A firsthand perspective on the IPO experience

It was a homecoming of sorts when Elizabeth Crain came back to Arizona State University in March to speak at the Economic Club of Phoenix Economic Outlook luncheon. Crain, who holds a bachelor's degree in economics, talked about what it’s like to be a newly public company on Wall Street and shared her perspective on the current business climate.

It was a homecoming of sorts when Elizabeth Crain came back to Arizona State University in March to speak at the Economic Club of Phoenix Economic Outlook luncheon. Crain, who holds a bachelor's degree in economics, sat down with club president and Professor of Practice Jeffrey Cunningham to recount her experience taking Moelis & Company public, talk about what it’s like to be a newly public company on Wall Street and share her perspective on the current business climate.

Crain also holds an MBA from the Wharton School at the University of Pennsylvania. She has been in the investment banking and private equity industries for over 20 years as a banker, principal and operations specialist. She has been named one of the 25 most powerful women in finance by American Banker. Today, she is COO at Moelis & Company, an independent investment banking firm that she co-founded in 2007.

Going public for talent

Moelis & Company had been a private partnership for seven years before it was listed on the New York Stock Exchange on April 16, 2014. Of course, the initial public offering (IPO) process began long before then. Recounting the experience, Crain said, “It was one of the most interesting projects I've ever worked on but also one of the hardest.”

Crain said she and the other Moelis & Company co-founders had long assumed they would take the company public — sometime. They made the decision late in the summer of 2013. “We looked at our opportunities for growth, and we felt that a public currency would help us realize that growth potential much more easily and more effectively than if we remained private.”

For many companies, the decision to go public is driven by a need for capital. That wasn’t the case for Moelis & Company. “Ours is a capital-light model,” Crain explained. “We advise companies on mergers and acquisitions, restructurings, capital markets and other strategic matters.”

How does a “capital light” firm like Moelis & Company grow? By recruiting the best bankers in the business.

Crain explained, “I do a lot of our recruiting at the senior level and I could see that not being able to offer public stock would begin to impact our hiring ability. Also, if we were looking to hire a whole team or potentially pursue an acquisition, having a public currency would be very helpful. Overall, we really believed that being publicly traded would facilitate the growth of our company in ways staying private would not have.”

The IPO process

A lot of the work that went into preparing for the IPO centered on how to structure the newly public company. “We were a private partnership, and converting from a partnership to a public company in a tax efficient way can be very complex,” Crain explained. “We did four and a half months of work before we were even in a position to file (a Form S-1, the initial registration form for an IPO) with the SEC.”

It was then time for the roadshow. “As a banker, I had worked on IPOs. I had been on roadshows. Telling the company’s story in the marketplace is something we as bankers do very well,” Crain recounted.

But the timing was not ideal: Moelis & Company launched their seven-day roadshow on the last day of a great IPO market. “Within the course of seven days on the road, the market had deteriorated significantly,” Crain explained. “So when we came to pricing day we really had to ask ourselves, ‘do we go for the price or do we step back a bit?’”

The company was, after all, selling to its peers. So Crain and her partners made a conscious decision not to push on price. “We kept the price back, pricing the offering so investors could feel positive about the decision we had made, and positive about our long-term relationship.”

The decision was in keeping with Moelis & Company’s longstanding reputation of being investor friendly. And it paid off: “It was the best decision we could have made. The stock traded strongly in the aftermarket, so, on the whole, it really worked in our favor.”

Post-IPO, a focus on short-term results

Being a public company has been positive for Moelis & Company, Crain said and in 2014, the firm had a “phenomenal” year, with revenue growth up 26 percent. But it is not without its challenges. Chief among them: the short-term orientation of the market.

“Ours is not a short-term industry. For any independent investment bank, like Moelis & Company, all it takes is a change in one deal to miss quarterly earnings. But if the deal closes on April 1 rather than March 30, is your company worth anything less? No, it’s not.”

Despite the challenges, being a public company has yielded tremendous benefits for Moelis & Company. For one, it has indeed helped the firm recruit new talent. “We hired 14 new managing directors last year after the IPO got their attention,” Crain said.

“Now, as a publicly traded company, our financial performance is completely public,” Crain explained. “The S-1 document showed the world what we had built and what we’re capable of building. It really changed how senior bankers viewed the company.”

Very interesting’ market dynamics emerge

From her own experience leading the growth of Moelis & Company, to the firm’s work with clients, Crain has a keen perspective on market cycles. In particular, cycles of mergers and acquisitions (M&A) and restructuring activity. “M&A cycles tend to come once a decade, with three or four years between them,” Crain said.

“The 1990s M&A cycle was driven by firms looking for top-line growth through acquisitions. The AOL Time Warner acquisition marked the end of that cycle,” Crain explained. In the 2000s, the M&A cycle was driven by credit. “Access to credit was a commodity. Corporate transactions driven by that access to credit fueled an M&A cycle that ended with the credit crisis.”

Today, we’re in the early stages of a new M&A cycle, Crain explained. “We believe we’re 12 to 18 months into the current cycle.”

In the kind of low-growth economic environment we’re currently in, top-line growth (that is, revenue growth) is hard to come by. So how is a company to grow? “In this kind of disinflationary environment, companies can achieve bottom line (earnings) growth through cost efficiencies,” explained Crain.

“We believe that many of the large-cap M&A transactions that have been announced in the last 12 months have been driven by consolidation. Companies are looking at cost efficiencies to drive growth because they’re not able to get top line growth in this environment.”

Crain shared another unique aspect of the current market: “We think we could see a restructuring cycle concurrent with this M&A cycle. That is unique because restructuring cycles and M&A cycles tend to be opposite of each other.”

“In this lower-growth environment, companies with greater prospects for efficiencies, with higher quality cash flows, are looking to acquisitions. Companies with less efficiencies, with lower quality cash flows — companies that don’t have pricing power — could become candidates for restructuring,” explained Crain. “We think there could be a very interesting dynamic in the next couple of years with both M&A and restructuring activity picking up.”

So Elizabeth Crain’s outlook for Moelis & Company — a firm that itself helps corporations through mergers, acquisitions and restructuring — is bright. Even brighter now that the company trades as MC on the NYSE.