalinna management’s view that listing the company would help its business in the future. To become the leading social and healthcare operator in Finland, the company would have to strengthen its capital structure. With the shares acquired in the IPO, business acquisitions can be made in the future,” says Sentica’s Managing Partner Mika Uotila.
For Sentica, Pihlajalinna’s listing was an opportunity for a partial exit.
“We wanted to withdraw some of the existing appreciation and we also wanted to have the chance to enjoy future value gains.”
According to Uotila, preparations for Pihlajalinna’s stock exchange listing got under way three years ago. It was a challenge because the company simultaneously carried out multiple business acquisitions while participating in bids on the outsourcing of social and healthcare sector services.
We gradually made preparations for the company to execute the IPO."
“We gradually made preparations for the company to execute the IPO. The process was implemented on the business’s terms. We didn’t want Pihlajalinna to lose any opportunities due to too many of its resources being used to list the company,” Uotila says.
Pihlajalinna’s IPO ultimately took place at a time when the stock exchange’s general index had been high for a long time. The timing was favorable also due to the fact that Pihlajalinna was able to execute its IPO just ahead of other listings taking place last spring.
The impact of market volatility
Saloheimo notes that after an IPO, company shareholders have to shoulder the business risks and the market risks.
“There are an increasing number of factors related to ownership value that shareholders have no control over. Another thing to keep in mind is that fund investors must return the capital to the investors within set timeframes.”
Uotila admits that pricing problems may make it difficult for an investor to make block trades in a situation of adverse market movement.
“However, I don’t believe that we’ll have any problem selling the shares when the time comes. In terms of market risk, keep in mind that stock market volatility also impacts the secondary buyout market (the selling of shares to another investor).”
According to Uotila, it is important to Sentica that the companies it once owned will succeed in the future too.
“Even if we no longer owned any of the company’s shares after a divestment or IPO, it is important to us that the company sees good success. When the next IPO of a Sentica-owned company arises, institutional and other investors will remember how successful the previous IPO was.”
Careful preparations for a company's IPO
The idea of listing a company may become relevant when, for example, the owners see that the company will not be able to make the necessary investments to develop and grow the business without new share capital.
"The company owners may have been thinking about taking the company to the stock market years before the listing," says FII Investment Manager Samuel Saloheimo.
Even if the owners are ultimately strongly in favor of the listing, alternative paths should be explored because the market situation can change quickly.
"Most IPOs take place when the stock exchange's general index is high and has been on the rise for a long time. However, the IPO window may close while the listing process is still in the works."
An IPO project usually takes 6 – 12 months. By that time, the company's governance and ways of operating must be ready for the new environment.
"When making their decisions, investors use the comprehensive prospectus and the due diligence report that is compiled about the company in conjunction with the listing. A listed company is obligated to report its result at regular intervals and to disclose material changes in its business operations," Saloheimo says.