November 8, 2017
IPOs: What do the FCA’s new proposals mean?Contact
Written by Giles Stewart, Partner, Financial Services, Corporate & Capital Markets.
Amid all the noise around regulatory flex and Saudi Aramco’s IPO, the FCA has published changes to the equity IPO process. Fundamentally, these are designed to level the information playing field for UK IPOs while re-centralising the role of the prospectus.
Ostensibly, the FCA’s opening position is that there is pernicious information asymmetry in the lead-up to the IPO bookbuild process which favours corporate issuers and their advisers, over investors. For the regulator, the process where full company information disclosure (via a prospectus) is back-ended and there is insufficient access for an independent, considered view (via research analysts not on the adviser roster), is one that leads to imperfect investor outcomes.
The FCA’s remedy, due to come into force from 1 July 2018, includes bringing forward the publication date of an approved prospectus ahead of connected research, and ensuring non-connected analysts get a fair crack at providing timely comment and analysis on the IPO candidate. Rules will apply to main market candidates, but the regulatory direction of travel appears to have AIM deals in sight too.
There is a reasonable argument to be made that London’s current listing process protects against information disadvantage. For example, the availability of the pathfinder prospectus ahead of the management roadshow and associated verification procedures, as well as the overriding need for house broker sales teams to stay on the right side of their institutional clients, and the broker itself to protect its brand equity.
Some will counter that the FCA´s new provisions will contribute to a reduction in the number of companies seeking a main market listing, based largely on the requirement to go “public” upfront in the marketing process. There is also the potential for the investor story and roadshow to be hijacked by non-house analysts, though we think the risk here is overstated. With Mifid 2 around the corner it remains to be seen if the economics for unconnected research stack up in all but the largest, highly liquid IPO situations. However, sector analysts will want to be informed and have a view.
Either way, under the new rules IPOs will become more public earlier in the investor conversation. The prospectus will provide plentiful content. Companies will need to be ready to manage independent comment, a lot of which will play out in the media and influence perception and deal demand. Media relations will be key.
Managing deal risk
Whichever way the new provisions manifest themselves it is clear that risk mitigation in the IPO process will now take centre stage, with key parts of the timetable effectively shifting left. Advisers will look to launch with much more deal certainty from early looks/pre-marketing and optimally with cornerstones (e.g. Old Mutual’s investment in the recent Charter Court float).
In terms of IPO preparation, three month timetables will be consigned to the dustbin. Corporates will need to be fully prepared and much of the deal work, specifically marketing-related preparations, will need to be well in hand ahead of early look meetings.
So what does this all mean for IPO candidates?
Firstly, early look/pre-marketing meetings with investors will become considerably more important as proof points of market appetite, with greater weight applied to feedback in determining whether or not to launch. In order to secure a favourable response, investors will be looking to: 1) the quality of the presentation and team; 2) depth of the equity story; 3) perception of the business based on desktop Google news searches; and 4) what the website looks like when investors scan it before the meeting.
The weight of securing a successful IPO will skew back to the corporate’s own actions pre-float, rather than a fundamental reliance on the broker via a tightly managed process.
In short, corporates seeking an IPO will need to have an established corporate reputation, reinforced by positive media coverage, well ahead of float. They will also need to be investor-ready with a compelling equity story that flows around this corporate story, supported by a sharp presentation and an engaging front of house website.
Engaging with your PR/IR adviser early in the process – 12 months ahead would be minimum in our view – will move from a ‘nice to have’ to a ‘must-have’ in order to enable IPO candidates to realise value. Companies will need to be prepared to manage (and win) a more “public” dialogue on deal merits ahead of impact. Adaptability will determine the winners.