We look at why companies are delisting in order to gain access to more capital sources than they can access as a publicly listed company
Companies seeking capital have two primary options: private and public capital markets. Public capital markets are well-known, with familiar stock exchanges like the Australian Stock Exchange, New York Stock Exchange (NYSE) and Nasdaq. However, private capital markets are often less visible and may seem less accessible to companies seeking to raise capital.
Going public can be an attractive option for companies seeking to raise capital and increase visibility. However, the drawbacks of going public, such as significantly increased regulatory and governance requirements, short-term market pressures and often limited access to capital, have prompted some companies to consider delisting and instead accessing private capital. Companies may choose to delist for a variety of reasons, including the ability to manage their operations without public scrutiny, the need for long-term patient capital and less onerous regulatory and governance requirements.
Now, let’s take a closer look at the limitations of public capital markets and why they may not be the best fit for all companies seeking to raise capital.
II. The Limitations of Public Capital Markets
Becoming a listed publicly traded company is a major decision for any organisation. While going public has its benefits, companies (especially smaller ones) can face limitations when it comes to accessing capital. In this section, we’ll explore three key limitations of public capital markets and how they can affect a company’s growth.
A. Regulatory and Disclosure Requirements
Going public means complying with a wide range of regulatory, governance and disclosure requirements from securities regulators like ASIC and the ASX in Australia, and the SEC in America. These requirements can be time-consuming and costly and may detract from a company’s core focus on growth and innovation. Additionally, the scrutiny and transparency that comes with being a listed company can be a double-edged sword, as it can attract unwanted attention from competitors or activists.
B. Short-Term Market Pressures
Publicly traded companies are subject to short-term market pressures, such as meeting quarterly earnings expectations or responding to market volatility, often under pressure to meet short-term performance expectations from investors, who are looking for quick returns on their investment. This can lead to a focus on short-term gains at the expense of long-term strategic growth and innovation. Additionally, the constant scrutiny and pressure from investors and analysts can make it difficult for companies to stay the course of their long-term strategy. In contrast, private companies have more flexibility to pursue long-term goals without the same level of scrutiny from investors or attracting the attention of activists.
In 2019, Uber went public in one of the largest IPOs in history. However, the stock struggled in the months following its debut, as investors became increasingly sceptical of the company’s long-term growth prospects. Airbnb stayed private for many years to avoid the short-term pressures of public markets and focus on building its business.
C. Limited Access to Capital
While going public can provide companies with access to a large pool of capital, it can also limit their options for raising capital in the future. Once a company goes public, it may find it difficult to raise additional capital through secondary offerings or private placements, as investors may perceive this as a sign of weakness, especially against the background of a weak or declining share price. Some investors may even be prohibited from investing in certain types of securities or may have restrictions on the amount they can invest. In contrast, private companies can raise capital from a wider range of sources, including venture capital firms, private equity funds and family offices. Additionally, the process of issuing new shares can be time-consuming and costly and may not be feasible for smaller companies.
For example, SpaceX has raised billions of dollars in private capital from investors such as Google and Fidelity, allowing it to fund its ambitious plans without the constraints of public markets.
In the next section, we explore how private capital markets can provide an alternative source of funding for companies looking to grow.
III. The Advantages of Private Capital Markets
In recent years, an increasing number of Australian companies have been turning to private capital markets to raise capital and grow their businesses. This trend is driven by the advantages that private capital markets offer over public markets, especially in terms of flexibility, control and access to longer-term patient capital. Here are some of the key advantages of private capital markets for companies in Australia:
A. Greater Flexibility and Control
Private capital markets in Australia offer companies greater flexibility and control compared to public markets. Private companies can choose their investors and negotiate more favourable terms, such as board representation and operational involvement. This allows for a closer alignment of interests between the company and its investors, which can lead to better decision-making and long-term success.
For example, Australian fintech company Tyro chose to raise capital through private markets before going public. While this allowed it to maintain greater control over the company and negotiate favourable terms with investors, which ultimately led to a successful IPO that was no guarantee of an easy post-listing life.
B. Access to Patient Capital
Private capital markets in Australia provide companies with access to long-term capital that may not be available through public markets. Private investors are often more patient and willing to make longer-term commitments, which can be particularly beneficial for companies undergoing significant growth or transformation.
C. Lower Regulatory and Disclosure Requirements
Generally speaking, private capital markets in Australia have lower regulatory and disclosure requirements compared to public markets. This can be particularly advantageous for companies that want to avoid the costs and complexities associated with going public.
IV. The Delisting Process
The decision to delist from a public exchange is not one that companies take lightly. However, it can provide a number of benefits for companies that have found life in the public markets not what they expected. In Australia, the delisting process involves several steps and considerations.
A. Reasons Why Companies Choose to Delist
There are several reasons why a company may choose to delist. One common reason is to gain greater control over the direction of the company without the pressure of public market scrutiny and expectations. Delisting can also reduce the governance and regulatory burden and costs associated with public reporting requirements, which can be a significant financial and administrative burden for smaller companies. Additionally, a company may choose to delist if it believes its shares are undervalued and wants to avoid the negative impact of short-term market pressures.
B. The Costs and Risks of Delisting
Delisting is not without its costs and risks. Companies that delist from a public exchange may find it more difficult to access capital in the future, as private markets may not be as liquid or as well-understood by investors. Additionally, delisting can result in a loss of transparency and visibility for the company, which can negatively impact its reputation and ability to attract investment. There may also be legal and regulatory hurdles to navigate, including shareholder approval requirements and potential activism from shareholders who disagree with the decision to delist.
As we have seen, private capital markets offer significant advantages over public markets for growing companies, including greater flexibility and control, access to long-term patient capital and lower regulatory oversight and disclosure requirements. While delisting from a public exchange may seem like a drastic step, it can provide companies with access to the capital they need to achieve their growth objectives.
However, it’s important to consider the costs and risks associated with delisting, including the potential loss of visibility and liquidity. Companies should carefully weigh these factors against their capital needs before deciding to delist.
Ultimately, the decision to delist should be based on a thorough analysis of the company’s financial situation and growth prospects, as well as its goals and priorities. By taking a strategic approach to fundraising and capital management, companies can position themselves for long-term success and growth.