Since then, we have gathered views on the potential effect of the changes from bankers and investors. As well as discussing with French bankers and lawyers on how a similar IPO structure has been put into practice in recent years. As one French banker said to me, they are “delighted that the UK has finally taken best practice from France!”
The Bankers’ Views
- Prospectus timing isn’t an issue. Bankers are robustly neutral on the prospectus timing. Since the practice until now is to have a final-form prospectus agreed with the UKLA at the time of launch, this will have in practice no real impact on their work. Although as I discussed in my previous article, there are startling implications for the amount of defensive PR and IR activity that a company should now be prepared to do.
- In some cases, the Analyst Presentation could be cancelled and IPO research eliminated. Bankers expect some companies (particularly private equity owned) to prefer to eliminate the random element of unconnected research, and decide to IPO without any syndicate research at all. This approach already takes place for Special Purpose Acquisition Companies, where the equity story is about the M&A experience of the founders.If there’s no analyst presentation, the understanding is there will be no regulatory need to invite unconnected analysts. Going without IPO research is a possibility for companies with a straightforward story, or which have spent months building a shadow book of demand. This may appeal to some private equity owners, who particularly like the resultant timetable compression. A live IPO period would then be only two weeks instead of four or more. Although it would rely on the offering being heavily pre-marketed, and either a shadow book of demand, or anchor orders for a significant part of the offering.Taking this decision will require careful thought by issuers and shareholders. It means the IPO process is no longer “one size fits all”.
The Investors’ Views
- Welcome the early prospectus. Universal approval of this change. The investors have been frustrated by the lack of formal information on the company. The previous process gave only two weeks with the prospectus, insufficient time to carry out appropriate investment diligence on a company.
- Analyst presentation could be even more open. An unconnected analyst presentation was seen as an overdue change. There’s a query why the analyst presentation document couldn’t now be published, given the unconnected analysts have access to it and it contains only information that is in the prospectus. And one investor asked why not throw the analyst presentation open to the buyside research as well (i.e. their own internal research team).One possible solution we’d suggest is to publish the analyst presentation document on the company’s website, and broadcast the meeting on Netroadshow. In this we foresee some resistance by market practitioners, particularly by those concerned about liability. But this shouldn’t be insurmountable, given it is effectively a public meeting. And for larger issuers, a session that is broadcast to suitably credentialled research individuals may be the most efficient way to address a sizeable interested analyst community on both buy- and sell-side. After all, the FCA mentioned the possibility of a webcast in their cost benefit analysis!
- Don’t overestimate the appetite to produce or buy unconnected research. Investors aren’t specifically eager to receive unconnected research on every transaction, not least given the MIFID 2 changes next year. At best, this was referred to as an appropriate enhancement to the functioning of the capital markets. In rare cases, research is specifically commissioned. But it’s more likely that IPO research, whether connected or unconnected, will go in the general bucket for research compensation.Which begs the question, will unconnected analysts really want to write IPO research on a speculative basis? After all, when they receive the invitation to an analyst presentation at one or two days’ notice, they will have to consider i) other stuff they are busy on ii) everything in the analyst presentation is in the prospectus, which is now public at the same time, and iii) will they get compensated for publishing immediately.
- Investors are prepared in principle to be involved earlier, in part to identify anchor investor opportunities. Anchor investors, whether formal or through an in principle discussion, are not unusual in European IPOs. They are relatively more common in Scandinavia in recent years.Several investors we discussed this with are ready to have an early discussion with management as long as it is informative. One investor went so far as to welcome meetings up to two years before IPO, and certainly before banks are involved, in cases where the story is complex and requires careful examination. And these early discussions are a suitable opening for possible anchor investor interest, in some situations.Where this will start indicating a possible direction of travel for market practice, is when this willingness ties into the point above on eliminating IPO research.
The Experience in France
- Autorité des marchés financiers (AMF, the French Regulator) has moved towards allowing separate connected and unconnected analyst presentations. Up to a year ago, the connected and unconnected research presentation were held at the same time and only after publication of the “document base” (effectively a shelf filing, being similar to an annual report plus forward guidance, capital structure, primary proceeds, dividend policy although eliminating the offering details). This effectively meant the IPO was live for eight weeks, a long period of market exposure.Now, the AMF allows the connected analyst presentation to be held in advance. Thereby reinstating the standard four week IPO period of market exposure.
- Unconnected analysts given two days’ notice, turnout is light. Two days, give or take, is market practice for the notice to unconnected analysts. And for the average IPO in a well understood sector, it’s normal for perhaps only 10-12 unconnected analysts to attend in person. Which is far removed from the FCA’s assumption of 60-100 in their consultation paper!
- Unconnected analyst attendance does not mean they will publish. The unconnected analysts have other demands on their time, as mentioned above. Where it’s a natural fit in their coverage, they frequently attend the IPO analyst presentation to pick up the presentation materials (which might otherwise not be available), meet management and hear the story. But the French experience is that their attendance doesn’t mean they will publish.
- Connected and unconnected analysts sign the same Research Guidelines. Our previous article raised a concern about the liability for mis-distribution of unconnected research, especially into the United States. Our concern was partly derived from the weak proposal by the FCA to work with “trade associations representing investment banks and independent research providers to develop a form of common “research guidelines”. After all, research guidelines might have good reason to vary from deal to deal.So it’s helpful that market practice in France has moved to requiring analysts to sign the research guidelines as a condition to accessing the analyst presentation. And reassuring that my French legal friends could not think of precedents for issuers suing analysts for liability and damages in relation to inappropriate research distribution around the time of a securities offering.
- The publication of the prospectus has become the main announcement date, even though the formal Intention To Float announcement may take place days or sometimes weeks later. The prospectus publication in France is a significant PR and IR event, as we mentioned in our previous article. So, it will be highly beneficial for PR advisors and the head of IR to be appointed no later than this date, ready to hit the ground running.
There are several ways the FCA’s proposed regulations could work in practice. What is certain is that the current market practice will evolve rapidly. Companies wishing to achieve the best engagement with the investor and research community will need to think carefully through their options, and watch closely as various approaches are tried out.
As always, if you have questions, The Deal Team is here to help.
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