Following Third Point Re’s recent IPO, Bermuda:Re spoke with Pete Cangany, partner at Ernst & Young about the timing and nuances of a re/insurance IPO.
Is an IPO the only way to go for newer reinsurers looking to go increasingly global?
Going down the IPO route enables re/insurers to access increased levels of global capital and delivers diversification away from those stakeholders that provided start-up funds. The IPO route helps to deliver considerable capital liquidity. If a company has a longer-term view of the market and the support of private capital they can operate without the need for an IPO, but most tend to opt for an IPO at a certain time horizon.
An IPO is generally regarded as a means of adding in an exit strategy for existing investors. Most investors have a three to five year horizon—whether it is cashing out, or converting their private capital to public funds or acquiring preferred ownership in the company. Typically to grow a company you are going to need more capital, which will necessarily demand greater transparency around the exit strategies of existing stakeholders.
Is it easier to bring in additional capital through an IPO rather than privately?
It is largely a question of how successful the company has been in executing on its strategy from its inception. If the company has underwritten and invested successfully, they will likely have little difficulty securing additional capital to grow the business. And if that same company wants to go down the IPO route, they will likely enjoy even greater success when they launch because they have been able to demonstrate they can execute on their strategy. If they can’t do that however, then capital will be difficult to come by.
Does speed to IPO reflect short-term success?
If a company is going public that quickly, it has likely been built into their strategy. Clearly, in this market, one year is not a long time, so what investors are looking at when a company goes public that quickly is the strength of the management team—particularly the underwriters—and the CEO. The quicker the IPO, the more likely it is that a well-known and successful management team is leading the new re/insurer.
How do you view the timing for an IPO? What are the major challenges and opportunities associated with an IPO right now?
Now is the best time we have seen in four years. A recent survey carried out by EY found that a lot of capital has been tied up on the sidelines during the downturn, with this year seeing a flurry of IPO activity. With the low interest rate environment persisting, those companies that have been able to grow during the downturn have proven themselves to be financially strong and, as a result, are receiving considerable interest when they go public.
How is the recovery helping IPO activity?
Companies are sitting on the most cash that they have probably had on their balance sheets in a long time and are anxious to put that capital to work. I think that as economies improve—and clearly they aren’t out of the woods yet—more and more of that capital is going to be put to work.
Ernst & Young, Third Point Re, IPO, Bermuda