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Eyeing the exit door

While 2023 was a relatively muted year for IPOs, there was a healthy flow of block trades, with a number of residual stakes from past years’ IPOs coming out of escrow. 

Block trades are transactions in which large parcels of shares in listed companies are sold off market, often following the expiry of escrow restrictions.

For private equity funds, founders and other early stage investors (Vendors) seeking to realise an unlisted investment via an IPO and listing, it is increasingly important to think about the transaction in stages. While there is clear attraction in selling a significant proportion of the Vendor holdings up front in the IPO, in terms of helping de-risk overall exit outcomes, and ensuring there is market liquidity in the stock immediately post IPO, IPO investors generally no longer support full Vendor exit on IPO. They want Vendors, particularly private equity funds, founders and management, to retain meaningful ‘skin in the game’ after the IPO – with a continued significant investment at risk and only able to be sold following delivery of IPO forecasts (or sustained post-IPO share price appreciation).

Exit strategies have adapted to meet these investor requirements. A strong headline price at IPO remains an important objective, but given significant economic exposure will be retained, and only realised via block trades which will often be occurring a year or more down the track, Vendors need to ensure forecasts are delivered, and that there is enough growth remaining in the business to support ultimate exit through one or more successful blocks, hopefully at above the IPO price. 

Not every recent block trade has been able to secure a sale price above the IPO price (and in fact a number of non-private equity blocks did not), but interestingly private equity Vendors have in large part managed to calibrate their exits so as to reap greater per-share rewards from post-IPO blocks than from the IPO itself:


Selected Private Equity Block Trade Prices 2020-2023

This trend has broadly kept both IPO investors and private equity Vendors happy.

While private equity Vendors have generally realised fewer shares as a percentage of their initial holdings at the time of IPO than used to be the case, say 10 years ago, they have often realised greater value overall (even after taking into account time value of money) and IPO investors have seen the value of their investments grow. 

That said, the IPO market’s requirement for meaningful retained and escrowed stakes (and consequent staged exit, with prolonged exposure to market and business risk, as well as delay in receipt of funds), combined with the expectation that an IPO stock will list at a premium to the offer price (and the absence of synergies with a buyer), continue to weigh with Vendors when considering the IPO route vs a trade sale as a means of exit.

Execution considerations

With Vendors choosing to, or having to, retain greater holdings post-IPO, it has become increasingly important for them to set themselves up at the outset for successful blocks in the future.

Blocks are far easier to execute than IPOs, with shares typically offered to institutional investors in a short overnight window, without disclosure documentation, and then crossed through the market early the next day. However, this does not mean that disclosure issues do not arise. Vendors are often entities connected to the company (either major shareholders, or sometimes controllers, with Board representation, or founders or entities connected with senior management). Care needs to be taken to ensure any sale takes place at a time the Vendor is ‘clean’ of inside information (and is seen to be clean – since even if information barriers mean a Vendor is technically separated from the company’s Board and information, as a practical and reputational matter, an information ‘surprise’ from the company following a block would obviously be highly undesirable). Additionally, if a Vendor is a controller, there is a formal Corporations Act requirement for cleansing statements by both the controller and the company in connection with a block. An investment bank selling a block will generally also require warranties that the Vendor does not possess any material non-public information.


Apollo and CIMIC Interests in Ventia


These issues need to be considered and taken into account ahead of an IPO. A relationship agreement will often be put in place between a private equity Vendor and the IPO company (and disclosed in the IPO prospectus) dealing with a number of key matters, including assistance by the company to the extent required with any subsequent blocks (including agreement to provide a company cleansing statement in a controller sale, if relevant). Where there are multiple Vendors, arrangements may also be required up front, at the time of IPO, to ensure competition law issues do not arise in relation to any later coordinated sale. 

An important way in which information issues are managed in practice is that block trades often occur shortly after a results announcements (subject to there being no further undisclosed material information at that time). Unsurprisingly, many of the block trades in 2023 occurred not long after the end of the escrow periods imposed after float, the expiry of which was generally pegged to the release of milestone financial year results. It should be noted that the ASX Listing Rule 3.10A requires companies to inform ASX of the impending expiry of voluntary escrow periods. 

On escrow’s edge

Where retained holdings are large, Vendors may not exit their entire position in one transaction, but instead undertake block trades in multiple tranches. Apollo’s and CIMIC’s staged exit from Ventia Services Group (on which Herbert Smith Freehills acted), was a highly successful example of a staged exit. The sale occurred over four tranches, following the expiry on 24 February 2023 of escrow restrictions dating from IPO. The IPO was executed at an offer price of $1.70 per share, and the subsequent block prices were $2.15 per share, $2.42 per share, $2.65 per share and $2.71 per share respectively.  

In conclusion, block trades will continue to be a key part of the capital markets securities distribution landscape. Any IPO Vendor must, as a matter of course, consider and plan for future block trades when structuring the IPO. While the frequency of floats on ASX may differ from year to year, we can expect to see robust block activity as investments retained in prior floats reach maturity with the expiration of escrow periods.  

Turning tides:

Australian ECM Review 2023

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Philippa Stone

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Henry Simpson

Senior Associate, Sydney

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