- Also known as an official public offering, an IPO describes when a private company shares its business with the public. Put simply, the purpose of an IPO is to raise capital from members of the public wanting to invest in a specific company.
- The main benefit of an IPO is that companies can access capital from the public market to purchase more assets and raise their public profile.
- Many are the fashion brands turning to Wall Street in what WWD defined as an “IPO rush,” and many will continue to do so in 2022.
The fashion market can be complex and volatile, making it hard to establish yourself amongst seasoned competitors. So, if you're a fledgling brand trying to break into the market, to give yourself an advantage, you’ll need to know about IPOs.
What's an IPO?
Also known as an official public offering, an IPO describes when a private company shares its business with the public. Put simply, the purpose of an IPO is to raise capital from members of the public wanting to invest in a specific company. When a company or group starts out, most of its startup capital usually comes from private investors, such as venture capitalists, founders, and friends. However, in the case of a fashion group, this initial investment may come from another associated business entity. For instance, the fashion group Kering is a conglomerate of Gucci, Alexander McQueen, and Balenciaga, among others.
Typically, a business will start their IPO once they are ready to trade on the public market. At this point, the company will work alongside a bank to underwrite its stocks, i.e., the bank will purchase any unsold inventory for a company. As part of this process, the bank assesses and values the company's shares to determine the risk of investing in that company and sets the price of public shares accordingly.
The main benefit of an IPO is that companies can access capital from the public market to purchase more assets and raise their public profile. For example, Swiss sportswear brand On certainly cemented their reputation within the business and investment community when they secured $746 million worth of investment through their IPO. According to CNBC, sneaker and streetwear resale platform StockX “completed a new funding round that values the high-end sneaker reseller at $3.8 billion” in April 2021, in what analysts have called “pre-IPO” behavior. Luxury rental company Rent the Runway raised $357 million in its IPO in October, for a valuation of around $1.5 billion. Many are the fashion brands turning to Wall Street in what WWD defined as an “IPO rush,” and many will continue to do so in 2022.
However, IPOs don’t come without risk. When a company enters the public domain, it has to maintain an interest in its shares to secure future investments. As a result, it's wise for companies to invest substantially in marketing, accounting, and legal protection. In addition, companies offering IPOs have to answer to the Securities and Exchange Commission (SEC) requirements. This demands transparency, including the reporting of businesses practices that businesses may not want to share. Nevertheless, IPOs remain a viable option for companies wishing to boost their capital and scale their business. Though, as we’ll discuss, there are other reasons a company may consider an IPO.
A buyout is when a buyer acquires 50% or more of a company's shares. When this happens, control of the company goes to the buyer (or group) who has the most shares. In this scenario, those who initially invested in a company, in other words, private investors who want to receive a return on their investment, can use an IPO as an exit strategy. What this means is when their private shares are converted to public shares, they can sell off their stake in the company on the public market. When a company goes public, the price and demand of shares can rise considerably. Thus, many private investors will look to quickly sell their shares via an IPO as a way of making quick money.
However, an IPO buyout isn’t just a way for investors to leave a company. For instance, investors may only sell some of their shares to raise capital which they reinvest in the business. For example, US firm TPG raised almost $900 million using this strategy.
Alternatively, a merger is another example of how a company can gain capital using an IPO. A merger is when two firms join together under one corporate name and become a new legal entity. A paper by Cambridge University suggests that strategically using an IPO can create merger opportunities. When a company undergoes an IPO, the value of their company is set on the market. Therefore, other companies looking to merge are more likely to consider enterprises whose share value and, by extension, the business’s viability has already been established.
The benefit of a merger is that companies can scale their business beyond their individual capacity. Namely, by reducing operating costs through bulk discounts on raw materials and increasing their output. As a result, the company is much better positioned to expand its market share and increase the value of its shares. One such example is the merger between LVMH Luxury Ventures and Stadium Goods. This helped them gain $4.6 million in new equity funding when they launched their IPO.
IPOs in the Fashion Industry
In essence, an IPO is a way to raise capital and gain publicity. However, going public with your IPO isn’t for the faint-hearted. IPOs work best for fashion brands with a robust financial structure and proven profitability. They have to meet the SEC listing requirements, which impose stringent regulations on public traders. Watch this space, you might be getting there soon.