As I See It

One for Wilson’s Growth Commission: more IPOs

Terry smiling headA surge in Scottish companies rushing to float on the stock market? That’s what the latest report from EY predicts. History dictates otherwise. But is the climate about to change?

EY says the recovery in market pricing since the summer could see IPO activity pick up.

According to its Eye report, while a return to the record levels of 2014 may be a stretch, activity in 2017 could surpass 2015. It says IPOs could become an attractive option again for Scottish businesses.

It echoes a similar report from Pinsent Masons just a fortnight ago saying much the same thing.

Maybe. But before we get too excited let’s take a look back. Scotland has never experienced more than a handful of stock market quotations in any year for some decades.

There are 24 Scottish companies on the junior Alternative Investment Market compared to 37 in the Midlands, 66 in Yorkshire, 81 in the North West, 105 in South East, while London boasts just under 300. In the last four years there have been only three AIM flotations by Scottish registered companies. 

In a media release issued this morning Mike Timmins, EY executive director in corporate finance, said: “The outlook for IPOs amongst Scottish businesses looks increasingly bright, buoyed by the markets’ strong recovery and the added interest of international investors looking to take advantage of the weaker pound.”

Mmmm…. cynics might say this looks more like an invitation to firms to use its services. Let’s not fall for that one.

That said, there are certainly a number of young technology as well as food and drinks companies that would find an IPO a fruitful route to new capital, particularly at a time when the banks cannot justify the sort of loans they were offering pre-crash.

Crucially, there has been a change in the economic culture. Scotland is more entrepreneurial and generally more confident. These attributes are important factors in securing investment and they have contributed to external interest.

Scotland’s growing reputation in the digital sector and the recent success of firms such as Appointedd and Skyscanner has encouraged investment from overseas and from alternative providers. These include the private equity and angel communities, and crowdfunders, an increasingly legitimate source of sizeable fund-raising exercises.

Pure li-fiA whole raft of companies such as Administrate, Free Agent and Pure Li-Fi (pictured) are producing disruptive technology and products that make them attractive stock market candidates. The explosion in food and drinks companies has also drawn attention and this sector was tipped in the Pinsent Masons report to produce a flurry of IPOs.

But will they take this route, or follow the trend of selling to a multinational? The artificial limb company Touch Bionics, based in Livingston, and the Borders drugs developer ProStrakan, were among those tipped to float, but chose to sell to bigger rivals.

Skyscanner, the flight search engine, would top many people’s list of stock market ready companies. Its $1 billion valuation has attracted the attention of investors from around the world and it would have few problems making the move.

Companies such as the cloud business Iomart and Craneware, the Edinburgh-based software billing company, have created role models by enjoying substantial growth since joining the market and using this access to capital to acquire other businesses.

Stock market flotations should be encouraged as they represent a huge stamp of approval by investors, providing access to capital and creating a badge of honour that helps companies promote themselves overseas.

Yet Scotland has traditionally avoided stock market listings despite attempts over the years through roadshows and other marketing exercises to drum up interest.

Is it simply that they are too easily tempted by a fat cheque?

Some say the lack of interest in flotations comes down to the historic dominance of the banks and the availability of debt finance. Despite the recent efforts of the banks, that source of funding has changed through a squeeze on loans.

It also comes down to geography. Because Scottish business leaders do not have day-to-day contact with the network of advisers in the City of London they do not develop the relationships and culture that would make a move to the market a natural step as it is might for a company based in Essex or Surrey.

Scotland has also seen itself as being something of a ‘feeder economy’, providing the ideas that others will use to build big companies. This could come across as a defeatism, but it is also an acceptance of the country’s realistic expectations.

The home market is small, and to build a company of scale requires capital that is often most easily and quickly achieved by ‘piggy-backing’ on to a bigger, more established business that already has the distribution, marketing and manufacturing capability that will make it possible.

Yes, it would be nice to see more stock market quoted companies based in Scotland. It would be a symbol of the country’s economic well-being and confidence.

It is also something for the nationalists to think about. There is rarely any mention of whether an independent Scotland would have its own stock exchange, largely because economic planning is focused on a narrowly-defined and unimaginative government funding agenda. Scotland needs more venture capital firms, more crowdfunders and its own market to trade shares.

Something for Andrew Wilson’s new Growth Commission to consider.

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