IMPROVING THE IPO PROCESS – THE INVESTOR VIEWS
We announced on 27th April our collaboration with Issufy, the provider of IPO distribution solutions for information provision and feedback gathering in capital markets transactions. The press release can be found here.
The IPO processes in EMEA are undergoing the most material changes in a decade. Issuers need to be fully aware of these changes and how they will impact IPO preparation and execution. We’ve written on several aspects of these before (Equities World is Shrinking, Proposed Changes to UK IPOs and Market Feedback on the Changes).
But these aren’t the only issues with the IPO process. Investors have other long-standing desires for improvement, and differences of opinion with bankers, which deserve to be reflected in a well-prepared issuer’s approach to the market. So, we surveyed the views of the bank-facing representatives from several of the largest investors in European equities.
Pre-IPO meetings (“Early Look”/”Pilot Fishing”)
The investors we spoke with agree that two, perhaps three pre IPO meetings with management teams can be useful. Sometimes one is sufficient.
The keys here are how useful the meeting is for the investor, and how close to the IPO. The investors genuinely wish to help influence the equity story messaging in a public market context. However, they must be given a fully formed investment case and strategy.
What makes this input difficult, is that investors are usually given no materials beforehand, and are told they cannot keep the presentation. They point out that if they had access to the presentation beforehand, the meeting would be a Q&A instead of an introduction – surely more useful for the issuer, and more likely to generate thoughtful feedback instead of shoot-from-the-hip reactions. Here, we’d suggest using secure online distribution such asNetroadshow is a potential solution.
This can be even more important when the company’s business or target market is hard to understand. Being prepared for longer meetings of 2-3 hours, and accompanied with site visits where relevant, can be very beneficial.
In terms of how early to meet, one year pre IPO is considered reasonable for the first meeting. However – the IPOmust be a realistic prospect for them to take the meeting. For the second meeting to be relevant, there must be enough time for management to demonstrate business progress. If the first meeting is six months prior, then a second is offered pre IPO, the investors may well refuse the second one.
Valuation feedback pre-IPO
The quality of valuation feedback will derive directly from the quality of information given to the investor. When the investor has had the materials beforehand, a lengthy session with management, and been on a site visit, the feedback will be more precise! And to make it even easier for investors, it’s useful to “Have the bankers set out some clear thoughts on how they think the company should be positioned, how they think it should be valued and which are the most appropriate comps. It’s by far the easiest way to start a dialogue.”
It’s important to understand that investors will be looking at valuation in a public market context only, and frequently by reference to a bucket of listed peers. So no M&A multiples, no $ numbers. And they caution that if their feedback is ignored, either pre IPO or during the offering, they are likely to switch off rapidly.
IPO bank syndicates
The view from one major investor
“We don’t feel five investment banks at the top level helps – ownership of the deal dissipates. There is just less focus from the senior bankers. We’ve run the numbers and as the number of Joint Bookrunners increases, share price performance reduces.”
Enough said… having run those same numbers in my previous career as an ECM banker, I cannot disagree.
Another investor said in relation to post IPO performance that “Smaller cap companies can have an easier time post IPO, as the brokers are more hands on”. And this is also true at the time of IPO as smaller companies have smaller syndicates with genuine ownership for the transaction – or even just one trusted bank.
Unconnected research at IPO
The independence of connected research is still being questioned. Even with the changes being proposed to the UK IPO process, one investor said, “negative opinions from the bank syndicate analysts just won’t happen”. Another investor said, “occasionally there are analysts from syndicate banks who give a full and frank opinion but it’s hard to recall seeing any research which is truly challenging of a company’s investment case.”
The investors agree that including unconnected research is a good development. While not all expect more IPO research on their desks, not least given the economics of research, it should be a good thing for issuers and investors. Basically “it enhances the capital markets – more people covering the stock, means the market is more informed”. Another investor said they already commission bespoke unconnected research, especially where they particularly value the relevant analyst.
One investor did ask why only sellside (ie banks) unconnected analysts were considered – and wanted to send their own analysts. This isn’t a totally ridiculous idea. The larger investors do a lot of their research work in house, and take only a small number of pre IPO meetings with syndicate analysts where they value the individual analyst. In circumstances where the analyst presentation is a quasi-public meeting in any event, this could be worth considering.
Board structure at IPO
It’s interesting that the investors don’t view non-compliance with the relevant Corporate Governance code as a barrier to investment. Although as roughly half of UK IPOs are in breach, perhaps this isn’t such a surprise. What is highly valued is the UK Code being a Gold Standard for issuers listing in London. Investors recognise that IPO timeframes might make it tricky to compile perfect boards, and are willing to give some flexibility. Nevertheless, they expect London-listed companies to have an achievable roadmap to compliance in a short period post IPO.
There is however general frustration with the newness of independent non-executive directors. As one investor said “Do the new board members have to look up the headquarters on Google Maps?”
Pre IPO shareholders – founders vs Private Equity
Encouragingly, there is no differentiation between founders and private equity when it comes to the quality of IPOs. At times in the past, private equity backed IPOs have been accused of pushing the envelopes on valuation or balance sheet structure. That doesn’t appear to be a factor today.
What is important is that the pre IPO investors continue to have skin in the game. Public investors want to know that their interests and aims are aligned with the early investors, founders, and management teams.
A comment on free float and liquidity
An insightful comment from one investor, worth reproducing in full
“The issue for us is liquidity. We consider the free float to be the true market cap of a business. Especially once the sticky holdings are taken out.”
A £1bn company with a target 25% free float is competing – at least in liquidity terms – with its much smaller peer of £250m market cap but a 100% free float. Something to bear in mind as an insight into the thought process of investors.
Challenges for newly listed companies
Two main themes:
Firstly, will the issuer hit their first reported numbers? Being too bullish in the IPO forward guidance backfires rapidly if the company misses the analyst forecasts. And this creates uncertainty about future delivery to plan. Remember, investors aren’t looking at a company in a vacuum. They will be actively assessing the attractiveness versus other investment opportunities, including some that, in the words of one investor, “have spent 20 years always beating their numbers.”
Secondly, the investor relations and communications strategy for many newly listed companies is perceived to be pretty poor. Investing in these ahead of time has real benefits to long term share price performance. And having a dedicated IR person is useful, not least as a consistent point of contact for investors.
Investor relations meetings post IPO
After the intensity of the IPO, will public side investors be all over the company? Surprisingly not. In general, the investors would prefer perhaps two meetings a year. And ideally outside of the reporting calendar so the meeting is a useful due diligence session, instead of an update on performance.
Perhaps most importantly, as one investor said “It’s important for new issuers to build their reputation and reliability. They need to keep servicing investors even when invested.“
There’s plenty of food for thought, much of which may not be apparent to issuers undergoing an IPO process. In many areas, the investor comments here are reflected in our core services to our IPO clients. As always, we’re here to help.
Please note – We’ve used our judgement to select the linked information which we believe may be of interest. We are not however responsible for the accuracy, completeness or relevance of the information and opinions contained therein. Some of the links may require a separate subscription to access.