Published: 18th April 2016

Of Relevance to:

IPO stakeholders including corporate finance advisors, investment banks and buy-side investors.

Initial Public Offerings

A double IPO offering from the FCA with the publication of both a Discussion Paper (“Availability of information in the UK Equity IPO process” – DP16/3) and an Occasional Paper (“Quid pro quo? What factors influence IPO allocations to investors?” – OP/15).

In May of last year the FCA launched a market study into investment and corporate banking by publishing its Terms of Reference (see Regulatory Roundup 65). One focus of the study was the availability of information during the IPO process – the subsequent publication of DP16/3 is based upon feedback and data requests from various firms including corporate finance advisers and investment banks.

The study shows that out of the 169 IPO transactions that were reviewed in the study, only one transaction featured ‘unconnected research’ i.e. research other than that attributable to the syndicate banks. The concern is that, notwithstanding information barriers in place, there is, perceived or otherwise, heightened risk of bias due to the pressure on connected analysts to provide favourable research, which in turn could lead to inefficiency in the price formation process – or possibly lead to inappropriate investment decisions.

A further concern is the ‘blackout’ period – typically 14 calendar days when no new information is released – between publication of research, which is traditionally published on the same day of the announcement of an intention to float, by the syndicate banks and the circulation of the pathfinder prospectus which is imposed with a view to managing potential legal liability and regulatory risks.

Interestingly, one of the questions raised in DP16/3 is what is this perceived ‘legal risk’ (the market study did not discover the legal analysis underpinning this view). The paper also questions the foundations behind the quoted ‘regulatory risk’, a view which the FCA say is not supported by the Handbook.

Annex 1 of DP16/3 summarises the list of questions raised within the publication.

Comments are invited by 13 July 2016.

OP/15 also looks at IPOs but with particular attention to the allocation process.

It is recognised that investment banks face potential conflicts of interest between the work they undertake for the issuing clients and their long-term relationships with the buy-side investors for whom they offer trading and other services.

Interesting findings from the study include:

  • finding evidence consistent with syndicate banks making favourable allocations to investors who provide them with information likely to be useful in pricing the IPO.
  • in particular, investors that submit price-sensitive bids, and those that attend meetings with the issuer before the IPO are favoured in allocations.
  • investors featuring in the top quartile of book-runners’ clients by revenues receive allocations, relative to the amount they bid, around 60% higher than those investors who are not clients.
  • on average, hedge funds are allocated a lower fraction of IPOs than long-only investors (which conflicts with the argument that hedge funds are valuable liquidity providers).

The nature of an ‘Occasional Paper’ is to encourage debate but is the work of the authors and not the FCA and as such do not necessarily represent the position of the Regulator. However, they are regarded as one source of evidence that the FCA may use while discharging its functions and to inform its views.

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