AXIAL CAPITAL

Going public through a special purpose acquisition company is nothing new, but in the US it’s certainly made a big splash in the mainstream in the recent couple of years. And now it’s in vogue on this side of the pond, too.

Special purpose acquisition companies, still viewed as a less respectable way to go public by the more traditional banking society, have been forming and going public at an unprecedented pace this year. As of this month more than 270 SPACs hit the public markets since the beginning of the year, all of these in the US, and at least 20 of these have been used by VCs to channel growth companies such as SoFi and Payoneer onto the public markets.

Clearly, the companies going public are no longer the under-the-radar types. Well-capitalized companies with brand name recognition are among those to go public or to announce their intent to go public through a SPAC.

With SPACs forming and going public every day, we decided to keep track of the companies that had announced they’ll embark on their next funding round via a SPAC takeover, as it’s a valuable bellwether for UK entrepreneurs when looking toward future funding rounds. Traditionally, the pillars of VC investment involve driving rapid growth in a young company and achieving an exit at a many-times multiple of the initial investment. And the pillars of PE investment were to strip out costs of an established company to drive up bottom-line returns and to achieve the same exit – a many-times multiple of the original investment. The public markets offer an alternative.

Whilst an increasing number of scale-up companies are choosing to remain private for longer, by recycling cashflows and handling investment rounds through more private channels, a good number of high growth companies are enjoying the benefits of a public listing – and in the UK that’s increasingly going to include the power of SPACs.

When a scale-up company rolls into a publicly listed shell (the SPAC), there is often already a level of cash in that shell and a further funding round is brokered for the merger – effectively an IPO in a different guise. Whilst the company is expected to perform and to ultimately deliver dividends and incremental value in its share price (translating into an increased market capitalisation), the sometimes high-pressure existence of hitting a VCs exit horizon of 3-5 years doesn’t exist. Ideally the company will flourish and will remain trading publicly with strong growth and increasing market capitalisation, giving the founders flexibility in when and how they may want to realise their personal value in the company – and ultimately to exit at a time that suits them.

Axial Capital advises on small-cap public listings, typically up to £100m of value, and is actively considering investment for proven scale-up companies across a range of sectors. Contact us to discuss your objectives if a suitable funding round is planned for your company.

Robotics in AgriTech, a MedTech app to support doctors through live procedures, and satellite-based software for real-time monitoring. That’s a snapshot of Q2 funding rounds at Axial Capital. Those three examples are growth companies we agreed to invest into through the second quarter of the year, and in particular with a cross-border angle to the transaction in order to provide greater exposure – and greater market access – to truly enhance the value of the funding round.

One thing the closed borders of the pandemic-world hasn’t been able to stifle is the free flow of information and capital. With our investment focus spanning beyond just the UK/EU, to include North America and the ASEAN regions, the ability for us to invest and to provide access to strategic partnerships in cross-border jurisdictions has in fact become better than ever due to the pandemic. This has become super effective in accelerating the expansion of high-growth companies.

The markets differ in dynamics and investment appetite of course. Where London has a high proportion of scaleup companies trying hard to get in front of VCs, Canada has an active and diverse investment base to support a proportionately higher number of those early stage companies. Where Western EU states have a mature base of investment funds, Eastern EU states continue to produce a pool of world class, scalable startups. This again is where a cross-border focus makes more sense to us when getting behind founders of high-growth companies.

The year ahead might (and hopefully will!) result in greater freedoms to travel and to meet in more personal settings than a video call, which we expect will enhance those cross-border relationships ever further. A positive outlook as the UK Autumn sets in.

In a season of IPOs, Deliveroo’s market debut made the headlines (for the wrong reasons of course). Following this, the director of AO Appliances offered an appraisal of the broader circumstances around the flotation, noting his view that capital markets are not supportive of entrepreneurship – hence the stock price cliff edge once shares were in public hands.

We see the public markets in a brighter light, noting the number of growth companies that have had much more positive experiences through the public listing process.

On the other side of the transaction is the money that supports growth companies to the point that they are ready for the public markets. Often this is private equity and VC money. This capital is the life-blood of early stage and scale-up companies. To keep that money working in the private markets we see the progression of these growth companies into the public markets as a natural and effective mechanism for recycling capital back into the VC/PE ecosystem.

There is a general view that individual investors are ring-fenced out of the VC space (plenty of crowdfunding platforms are attempting to rectify this – though whether they can provide access to genuinely high quality businesses is another matter of course). There has also been commentary that retail investors don’t get enough access to IPO subscriptions, though this too is being addressed on increasing numbers of public listings. Keeping this dovetail active between private and public markets maintains liquidity in the VC/PE funding pool, and enhances opportunities in the public markets.

We’re fortunate to operate in that dovetail, engaging with private equity markets in funding promising scale-ups, and then taking those companies to an IPO once their market relevance is proven. The equities market remains buoyant this year, and we look forward to seeing the virtuous (re)cycle of capital continue, to support the next wave of entrepreneurs!

It was only a couple of months ago that businesses watched beyond belief as revenues dived and forward-looking sales forecasts became merely hopeful suggestions. It certainly remains a turbulent time but activity on both the investment side and the client side is now back at pre-crisis levels. The steep discounts that were being applied to forecasts and enterprise value through March/April when agreeing investment terms are now improving, and funds are again being committed for leveraged buyouts and growth-by-acquisition deals (telling us that deals can indeed be executed over Zoom!).
 
So where is buyout capital generally flowing in the current market? We’re placing capital predominantly into established businesses with positive cashflows, either to fund growth by acquisition, or for management to buy the company they’ve been running, and sector wise it remains quite broad as long as the revenue model involves regular cashflows (eg. contracted B2B service providers, where forecasts are less dominated by direct-to-consumer sales or large infrequent sales). It’s about backing opportunities with stable income, for a degree of de-risking against a still unclear horizon.

Aligned with this is VC funding that is selectively completing on deals now that the position of existing investments is more stable, with funds going to companies that have proven their business model and their market, and can demonstrate rapidly growing revenues.