Perspective

Considerations for Australian Technology Companies When Assessing an IPO Location

This article includes the key considerations and supporting data we recently compiled for a portfolio company to shine a light on the trade-offs between potential public market listing locations.

The original presentation can be viewed here.
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As investors and board members, it is our job to arm our portfolio companies with the data to understand the key considerations for their most strategic questions. Often this relates to their transition from a private to a public company, where one key consideration is always, ‘Which exchange should we list on?’.

For many Australian technology founders with a potential IPO on the horizon, listing on Nasdaq and NYSE has become an increasingly viable option, particularly given Atlassian’s success in forging this path.

However, for most founders, ASX should and needs to be considered as a very logical option, with many attractions to listing locally.

When it comes to the boardroom discussion, we simplify the conversation into three critical considerations:

  1. Strategic or Brand Value
  2. Valuation, Trading and Market
  3. Operations, Governance and Timing

1/ Strategic or Brand Value

This is the hardest to quantify but, without a doubt, a successful IPO can generate a brand ‘halo effect’ regardless of the listing venue.

It is fair to argue that a US listing has the potential to generate incremental strategic or brand value in terms of customer awareness and future acquisition currency given that the US is the centre of the financial universe and the dominant western economy that most technology companies will want to enter from a customer point of view.

While the US is larger, it is also more crowded media landscape. Our data shows that smaller businesses in Australia receive more share of voice from PR and media. For example, Siteminder (AUD$1.5b market cap) since it listed in November 2021 on ASX has had a ten times the mentions in the AFR than Braze (listed at the same time, market cap of US$6b at listing) has had in the WSJ.

Simply put, there is an opportunity to be a big fish in a small pond when it comes to brand halo in Australia.

2/ Valuation, Trading and Market

A common misconception amongst Australian based founder is that US-listed technology businesses receive higher valuations. Generally, we see zero impact between the two locations on valuation multiples. Both markets are highly correlated for valuation in terms of both absolute growth and efficiency.

If there is any valuation premium, we actually see top-quality ASX tech businesses attract a valuation premium given the scarcity of high growth, tech businesses on the ASX.

Interestingly, the free float of US companies turns over about 3x faster than ASX-listed companies. The benefits of a stable share register and longer-term investors is obvious and amongst other things provides businesses a greater ability to execute longer-term strategic initiatives rather than constantly have to battle the shorter term quarter to quarter investor trap that is both distracting and not productive to long term shareholder value.

Capital Market Considerations – The Trade Off on The Magnitude of Market

Some statistics of interest to give context in the variation in market sizes between the US and Australia;

  • There are 15x more listed software companies of scale (>$200 million in revenue) in the US than in Australia
  • The median market cap of software businesses on the S&P500 is 9x higher than the ASX200.

The size of the US market, given it is the deepest capital market in the world has its attractions. There are certainly more investors and research analysts that possess a niche focus and acute understanding of comparable tech companies.

The downside to this, at a certain scale, is it is much easier to get lost and not attract investor or analyst attention. In line with this, our data shows that there is a higher concentration of analysts in Australia for businesses with an enterprise value less than $3 billion. (SLIDE 9)

Index Inclusion

Given the size of the market, it is far easier for smaller businesses to qualify for major indices in Australia. Inclusion in the indices can create meaningful demand. For example, the market cap threshold of an ASX200 is ~$510 million vs S&P500 ~$7.6 billion.

This is not to suggest ASX lacks either sophistication or depth of capital – Australia has the 5th largest pool of pension assets & global investors make up a significant portion of ASX-listed companies’ share registers.

3/ Operational, Governance and Timing

The two markets have vastly different operational and governance requirements. In short, listing in the US is far more costly, takes far longer to execute and is a far more onerous process.

Of course, one relevant factor that is often overlooked in discussion is the physical location of the CEO, Board, management team & employee base. Our simple rule of thumb is that unless the CEO and CFO are permanently located in the US, it makes listing in the US far more operationally challenging than imagined and is not recommended.   

While the pdf pack provides a detailed comparison of listing on the two major exchanges in the US and ASX in Australia, a simple summary is provided below;

Cost to List:

Listing in the US costs more upfront and ongoing. On average, it is twice as costly to list in the US – a difference of $10 million. The biggest variance in quantum is in underwriting fees – while the legal fees are almost 5x more expensive to list in the US, Directors and Officers insurance can be up to 10x more expensive in the US.

Timelines:

Prior to the lodging of any prospectus, there is a significant workload that needs to be completed by the listing company. These work streams are wide and varied, but a vast majority of these fall upon the finance function to ensure a smooth transition to the public markets. The other critical work streams are related to corporate and capital structure, compensation and post-IPO stock-based incentive programs as well as board and committee composition.

In our experience, this IPO preparation phase is more time consuming and distracting than any management team thinks it will be. In the US, we think on average it will take at a minimum 18 months, but more likely 2 years, and in Australia management teams should set aside at least a year prior to the lodging of a prospectus.

The official IPO timeline is far more defined – as seen below, the US can take up to up to two times longer that in Australia, that is generally three to four months. Notably, the SEC review process in the US can take up to 16 weeks versus the typical ASIC review of one week.

Secondary Transactions (Pre- and Post-Listing):

In Australia, it is easier to sell shares at IPO and raise money in follow-up offerings. The US, however, is better structured to facilitate founder and management selling post-IPO via 10b5-1 plans.

Ongoing Obligations:

The most obvious variation is that the US requires financial reporting quarterly vs Australia’s requirement for semi-annual. Beyond this, it is generally far more onerous to be a listed business in the US – audit and internal control requirements are cases in point.

Directors and Board Governance:

There is a wide variety of nuances to consider in the two markets that you need to be aware of. By way of example, in Australia, all Directors are (re) elected at each AGM, while in the US Directors have set terms. Remuneration norms are also very different – for instance in the US often board members are issued RSUs, while in Australia there is no allowance for performance-based equity programs for directors.

Emerging Growth Company (EGC) and Foreign Private Issuer Concessions:

As an Australian company, and most likely meeting the threshold of a EGC (defined as being <$1.235 billion in gross revenue) it is important to understand the reduced disclosure requirements and concessions available both during the IPO process and ongoing.

For instance, only two years of audited financial statements are required versus three for non-EGCs and there is a more streamlined executive compensation disclosure on an ongoing basis.

As a Foreign Private Issuer there are reduced disclosure requirements but of course, this comes with the risk of reduced investor appetite and associated trading discount.


View the original presentation for the full data set and considerations


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