Special IPO considerations and key insights
Beyond the other processes outlined above, portfolio companies that are being considered for an IPO by their private equity owners will require an additional assessment for the IPO process. This is necessary due to the inherent complexity and regulatory requirements associated with an IPO.
Many private equity firms are initiating their IPO readiness assessments earlier than usual. However, heightened public scrutiny and increased enforcement by the Securities and Exchange Commission in 2023 underscores the need for portfolio companies to undergo a thorough end-to-end preparation process in the following key areas:
Accounting and SEC reporting
Accounting and SEC reporting processes are key aspects that most portfolio companies’ finance teams lack experience with. A shortage of experienced accountants and trained CPAs is increasing demand for interim resources to support the end-to-end registration process for the red herring prospectus, engagement letters, letters of intent, compliance with Regulation S-X and S-K, final prospectus, registration development (e.g., S-1, S-3 form), and the alignment upon final terms between the issuing company and the underwriter. Due to these resource constraints, many private equity firms are now addressing financial statements, including GAAP, International Financial Reporting Standards (IFRS), management discussion and analysis and required disclosures, including products, services, and competitive landscapes, a year before IPO, not in the usual 6–12-month timeframe.
HIGHSPRING EXPECTATION
Audit readiness and auditor independence are significant topics for the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB). These regulatory bodies are implementing stricter reviews of financial records and enforcing independence rules. Consequently, there is and will continue to be a greater demand for private equity firms to engage independent non-audit firms to conduct an IPO audit readiness process.
Finance transformation
Core strategies such as close process optimization and organizational redesign are frequently employed in the performance improvement activities mentioned earlier. However, the finance transformation necessary for IPO readiness will focus on specific aspects of internal and external quarterly board reporting, environmental, social and governance practices, and internal controls—areas not typically emphasized by private equity firms. Over the past two years, there has been increased corporate governance scrutiny from the SEC and key stakeholders such as Blackrock and Vanguard, particularly regarding ESG practices and control readiness before an exit.
HIGHSPRING EXPECTATION
Private equity firms that plan to exit through IPO will need to increase their investments in internal controls monitoring and corporate governance reporting. This is necessary to meet investor disclosure requirements, which include areas like board structure, compensation, ESG practices, and risk management.
Technology assessment and solutions
Many private equity portfolio companies result from acquisitions, often leaving disparate ERPs in place and reliance on manual processes to consolidate financial data in spreadsheets. This situation not only poses potential cybersecurity risks due to the use of disparate ERPs but also leads to delays in recent IPO processes for many portfolio companies. These delays are exacerbated by the heightened cybersecurity regulations imposed by the SEC and the rigorous reporting requirements of publicly traded companies.
HIGHSPRING EXPECTATION
IPO readiness assessments will increasingly include an end-to-end cyber evaluation along with a “trial-run” to assess the ability of a portfolio company’s ERPs to readily report on the management discussion and analysis section of the 10-K and quarterly shareholder calls.
SOX readiness
Many portfolio companies have historically deferred SOX readiness, particularly 404 readiness, until the end of the IPO process. The SEC and PCAOB have adopted stricter regulatory enforcement perspectives since 2020, which in turn is driving greater investment in SOX readiness. Portfolio companies are now beginning the SOX readiness portion of the IPO process more than 12-18 months before going public. Many portfolio companies are enacting a phased internal controls program to identify gaps, create key required documents, evaluate and monitor internal and IT controls, and remediate identified deficiencies.
HIGHSPRING EXPECTATION
In response to stricter regulatory enforcement, portfolio companies are proactively opting to incorporate SOX compliance measures during the initial IPO readiness assessment, typically conducted 12 months before the IPO. This proactive approach aims to enhance corporate governance, improve controls and bolster reporting integrity. Additionally, it enhances their appeal to publicly owned strategic buyers.
