Managing Director & Senior Partner; Global Leader of Mergers & Acquisitions
Companies entering the hot IPO market are looking for an advantage in their pursuit of a successful listing. Among the actions that issuers should systematically consider is onboarding a supporting investor. We distinguish two types: anchor investors buy a stake before the IPO process begins, while cornerstone investors acquire shares after the process is initiated but before the formal book building.
Supporting investors are typically known and respected players—whether large corporations or financial investors. A company should consider taking on supporting investors whenever it plans to sell a relatively large equity stake in its IPO. Their presence as shareholders helps to mitigate the risks of an IPO by building other investors’ confidence in the issuer, boosting the IPO valuation, and, ultimately, driving higher total shareholder return (TSR). Supporting investors, for their part, can benefit from early access, value realization via the stock market, and strategic flexibility.
BCG’s analysis shows that these benefits are tangible and empirically verifiable. However, an issuer must carefully select its supporting investor in order to ensure that each party fully realizes the potential rewards.
In 2020, despite the COVID-19 pandemic, the number and proceeds of IPOs increased sharply across the globe. The IPO boom was especially evident in China and the US for much of the year, while Europe saw significant activity in the fourth quarter. The global proceeds were $227 billion, a 29% increase versus 2019 and the highest level since 2010. The surge in activity was driven, in part, by new listings of special purpose acquisition companies (SPACs). (See “SPACs Versus Supporting Investors.”)
For the overall IPO market, the momentum has continued into 2021 and is expected to persist for the rest of the year and beyond thanks to a strong pipeline of candidates from all regions. In the first quarter of 2021 alone, companies raised $104 billion through IPOs globally—nearly half the full-year value in 2020. In this context, having a supporting investor is especially beneficial for companies that enter the IPO market without a track record of profitability, such as many tech startups.
The key differences between the two types of supporting investors are timing and size of investment. (See Exhibit 1.) Anchor investors come onboard before the issuer initiates the IPO process and typically acquire a 20% to 50% stake in the issuer. Cornerstone investors enter the picture later (after the issuer initiates the IPO process) and typically acquire a smaller stake (up to 10% of the issuer’s shares).
Issuers can benefit in several ways by taking on supporting investors. These benefits are especially important for IPOs involving a relatively large portion of the issuer’s shares:
An important caveat: Issuers should be wary of selling a stake to an anchor investor if they are simultaneously preparing for an IPO and a full sale to a third party and intend to decide which track to follow at a later date. If an issuer takes on an anchor investor but then decides to pursue a trade sale instead of an IPO, the anchor investor could become a roadblock, such as by refusing to sell its stake.
Several types of entities have emerged as supporting investors in recent years. Strategic investors from the issuer’s industry or a related industry are pursuing commercial objectives, such as solidifying a supplier-customer partnership or capturing synergies. Financial investors—private equity and venture capital firms—seek to secure an ownership stake in an attractive target when facing a competitive, seller-friendly market. Sovereign wealth funds and public pension funds are looking for IPO candidates that fit their criteria for asset allocation and investment size, among other deal requirements. Additionally, multiple entities can join forces within these categories (such as financial investors forming a group) to be anchor or cornerstone investors for a particular issuer.
Buying a stake in an issuer allows supporting investors to pursue several objectives:
Issuers that take on supporting investors create more value than those that do not, according to our analysis of IPO performance. They are less likely to experience underpricing, as measured by the difference between the final offer price and the price per share after the IPO (for example, after the first day of trading). They also have superior TSR, as measured over various time frames after the listing. Moreover, these listings generally feature superior risk-return profiles, as measured by the lower volatility resulting from greater investor confidence.
Recent examples illustrate the potential for issuers to boost IPO valuation and price by taking on supporting investors. (See Exhibit 2.)
Although supporting investors generally have a positive influence on value, their presence does not guarantee a successful listing. Each IPO is a complex undertaking. Various factors—including the macroeconomic sentiment, industry-specific outlook, soundness of the equity story, investor appetite, and lockup periods—influence the offer pricing and the first day’s trading results. Achieving the anticipated benefits also requires overcoming several hurdles. (See “Minding the Obstacles.”)
To select the optimal supporting investor, an issuer should consider criteria that include a prospective investor’s overall reputation, industry experience and expertise, and the cultural and strategic fit with existing investors. There are generally three approaches to finding the right match: