Investment Banking Is an IPO right for your company?

Riggs says often the interest in going public is not only driven by the idea that it represents success, but from a financial standpoint, the need for capital. That could be because the business needs to grow, or it could be to provide liquidity for owners or shareholders. The decision could also be based on a desire to set the company and employees up for success, potentially giving the company the ability to offer shares to high-performing workers as an employment benefit.

If your company has private equity investment as part of its capital structure, those partners could push going public as a way to potentially generate a return on their investment.

Even if you or other ownership partners have a strong desire to go public, however, it’s important to consider the financial implications and weigh going public with raising capital privately.

“Public markets, generally speaking, want companies that are growing and can execute on their business plan to create returns in excess of the market,” Riggs notes. “Just because you need capital doesn’t always make you an IPO candidate. Ultimately, it may come down to your company’s valuation in the public markets versus the private markets.”

Riggs says Truist Securities encourages clients to keep an open mind and pursue both private and public paths for future capital needs, even if they strongly believe they want to go public. Ultimately the decision should be based on optimizing your capital structure in such a way that you can execute on the business plan you already have in place. Companies can face potential long-term challenges if they change their business plan solely to try to make themselves more attractive as a public company. They risk sacrificing their future for the IPO if they can’t deliver on the new plan after the IPO.

Another consideration is what Riggs refers to as “maximizing versus optimizing” the IPO if you go down that path. “Our view is always thinking about how you optimize for the next leg of the journey, not necessarily maximize,” he says. “When you maximize, you have the potential to set yourself up for failure.”

Riggs says optimizing means you price your IPO in a way that the share price continues to look attractive for potential buyers after the IPO, so more investors buy in. This creates continued momentum, which can create greater capital and valuation for your company for the long term. Maximizing the IPO may give you more proceeds on the first day of trading, but if your share price begins to go down, you run the risk of upsetting those initial investors, who may then sell and drive share prices down even further.

Keeping your options open and pursuing a dual-track public and private capital raising process gives you options should the IPO path show signs it may not be the optimal way forward. Private options include lending facilities or pursuing a mergers and acquisitions (M&A) transaction or sale of the company. Not every solution works for every company, depending on their goals.

“It’s important to think about all of it holistically,” Riggs says. “We bring in what we call our SWAT team, and that may include an industry banker, an M&A partner, and a leveraged finance partner. It’s not a siloed decision; it’s everyone coming together and saying, ‘OK, you’re thinking about an IPO, but should you be, and is that the right solution? Let’s do the analysis.’”

Jim Pirouz, former Head of Capital Markets, now Head of Corporate Banking at Truist Securities, adds, “That dual-track process helps maintain a level of tension. It keeps potential public equity investors honest about the valuation. If their valuation isn’t healthy enough, the private M&A market may be willing to pay more. Conversely, if an M&A suitor isn’t willing to pay enough, you still have the public option.”

As you and your team work to determine whether an IPO is right for your firm, another key thing to keep in mind is what any change in capital structure would do to your ownership structure. If you’re considering either an IPO or an M&A transaction to help fund growth, you’ll be diluting your ownership stake—but in different ways.

“What are you willing to give up in terms of control?” Riggs asks. “If you’re a founder who owns less than a majority of the company, or would own less than a majority of the company after the IPO, how can you think about structures that would give you voting control even if you don’t have control from a percentage of ownership perspective?”

Through an IPO, you’re beholden to a wide variety of shareholders. Public companies need to have an independent board of directors who will judge management’s actions on behalf of shareholders. With M&A, there could be even greater loss of control if your firm is being acquired and the purchaser wants to install its own management team.

As a public company, you’re also held to a higher level of transparency when it comes to reporting your financial results and other operational details. This could require additional investments in team members or third-party resources. Whereas if you pursue other capital-raising options, such as a private placement, where you offer a stake of your company to a smaller group of institutional investors or funds, you may be held to a lower threshold of reporting.

“There are a great deal of costs that go into setting up a company to have the infrastructure to withstand the rigors of being a public company,” Riggs says.

As you go through the process of making your decision, your Truist Securities team can help you weigh all your options. Once you’ve decided to pursue an IPO, you’ll have many items to take care of, including developing and optimizing the story you’ll tell to investors and analysts.

“For us, it’s about getting to know our clients, understanding what their objectives are from a growth perspective and for the long term,” Riggs says. “And then helping them determine how to set themselves up for success over the long term with short-term moves. There are a variety of things we can do, but the overarching theme will always be ‘Let’s think about it from a strategic perspective and help them achieve their goals.’”