Roundtable | Guzman y Gomez proves the market is always open for appetising IPOs

Having behaved like a listed business for years, GYG was an overnight success when it came time to float.??

Homegrown Mexican quick-service restaurant (QSR) chain Guzman y Gomez (GYG), founded in Sydney in 2006, listed on ASX in June this year to much fanfare. While the company completed its preparation for initial public offering (IPO) in just eight weeks, the work to bring the company to the bourse began much earlier. In this Listed@ASX roundtable, the well-honed group of advisers who supported the business as it prepared to make its ASX debut reflect on what the deal indicates for the other aspiring businesses.??

Alexandra Cain, editor, Listed@ASX: Tell me about your role in GYG’s listing??

Ed Cowan, investment team member at major GYG investor TDM Growth: “It certainly was a team effort across the investment team. Unlike the way other investors may behave in transactions like this one, we were very much in the weeds. We've been assisting the company on its scaling journey with a view to listing for some time now?– from implementing back-office systems to reporting processes –?so the burden of the public markets could be eased.

The company had been reporting as an unlisted public company for some time and for many years has intentionally behaved like a listed one.?Our focus was to do what was necessary to make sure the transaction ran as smoothly as possible –?a very different approach to one other investors would take in a situation like this.?

Jabe Jerram, co-head of equity capital markets, Barrenjoey: As joint lead manager and underwriter to the IPO with Morgan Stanley, our role was marketing and selling the transaction and preparing the offer materials. We’ve supported GYG for a number of years, establishing and managing a fund several years prior and the conduct of a cornerstone round of investment pre-IPO.?

Luke Boeg, head of equity capital markets, Australia, Morgan Stanley: We've been involved with GYG for many years and have introduced investors globally to the story over an extended timeframe, bringing them along on the journey and preparing them for the ultimate IPO milestone.??

Adam D’Andreti, partner, Gilbert + Tobin: Our role was advising on the due diligence process, which is critical, because you want to make sure all the people who have liability for the prospectus get the benefit of the due diligence defences to that liability. You want a system where inquiries can be made, so the prospectus has the best chance of not having anything misleading or deceptive in it. We oversaw that process, which on this transaction was really interesting because it was done in such a short space of time. But we never had to cut any corners in doing that. The other side of our role was helping steer the company through ASX compliance and working with ASIC as well, because it had a role reviewing the prospectus.?

Listed@ASX: How do you run a quick, quality IPO, and why did it make sense to run the IPO like that at that time??

Luke: You have to have the business ready to be listed before you commence the process. That comes back to preparedness and that includes everything from governance to financials. The extended investor engagement and education piece also plays an important role in delivering swift, quality execution.?

Jabe: GYG’s founders and management built an exceptional business. They had a board that added value to the company prior to the IPO and knew the business inside out. Its financial disclosures were ready. That allows you enormous flexibility on when and how you IPO, which can be a model for IPOs in the future.

Our cornerstone investor engagement was important, because outside a very tight club of investors, the first the market heard of the transaction was when the prospectus was lodged.?

Luke: That chemistry among the group of investors was built over many years. They backed the management team that had built this successful business. They got to know some of the major shareholders like TDM, so when we came to market with the IPO, they were already well-entrenched in the story. They really understood what they were investing in, and that allowed us to accelerate the process in a way which most other IPOs can’t.?

Adam:?GYG has taken its legal compliance obligations very seriously for a very long time and had a proper legal function. It’s important for a business that has to comply with different employment, franchising and food safety regulations to get this right. Having a clean due diligence, tax and finance due diligence report allowed us to IPO and hit a market window. The whole IPO timetable could not have worked if we had come out with a due diligence report that had three or four issues in it. We had a DD report that was clean and same with tax, same with finance. You can't IPO and hit a market window if you're going to have things being discovered in the DD process for the first time. There's absolutely no excuse for that to happen. The only things you can't control are random litigation from a third party. But other than that, you should be on top of it. So, I don't want potential companies contemplating an IPO to see it as an unattainable goal, all of this is achievable. We have spent years talking to everyone from start-ups to people who are close to listing about things you should do, and routinely not had that advice followed, often due to cost reasons.?

Kate Galpin, ASX, senior manager, listings: What was unusual about the group who invested in the business before the IPO??

