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Raising funds in London

Category: Business in Great Britain

The UK offers companies a wide variety of financing options — some more traditional, some more easily accessible than others. The primary sources of finance are:

▼ London Listings (Corporate Finance / Equities), such as initial public offerings (IPOs) of securities on the London Stock Exchange (LSE), including the exchange for smaller companies operated by the LSE and known as the Alternative Investment Market (AIM).

▼ Eurobonds (Corporate Finance / Bonds)

▼ Bank Finance (Loans), offered in many “flavours” such as syndicated finance, project finance, commodities trade & structured finance, and asset finance.

▼ Private Equity / Private Placement, in which investment funds, professional investors and high-net worth individuals purchase equity (shares) in a venture as financial investors, not as strategic investors. In private equity / private placements, the equity (shares) of the company raising finance is not listed on any stock exchange.

For companies from the former Soviet Union, each has advantages and disadvantages. This article provides an overview of each and focuses on the requirements imposed on companies seeking access to these funding mechanisms.

London Listings (Corporate Finance / Equities)

A company may either float on the Official List of the London Stock Exchange (the Official List) or on the Alternative Investment Market (AIM). Alternatively, a company may seek an introduction to OFEX (a separate market, generally favoured by companies with a smaller market capitalisation than those on AIM) or to various other more specialised markets.

There are numerous benefits to be gained from listing on the London Stock Exchange, including: access to London’s extensive capital markets; the opportunity to raise funds and to issue shares with a value recognised by the market; widening a company’s shareholder base; creating greater liquidity in a company’s shares; and raising a company’s profile with its customers, financiers and international investors. Furthermore, establishing a public market in a company’s shares and a listed share price makes employee share ownership schemes more attractive to employees, helping the company to retain good staff.

Information Memorandum: If a company is largely unknown in the London market, the first step should be to produce a short information memorandum, setting out brief details of the company’s background, business, financial record and cash flow and management and shareholder structure, as well as its reasons and suitability for listing. The information memorandum also introduces the company to potential professional advisers and professional investors.

Methods of Listing: There are three primary ways a company can list on the London Stock Exchange. The method used will depend upon the company’s business, its shareholder base and its capital requirements.

▼ Public offer: The Sponsor offers the company’s shares to private and institutional investors. The offer is often «underwritten» — institutions agree to purchase any shares which are not taken up pursuant to the offer for an underwriting commission. It is the most expensive method of listing, but it is often the best means to raise large amounts of capital and to increase liquidity in the company’s shares. The public nature of the offer will also significantly raise the company’s profile.

▼ Placing: The Sponsor offers the company’s shares to a selected group of largely institutional investors. This allows the company to raise capital, but with lower costs and more freedom to select potential shareholders, although the more limited range of shareholders can lead to less liquidity in the company’s shares.

▼ Introduction: The company simply joins the market without raising any capital. This is usually the most straightforward and least expensive method of obtaining a listing.

The Official List and AIM — Comparison

The rules governing companies listed on the Official List are set out in the Listing Rules of the UK Listing Authority (UKLA). The rules applicable to companies quoted on AIM are contained in the AIM Rules of the London Stock Exchange. Both markets accept foreign companies. Both the official list and AIM require that the listed company be incorporated as a Public Limited Company (PLC) in the UK. Thus an FSU company will need to restructure existing assets or companies, so that the UK listed company is, essentially, a holding company.

The Official List is more expensive than AIM, and has more onerous disclosure and ongoing obligations than AIM, but it provides a higher level of publicity, more interest from outside investors, more opportunities to raise funds and greater liquidity in a company’s shares.

In general, an AIM listing is much more flexible and, if the company has not traded, no audited financial statements are required.

