Feeling bullish

You can count on the fingers of one hand the number of insurance brokers quoted on the London Stock Exchange. For the most part, as far as brokers are concerned, the stock market remains the preserve of the big global behemoths.

That said, Aon founder Paul Ryan was able to transform a small-town US broker into a global giant, almost entirely on the back of its listing oon the New York Stock Exchange – a move that enabled him to raise capital and expand through acquisition at breakneck speed.

Several of the major consolidators, including Towergate and Oval, have made no secret of their ambitions to go public. And just last month, Hyperion-owned Howden also threw its hat in the ring. So can a listing on the London Stock Exchange offer brokers a gilded pathway to growth and riches? Or is it a fast track to turning a successful private broker into a public-listed disaster?

Arron Banks, founder and director of Alternative Investment Market-listed Brightside Group, has no doubts about the benefits of going public. Although its value more than halved in the bear market of 2007-09, Brightside, which listed on AIM in 2007, has seen its share price climb almost 50% this year and has a market cap above £100m.

“You’ve got to get to a certain size before it’s useful,” Banks says. “But we’re looking to grow our business, partly through organic growth, but also through acquisition, and that’s where a listing helps. As a public company, if you find an acquisition you want to do, you can go back to investors and raise money for it.”

Banks’s view is echoed by privately owned Hyperion’s founder and chief executive David Howden. “We see a lot of attraction in listing and will look to float once we have the company in the shape we want it to be and once we’ve grown a bit. Unless your market cap is north of £250m, you’ll end up struggling at the stock market,” he says.

“You need to be large enough to attract the interest of the reasonably sized and right investors, otherwise you could slightly die a death; you float and nothing happens.”

The reasons for launching an IPO are obvious enough. Being publicly listed gives companies additional capital and access to liquidity. For listed companies, those benefits more than outweigh the additional rules and regulations the stock market imposes on businesses, and the hoops that aspiring public companies must first jump through.

“The City looks for good governance and transparency when considering whether to invest in an IPO,” Panmure Gordon Insurance analyst Barrie Cornes says. “And obviously, as an investor you’re also looking for a growth stock [which will deliver share price rises], or an income stock, that delivers income over a period through dividends payments.”

New faces

But before getting anywhere near potential investors, aspiring public companies must first appoint financial advisers to ensure the company can satisfy stock market regulations and persuade investors to buy into it. It also helps to have a well-known auditor and remuneration committee in place before approaching investors.

Going public also involves bringing onto your board some ‘City faces’: people with executive experience at public companies that investors are familiar with in the Square Mile.

“I wouldn’t say you have to, but we did choose to do that,” Banks says. “Our chairman [Christopher Fay CBE] is a former chairman of Shell and still sits on the board of Anglo America. He probably shouldn’t be knocking around with us, but we managed to get him on board because he liked our business and enjoys the entrepreneurialism of it.”

But Cornes says experienced City hands on a board is a prerequisite for an IPO. “Experienced non-executives who add value to a business is a key element of going public. If the City isn’t happy with the look of a management team, it will make its reservations clear or simply won’t get involved.”

In addition to increased access to capital and liquidity, an IPO is also a crucial mechanism for rewarding and retaining ambitious staff.

Banks says: “Around 220 of our staff have share options in the firm and that’s a way to encourage them to continue building the business. If you’re a private company, that’s difficult to do because staff don’t really have an ultimate market for their shares. As a public company, they can see the value of their shares and the potential to make some capital out of them.”

Staff retention is also one of the drivers behind Howden’s desire to take Hyperion public. “We’ve attracted a lot of high-quality talent. They want us to grow and remain an independent business, and flotation gives you that. You can push the shares quite low down in a business and that motivates people. If your strategy is to flog the business to a large corporate, you won’t motivate staff or attract new people.”

In sickness and in Jelf

It all makes the stock market sound like a financial Shangri La until you remember that there has been the odd casualty amongst the publicly quoted broking fraternity in recent years.

Lloyd’s insurance broking group Windsor enjoyed bullish growth for a number of years as a public company, but delisted in 2007 after struggling to attract enough investor interest. More recently, the highly acquisitive broker Jelf has endured a torrid time on the stock market and has seen around £60m wiped off its value in the last year and a half.

In April 2008, Jelf’s share price peaked at 247p in the midst of a £100m-plus buying spree. In November, the shares slumped to a new low of 37p. The group now has a market cap of £20m, with debts of more than £30m, and the odds on Jelf continuing as an independent trading entity are very long indeed.

Jelf declined to comment for this feature. But does the firm’s experience on the stock market provide a warning for others?

“It isn’t the stock market that did for Jelf,” one industry figure insists. “It was buying brokers with debt at high prices that caused its problems. Prices have fallen but the debt is still here. Their business model was flawed, not the stock market.”

Jelf’s current plight highlights another issue, namely the problem that arises when a City institution with a large holding in your firm decides its investment is surplus to requirements.

One of Jelf’s largest investors is private equity group 3i, which has a 27.9% stake in the company after it absorbed its ill-fated sister company and the original investor in Jelf, 3i Quoted Private Equity. It is understood that 3i is looking to offload its stake but has so far been unable to find a buyer.

Cornes says: “There are always concerns if you’ve got a large shareholder and they decide they want to exit. But normally in those circumstances, the company will tell its financial adviser quietly what’s happening, and their adviser will line up other investors who can buy at a small discount to the quoted price. It’s not a huge issue.”

One way a newly listed company can insulate itself against this is to retain a majority of the new shares, although such arrangements can also put potential investors off.

“If a shareholder wanted to retain 70% of the company, then potential investors might not be happy. Investors need to be comfortable with the shareholding and firms seeking to go public need to be aware of that,” Cornes says.

When Brightside listed, its three main directors – Banks, Paul Chase-Gardener and John Gannon – retained around 50% of the company. Banks insists the plan is to eventually turn into what he describes as “a genuine public company”, but adds the process cannot be rushed.

“You can’t do it in one bite; it has to be a rolling programme. But the key is not to have a dominant investor. We raise money if we need to from a range of investors,” he says.

Listing costs

Another important consideration for private companies looking to come to market is the cost of the infrastructure that underpins a public company.

“The amount of due diligence and paperwork that being a public company involves is expensive,” Banks says.

“We spend around £300,000-£400,000 a year to maintain our listing. You need better-known auditors when you go public, and they charge more.

“Same with lawyers – you have to have a recognised law firm. We also have to update shareholders regularly on what the company is doing, explaining things to people, institutional investors, which we never had to do. It all adds up.”

With all that in mind, it begs the question of whether insurance brokers are really suited to life as public companies?

Cornes has no doubts. “Provided a firm is well-capitalised, a market quotation is a good thing. Insurers can be good investments, but size does matter and brokers are not normally that big. The problem for all small entities – those with a market cap below £100m – is that they are not on the radar of the City.

“You can be a great performer, but no one is interested if you are too small." IT

LSE flotation checklist

1 Does your company have a clear strategy and business plan?

2 Is the structure of the board suitable and robust?

3 Are the members of the management team prepared for the greater disclosure, openness and accountability that investors and the market require following flotation?

4 Is the management team able to invest the time and effort to get your company ready for flotation?

5 Is the current structure of your company appropriate for life as a publicly traded company?