Luke: These were listed market investors who wanted to own a business that was operating like a public company, with a view to supporting a listing down the line. The GYG IPO was a situation where investors recognised they needed to be more nimble in how they approached the process. GYG had no immediate time pressure or capital requirements that couldn't be serviced from staying private. It was partly investor driven with investors being willing to move into ordinary unlisted equity, without a convertible note structure. That commitment and alignment of interests gave everyone the confidence to move forward with an IPO.?

Ed: At that point, there was no official timing of the IPO and it was accelerated given demand from those investors. Back in March, they were very excited about the business, but the plan wasn't to list the business straight away. So these investors were supportive, knowing the timing was uncertain, but given the demand and support from them, the business decided to accelerate the process and that led to a very shortened run at the IPO.?

Luke: The base case was the IPO being in the second half of this year, but the demand from those investors, coupled with the preparedness of the business, the management, the investor group and the adviser group, got us to market within an eight-week period.??

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Listed@ASX: What were some of the other challenges you needed to overcome to achieve the IPO??

Adam: The unit economics of the business was a really important part of the disclosures, because it allowed sophisticated investors to model the future value of business. Everyone was collectively comfortable there was consistent information in the market. Saying you want to open more than 1,000 restaurants over 20-plus years is a very long-dated, forward-looking statement. So we spent a lot of time getting comfortable with the assumptions on which the growth strategy is based.??

Jabe: Consistency of message prior to listing and when you are listed, and constantly delivering mitigates a lot of challenges. In GYG’s case, the investment narrative came down to a handful of points: store economics and roll outs, the cost base of the business and how scalable it was. Investors could get their head around those points quickly.?

Luke: The challenge was encouraging the existing shareholder group to release some of their equity into a pre-IPO round such that we could deliver an offer size that was marketable, as well as encouraging GYG to raise additional primary capital at IPO for future growth initiatives. We had like-minded, long-term investors who were happy to release a small part of their investment to encourage new investors into the company and promote a successful IPO.?

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Listed@ASX: How does GYG’s listing align with current market trends and investor sentiment and what opportunities does this present for the IPO market???

Jabe: GYG shows the market has always been a growth market and wants high quality growth stories. The Australian capital markets love founder led businesses and the ability to get alignment between new investors, existing investors and the management team.??

Adrian Cudrig, executive director, equity capital markets, Morgan Stanley:

One of the things we often talk about as an industry is whether the IPO market window for listings is open or shut. IPOs are a risk product and the market should generally follow the economic cycle. However, while we have seen global markets and the ASX trading at all-time highs this hasn’t been reflected in IPO activity locally. This is a good example that shows the market is not shut, it's just not tested.

Adrian: There's been a dearth of opportunity for listed market investors, so there is strong underlying demand for new opportunities particularly high quality, defensive assets, and growing businesses.? The IPO market is always open for high quality businesses with long term growth prospects.?

Listed@ASX: Where to from here for GYG???

Jabe: The GYG IPO has been a great success. But long-term success will be determined by the company executing and delivering over time. GYG has a well-articulated plan for growth over the medium term. I think the prospectus tried to give as much information to investors around what that medium-and-longer-term plan looks like, and really from here, it's for the company to execute on that plan. Clearly index inclusion has become an ever-increasing part of not just being on ASX but on a global exchange. ASX is a very attractive listing venue in terms of where those thresholds kick in for index inclusion for GYG to get itself in the ASX 200 so quickly after listings is a fantastic outcome for the company and makes it a much more relevant to a much bigger breadth of investors.??

Luke: As an investor, it’s important to have confidence in a management team’s ability to deliver on the strategy. In the case of GYG, this is a uniquely strong team and deep bench with big ambitions.?

Jabe: Only a small percentage of the company needed to be sold down to provide a very liquid and deep pool of investors. This shows ASX can provide a forum where you can deliver a small, free float IPO in a cornerstone, underwritten way and still get great support from retail investors. We had a very supportive retail syndicate in the IPO, who've been very active in the aftermarket. We had to have a targeted group of investors to underpin the IPO, but there's been great support from people who weren't in that group, who've become very meaningful shareholders.?

Adrian: This IPO shows that a supportive group of investors can catalyse a company coming to market. We know there are a range of institutional investors out there looking at assets in private hands, that have been slated to float, and testing whether a similar approach can be used. That kind of proactive action from fund managers in other situations can potentially make those assets could the next major market listing.??

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