How Should Public Companies Prepare to Raise Capital in the Public Markets?
TL;DR
Public companies should carefully define why they are raising capital, choose the right funding structure (equity, debt, or hybrid), and prepare thoroughly with strong financials and clear investor messaging. Early engagement with the right investors and consistent communication are critical to a successful offering.
How Should Public Companies Prepare to Raise Capital in the Public Markets?
They should start by clearly defining the use of proceeds and selecting the most suitable financing option (equity, debt, or hybrid) based on their strategy and financial position. Then, they must ensure financial reporting is clean, build a compelling investor story tailored to equity or debt audiences, engage sell-side advisors, and actively build relationships with investors well in advance of the offering.
Introduction
Raising capital in the public markets is a powerful way to fuel growth. It’s also a critical opportunity to enhance your company’s relationship with the sell-side and the buy-side when managed wisely. However, even seasoned public companies can squander this relationship building opportunity without thorough preparation and strategic relationship management.
For your initial public offering, please also review MCI Capital Markets’ article about Preparing for your IPO.
Raising capital in the public markets can take several forms: an equity offering, a debt issuance, or a hybrid instrument. Regardless of the method, it requires careful planning, clear communication, and strategic execution. Companies need to plan ahead, align their financing with business goals, and engage both the sell-side and buy-side proactively. This article provides a comprehensive outline of key capital raising strategies and preparation steps. With these insights, your company can approach its next financing with confidence.
Defining the Use of Proceeds
Before launching into the mechanics of a capital raise, public companies should clearly define why they are raising capital. Investors will ask: What is the money for? A compelling answer is critical, and “general corporate purposes” is not a compelling answer.
Your company’s use of proceeds not only justifies the raise but should also build investor confidence. Specifically outline how the funds will be used and how this use supports the company’s strategy and growth.
Common uses of proceeds include:
- Funding R&D: For example, financing a Phase 3 clinical trial or other product development.
- Market Expansion: Entering a new market or scaling operations in a growth region.
- Strategic Acquisition: Expanding the scope or scale of your business by buying a complementary business or asset to accelerate growth.
- Deleveraging: Strengthening the balance sheet by paying down debt
- Capex: Investing in new equipment/facilities required for growth.
Be as detailed as possible in explaining the use of funds. For instance, if the capital will finance a new project, make the budget explicit. Break down costs (e.g., specific trials, marketing campaigns, or asset purchases). This level of clarity demonstrates foresight. Additionally, it gives investors confidence that management has a thoughtful plan for the influx of capital.
Strategic Planning and Preparation
After defining your use of proceeds, thorough planning becomes the foundation of any successful capital raise. Start by considering key strategic questions and building a timeline. Additionally, be aware that raising capital can take longer than expected – often six months to a year from preparation to closing. Therefore, it’s wise to begin preparations early and ensure your current resources can last through the process.
Key preparation steps before raising capital include:
- Evaluate Funding Options: Decide whether an equity offering, debt issuance, or hybrid instrument best fits your goals (see next section). Consider how much capital is needed and what structure makes sense.
- Clean Up Financials: Ensure your financial statements are in top shape and free of “red flags.” Tidy up the balance sheet and address any accounting issues to optimize the company’s financial health and transparency.
- Craft a Strong Business Plan and Pitch: Develop an investment grade investor presentation that clearly explains the ask, what you will do with the capital, and how it will generate returns. Include proforma projections and scenarios showing investors you can deliver results under a variety of conditions.
- Target Investors: Through quantitative and thematic targeting, determine the institutions and investors to target for the raise. Leverage existing shareholder relationships. Also, research new investors who match your offer (e.g., equity funds for stock issuance, bond investors for debt).
- Build Sell-side Relationships: The raise is also an important opportunity to expand your sell-side relationships with the right broker-dealers and generate additional sell-side support. With few exceptions, going the non-brokered route with your raise can do long-term damage to your sell-side access and support.
In short, effective planning means having your documentation, financial metrics, relationships, and team ready well in advance. Think through these aspects ahead of time. As a result, you reduce execution risk and ensure you can move quickly when market windows open.
