A handful of U.S. venture capital firms may take portfolio companies public on the London Stock Exchange‘s Alternative Investment Market, the small-cap exchange, to avoid Sarbanes-Oxley and other regulatory hassles.
“I’ve been saying this all year, ‘If they’re not going to give us access to capital, we’ll go elsewhere,'” said Charles Lax, managing general partner of GrandBanks Capital in Newton Center, Mass. “I’m not going to sit around waiting for the boys in Washington to get off their fat asses and do something to help us.”
Lax has been through high profile listings before, helping to take Yahoo public while at the company’s main backer at the time. He has six companies in GrandBanks’ portfolio that could go public next year and is currently in discussions to bring some of them public on the AIM.
Beringea, a private equity firm, has two portfolio companies that could go public on the AIM next year, according to Malcolm Moss, a founder and senior managing director in Farmington Hills, Mich. One is an automotive company handled by Beringea’s investment banking arm. The other is Porchlight Entertainment, producer of the children’s television show Jay Jay the Jet Plane.
The London Stock Exchange recently began marketing AIM to venture capital firms and private companies. A team from the exchange has scheduled 13 seminars on the east coast and in California from January to February.
Mark Heesen, president of the National Venture Capital Association, said he expects a trickle of companies to list on the AIM, not a flood, until Congress lightens the regulatory burden for smaller companies, and investors regain their enthusiasm for technology offerings. Most companies still prefer to list at home, even if the paperwork and the cost of being public is cheaper in the U.K. Prospective issuers also tell bankers they’re concerned about liquidity in secondary offerings and losing U.S. institutional investors who regard foreign securities as more risky. “If the IPO market opens up again, they’ll stick with the Nasdaq,” Heesen said.
But going to London isn’t just a way to escape Sarbanes-Oxley, say investors. On the AIM, follow-on offerings often get finished more quickly and cheaply and valuations are also high. Analyst coverage is guaranteed once a company finds a nominating advisor, basically an underwriter that vouches for a company after taking it public.
American companies with $100-$400 million in market capitalization seem like prime candidates for listing on the AIM, said T. L. Stebbins, investment banking chairman of Adams Harkness. “Let’s forget the sub-$100 million IPOs,” he said. “The blind spot in the U.S. market in the last five years is the $100-$250 million IPO, the predominant range in the late 90s. AIM is stepping into that space.”
Venture-backed companies have found the U.S. IPO market unwelcoming in 2005, as fewer than 60 have gone public thus far, according to the NVCA. There were 93 venture-backed IPOs in 2004. “And that wasn’t a spectacular year,” Heesen said.
In contrast, the AIM had 318 IPOs this year, many backed by venture capital. An official at the exchange said listings from U.S. companies jumped from 19 to 33. The most recent American addition was Massachusetts-based International Metal Enterprises‘ £114.12 million ($199 million) IPO on Oct. 5.