The Official List AIM
Broker There is no requirement to appoint a broker. However, most companies do so. The company must appoint a broker, approved by the London Stock Exchange.
Trading Record A three-year trading record is usually required. If more than six months have elapsed since the end of the last financial year, interim (half-yearly) accounts are required to be published. There is no requirement for a company to have a minimum trading history. If the company has a trading history, audited accounts for the last three years (or such shorter period as the company has a trading history) must be published. If more than nine months have elapsed since the end of the last financial year interim (half-yearly) accounts are required to be published.
Minimum Market Capitalisation The company’s market capitalization must be a minimum of L700,000. None.
Shares in Public Hands A minimum of at least 25% of securities to be listed. No minimum stipulated but a proportion of sufficient size to generate liquidity in the shares is advisable.
Accounting Standards Accounts must normally be prepared and audited to US, UK or International Financial Reporting Standards. Accounts must normally be prepared and audited to U.S., UK or International Financial Reporting Standards.
Independence from Substantial Shareholders A listed company must demonstrate that arrangements are in place to ensure that the listed company can operate on an arm’s length basis, without undue influence from a shareholder holding 30% or more of its shares. No similar requirement, but a Nominated Adviser is likely to ensure that appropriate arrangements are in place to ensure the independence of the company.

Advisers: A listing usually requires the company to retain advisers. These will include Sponsors for an Official Listing or Nominated Advisors (“Nomads”) for an AIM listing. Other advisors include accountants, UK lawyers, financial communications/IR firms, brokers, and share registrars. Companies should anticipate that the total fees for advisers will be in the range GBP 200,000 to GBP 800,000.

Reverse Takeover: A «reverse takeover» (RTO) is a fast and streamlined method by which a private company with a viable business becomes a public company listed on a stock exchange. A high percentage of listed companies used this method. In an RTO, the original public company is usually a «shell company» with no real assets (other than its minimum charter capital). The shell company has met all of the regulatory requirements and is listed — this is its value. The next step is for the shell company (with no real assets) to recapitalize and issue shares to acquire the private company (with a viable business and real assets), giving shareholders and management of the private company majority control of the shell company. The shell company now has new assets, new shareholders and new management.

Insiders — Restrictions on Dealing: Directors and applicable employees must comply with the Model Code, which provides that they may not deal in the company’s shares prior to the publication of the company’s annual or interim results (or quarterly results, if the company produces them) or at any other time when they have unpublished price sensitive information in relation to the company.

Other Securities Sold Via the Equity Capital Markets: In addition to IPOs and secondary offerings which involve company shares, other types of securities can also be sold by a company to raise funds from the equity capital markets, including convertible bonds, rights issues, monetisations, and corporate derivatives.

Eurobonds (Corporate Finance / Bonds)

An FSU-based or other company might also raise funds by issuing Eurobonds with the assistance of underwriters in London. Other types of “fixed-income” securities such as treasury bills, commercial paper and repurchase agreements are also underwritten in the London markets.

Many types of companies may issue (or “float”) Eurobonds, including private corporations, banks and financial institutions, sovereigns, parastatals (i.e. state-owned companies) and public authorities (such as municipalities).

Not all Eurobonds are listed on a stock exchange. For a Eurobond to be listed on the London Stock Exchange, a document referred to as the “listing particulars” must disclose relevant information for potential investors. The listing particulars and the information disclosed must comply with the requirements of the FSA and the regulatory body, the UK Listing Authority.

Using an SPV for Tax Purposes: A Eurobond for an FSU company might be issued through a newly established special purpose vehicle (SPV), often in a jurisdiction with a favourable tax treaty relationship with the target group of investors, to achieve tax efficiencies and other legal objectives. The SPV then lends the proceeds to the operating entity.

Lead manager: The lead manager of a Eurobond is customarily an investment bank or other respected financial institution, such as Goldman Sachs, Solomon Smith Barney, CSFB, Merrill Lynch and Morgan Stanley. The lead manager oversees the issuance in all its phases until receipt by the issuer of the funds raised by the sale of the Eurobonds. Importantly for the issuer, the lead manager should optimize the structure and timing of the issuance to ensure a successful sale of all of the offered Eurobonds.

Fiscal agent or Trustee: Eurobond issues have either a fiscal agent (under a fiscal agency agreement) or a trustee (under a trust deed), but not both. The legal effect differs. The fiscal agent represents the issuer and not the bondholders, and undertakes to facilitate payments to the bondholders of principal and interest. Although appointed by the issuer, the trustee represents the interests of the bondholders. The trustee (unlike the fiscal agent) owes the bondholders a “duty of care” under common law trust principles. A trustee for a Eurobond will be a professional trust association or a subsidiary of a bank or other financial institution, whose special purpose is acting as a trustee. Documentation: Issuing Eurobonds is a document intensive process. Key documents include:

▼ The informational papers concerning the underwriting, subscription and distribution of the bonds (i.e., mandate letter, invitation telex, listing particulars or other offering document, subscription agreement, auditor’s report and consent letter, legal opinions, etc.).