Choosing Equity vs. Debt vs. Hybrid Financing
Next, public companies have multiple avenues for raising capital. The right choice depends on the company’s financial profile, market conditions, and strategic priorities. The three main financing options are:
Equity Financing
Equity financing means issuing additional shares to investors in exchange for capital. This approach places no burden of repayment or interest on the company. Thus, it frees up cash flow for growth initiatives. However, selling equity dilutes existing shareholders’ ownership and can cede some control to new investors. Companies typically pursue equity raises when they have a compelling growth story. Moreover, a strong stock price helps minimize dilution.
Debt Financing
Debt financing involves borrowing funds (for example, by issuing corporate bonds or taking a loan) that must be repaid with interest. It allows the company to raise money without giving up ownership, and interest payments are often tax-deductible. However, debt adds fixed obligations that must be met regardless of business performance. Too much debt can strain the balance sheet or violate debt covenants. Therefore, this option is best suited for companies with steady cash flows and prudent leverage.
Hybrid Instruments
Hybrid instruments like convertible bonds or preferred shares combine elements of debt and equity. These instruments can offer flexibility. For instance, a convertible bond may carry a lower interest rate in exchange for giving investors an option to convert into stock later. Nevertheless, hybrid capital raising tends to be more complex than straight debt or equity and can favor hybrid investors while creating an overhang in the company’s equity if not structured carefully. Companies should only use hybrids when the terms align with their long-term strategy and they fully understand the trade-offs (specifically long-term equity performance).
Investor Communication and Market Engagement
Finally, once your plan and structure are set, the next step is to communicate your story effectively to investors. Indeed, successful capital raises are supported by strong investor relations and marketing efforts. Do not wait until the last minute to generate interest. Instead, begin engaging with potential investors early – well before the official offering launch. Additionally, use that time to educate them on your company’s vision and performance. If you lack a broad base of investor interest, a financing could struggle due to insufficient demand. However, early and ongoing communication helps prevent a situation where a deal is under-subscribed or priced too low.
Caution: While pre-engagement with investors is important, management teams must avoid talking about the raise before it is officially launched. To do so is selective disclosure, and will also stop an investor from buying in the open market. If an investor knows your company is going to raise capital in the near future, they will wait to see the pricing of the offering before buying in the open market.
Tailor your messaging to address the divergent needs of equity vs. debt investors. Equity investors tend to care about growth potential, competitive advantage, and upside catalysts for the stock. They will want to hear about how the raised funds will drive revenue, innovation, and market expansion. By contrast, debt investors prioritize stability and downside risk management. Emphasize your cash flow consistency, solid asset base, and plans for prudent use of leverage. Craft an investor presentation that highlights the aspects most relevant to each audience segment.
Be transparent and proactive in your disclosures. Prepare clear, straightforward prospectuses or offering memoranda that answer anticipated questions about your strategy, risks, and financial projections. In investor meetings or roadshows, management should address key concerns head-on to build credibility. For example, be ready to explain how you are mitigating operational risks and competition, and demonstrate strong corporate governance. Consistency across all communications is key. Ensure that what you communicate in press releases, regulatory filings, and investor presentations all aligns to build investor trust.
Conclusion and Key Takeaways
Raising capital in the public markets is a significant undertaking for any listed company. In conclusion, success comes from careful preparation, strategic decision-making, and effective engagement with the sell-side and buy-side communities. By clearly defining the use of proceeds, planning thoroughly, building the right relationships, choosing the right financing vehicle, and communicating transparently, you position your company for success. Ultimately, these steps help unlock growth capital while strengthening investor relationships.
Key takeaways for raising capital in the public markets:
- Clarify Why You’re Raising Capital: Tie the capital to specific strategic objectives (growth, R&D, acquisitions, etc.) to justify the move.
- Plan Meticulously: Start early, polish your financials, and line up the necessary resources and advisors to execute the raise smoothly.
- Choose the Right Instruments: Weigh the pros and cons of equity, debt, and hybrid options in light of your business’s situation and investor preferences.
- Engage and Inform Investors: Communicate proactively and tailor your story to what your target investors care about (equity vs. debt perspectives). Build demand ahead of the offering to ensure a successful placement.
Raising new capital is an opportunity to accelerate your company’s momentum. Above all, don’t leave it to chance. Therefore, take action now to implement these strategies and position your company for a successful capital raise. If you need further guidance on raising capital in public markets, consider MCI Capital Markets’ Financing Support Services. With the right approach, you can secure the funding needed for your next phase of growth while enhancing your credibility in the eyes of investors.