Prepare for Launch

The global IPO market may be in the doldrums, but the Channel Islands are ideally placed to profit when confidence returns, as Christian Doherty explains.

There are many ways for private businesses to raise capital. They can ask the bank; they can try to attract an investor; or they can look to the public markets and list on an exchange.

Until the financial crisis, this last route was a viable option for most healthy businesses. The number of initial public offerings (IPOs) on the world's exchanges held strong, and London enjoyed a steady stream of companies going public, both from the UK and beyond.

Market sentiment was broadly bullish (some might say too much so), and any company with a reasonable story to tell was welcomed. Advisers' deal fees swelled as they shepherded companies into the public arena.

Fast-forward a few years to April 2011. Engineering firm Edwards Group announced it was shelving its plans to go public after poor investor demand left it struggling to meet the valuation needed for its private equity owners. It had been on track to raise £350 million, but could barely muster any investor interest.

Three days later, another highly regarded business, Moneybookers, was forced to pull its long-awaited IPO. Tellingly, a comment from a source close to Moneybookers attempted to put a positive spin on the story.

“Early responses to the IPO were positive – it was a rare opportunity to invest in European internet,” the source told the Daily Telegraph. “But then the IPO was hit by the perfect storm: Edwards was pulled, other IPOs traded badly and all of that came against the backdrop of unrest in the Middle East and the troubles following the tsunami in Japan. This wasn't about the company; it was all about the timing.”

To put this in some context, London saw 268 IPOs in 2007 (both main market and AIM). In 2008 that fell to 72, and as the first effects of the financial crisis began to be felt, reached an all time low of 21 in 2009. In 2010 there was a significant bounceback to 94, but figures fell again in 2011 with only 76 successful IPOs on the London markets.

A difficult market

“Last year was a difficult year to get anything away,” confirms Mike Jeffrey, Corporate Finance Partner at Carey Olsen. “Investor appetite was down on where it had been previously. Everybody knows that London markets had a terrible year or two, compared to what they were doing back in 2008, before things changed so drastically.”

There are a number of reasons for this serious slowdown in activity: some obvious, others less so. “People talk about markets and banks and hedge funds as though they are an entirely separate world,” says Nick Harriss, Director of Corporate Finance at Allenby Capital. “But they're all run by people, and are affected by the same emotional issues that affect us all. As much as they claim to be entirely rational, they're not.”

In Harriss's view, the fundamental problem remains one of confidence. Businesses need to raise capital, but the two main sources – banks and the public markets – are less likely to supply it while the economic uncertainty continues.

But what of the capital markets? Surely that money will back a good IPO story? “That's slightly different,” says Harriss. “It's not that there's a shortage of available capital. In fact, there are plenty of investment institutions able to put money in equities or bonds. But there are a lot of institutions that are concerned about their own investor base requiring liquidity, therefore probably running higher levels of internal cash balances than might otherwise be the case.”

Leading the way

All of this leaves the Channel Islands in a peculiar position. Both Guernsey and Jersey benefited enormously from the bull run to 2007, which had London at its heart. While times were good, the Channel Islands established themselves as the first choice for both listed funds and trading companies looking for a tax-neutral jurisdiction in which to register. That dominance is reflected in the fact that all non-UK companies on the FTSE 100 are registered in Jersey. In the 12 months to June 2011, Jersey-registered companies floated on the London Stock Exchange and AIM raised £8bn, which was over half of all new capital raised on London markets during that time. Incidentally, since its foundation in 1998, the Channel Island Stock Exchange has also enjoyed healthy growth. It recently celebrated its 4,000th listing, and now has by far the most Channel Islands listings of any global exchange, with more than 1,100.

Mark Lewis, Senior Partner at Appleby Global, believes there are three pillars that make the Channel Islands' offering to those looking to incorporate and then join the London market. “The first is familiarity – the Jersey Company Law Regime broadly follows the UK system. Investors like the English legal system, so they feel comfortable with Jersey companies,” he explains. “Second, they like the flexibility of offshore companies, and finally they like the tax neutrality.”

It is the tax element that has paved the way for the Channel Islands' dominance of the listings market. Under the current rules, any operating company, wherever it is based, must pay all tax liabilities – corporation tax and so on – in its home country. Incorporating the company in the UK would mean that an extra layer of corporation tax would be added. A Channel Islands registration, by contrast, doesn't attract that slice of tax.

That tax saving serves as a beacon to attract foreign companies looking for a London listing to the Channel Islands. “They want to get the maximum capital in from the IPO, so they don't want to have any additional tax burdens,” Lewis explains.

Emerging onto the market

While the volume and number of deals might have dropped, there are some sectors where companies continue to pursue an IPO as a way of raising funds. And that isn't limited to London. A growing number of Jerseyregistered companies have also been welcomed on the Hong Kong and Shanghai exchanges recently, reflecting the importance of emerging economies in driving growth.

“The ones I've seen more recently have been mining or commodities groups, and I think that reflects the fact that they're very attractive just now to investors, because commodity prices have been going northwards,” says Carey Olsen's Mike Jeffrey.

“Those commodities companies are also a good bet for investors, largely because emerging markets need more and more commodities to make the engine run. So they're very attractive to investors, and as a result, this is probably a good time for them to go to market. Glencore and Polymetal were two examples of that.”

Logic suggests that the market will rebound, but when the economic freeze begins to thaw, will Jersey and Guernsey be in a good position to capitalise on the upturn? Mike Jeffrey certainly thinks so.

“Clearly, it's not a good time for any IPOs at the moment, but I firmly believe that things will change back for the better,” he says. “And when it does, the Channel Islands are well placed, not least because of the historical links, but because in the meantime, we've all had a chance to digest this stuff and get better at it.”

However, while no one doubts the ability of Jersey and Guernsey to handle major IPO business, there are challenges to be faced. “There is no doubt that governments in the major industrial countries are looking desperately to raise taxes, and anything they can do to keep the tax revenue within their zone, rather than let it escape by way of an offshore jurisdiction, I think they will do,” says Harriss, who believes this impulse will be especially strong in the Eurozone countries, for obvious reasons.

That said, current wisdom dictates that whatever growth the global economy sees will principally be driven by emerging economies. If that proves correct, then companies from those growing territories need to access capital markets to maintain their growth. And the key to the door for many of them will be found in the Channel Islands.