▼ The contracts for the bonds themselves (i.e., fiscal agency agreement, temporary global bond, permanent global bond, deed of guarantee, deed of covenant, etc.).

Bank Finance (Loans)

There are many “flavours” of bank finance, and seeking advice from a qualified financial adviser is helpful. Bank finance includes syndicated finance, project finance, commodities trade & structured finance and asset finance. The major UK commercial banks such as HSBC, Barclays, Lloyds, and National Westminster are familiar bank lending institutions because they have branches on most high streets (and thus are known as “high street banks”). They are joined in London by the other major banks (known as “money centre banks”) such as Citibank, ABN Amro, and ING Bank. The high street and other money centre banks provide the full range of lending. These and a number of other banks have strong corporate finance and commodities trade finance lending departments.

Merchant banks began in the 18th century as trading houses. Due to their original business of accepting bills of exchange, they are sometimes referred to as “accepting houses.” These banks advise their clients (mainly corporate) on how to arrange financing. Merchant banks do not customarily lend their own funds. Their advice includes raising capital (e.g. through issuing securities), underwriting a securities issue, managing investments, and M&A advice. Some merchant banks have now entered the PE financing arena. Merchant banks include Rothschilds, ING, Hambros, Kleinwort Benson, Lazards and SBC Warburg Dillon Read.

As with securing funding from other sources, obtaining bank finance is essentially a matter of persuasion. Borrowers need to persuade the lender that their business plan and financial forecasts are reliable. Banks assess the risk associated with a borrower’s proposal, e.g., whether the proposed business has capacity to repay the debt. Thus, banks typically seek financial statements and other information on the potential borrower, in order to prepare “cash flow” models and other internal credit analyses of whether a project or borrower or transaction is creditworthy (or “bankable”).

Private Equity / Private Placement

Private equity (PE) and venture capital is capital provided by full-time, professional firms (venture capitalists) or by private persons who invest with management in companies with the potential for significant growth. PE finance might be suitable for companies that (i) are willing to sell equity in their companies to outsiders; (ii) have high growth prospects; (iii) seek investment capital in excess of GBЈ250,000; and (iv) have a clearly defined exit strategy.

A number of investment funds and very substantial investors specialise in private equity, where typically they take an equity stake in a venture as financial investors (not usually as strategic investors). Well-known private equity firms include: AIG, Icap, CMC Group, Brunswick, Finsbury, CVC and Russell Investment Group. Private equity or «PE» means investing in the shares (equity) of a company that is not a public company on a listed stock exchange. If the company is relatively new, then the term «venture capital» is sometimes used to describe an investment into the company. For more mature companies, the term is simply «private equity,” especially if the investor is an experienced investor or PE fund.

Because a «venture capital» or «private equity» investment involves a company not listed on an exchange, any investor who later wishes to «cash out» must either find a buyer (another PE investor, or list shares via an IPO, or sell to a strategic investor) or recapitalize the company to free up cash.

«Venture capital» or «private equity» investment takes into account the entire «life cycle» of a company, from concept to mature company. A seed-stage company is one with not much more than a concept; a start-up company is one that is already in business and is developing a new product but has not sold it in significant commercial volumes; and a first-stage company has developed and market-tested a product but needs greater capital to initiate full-scale production. Second-stage, third-stage and mezzanine financing is for growing companies; and bridge-financing is often used to support a company while it is between rounds of financing, often while it waits to launch an IPO (hence the term “pre-IPO”). The newer the company and its product, the greater the risk, and the higher the expected return.

In addition to injecting cash into the company, the PE investor or venture capitalist is likely to add considerably to the credibility of the company and to supply management expertise, support and access to contacts. As part of their monitoring of their investment, PE investors often require board membership.

In contrast to bank finance, PE investors and venture capitalists are not looking for repayment, but for an equity stake. They typically look to realise their investment within 3-6 years. This means the investor needs to plan a realistic “exit strategy,” for example, a floatation on a public market (IPO), a trade sale (to a strategic investor), or for their stake to be bought out by company management (MBO).


Clyde & Co is an international law firm which provides a full range of legal services, including advice to clients on fundraising on the London markets

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