Putting the ‘Public’ in UK Initial Public Offerings?



Assessing the FCA’s latest proposals and their implications for communications advisors

On March 1, the Financial Conduct Authority (FCA) published a Consultation Paper outlining a number of measures designed to shake up the UK’s initial public offering (IPO) process and make it “clean, efficient and competitive”.
The FCA wants issuing companies to provide more information, to a broader stakeholder base, earlier in the IPO timeline. It believes that this would improve transparency and act as a clear statement of intent that, in uncertain times, London is ready to adapt to the new demands of international investors.
If adopted, a change in regulation would also have wide-ranging consequences for the role of IPO communications advisors.

What is the status quo?

Currently, any company that wishes to list its shares on the London Stock Exchange (LSE) starts by publishing an Intention to Float (ITF) document, briefly outlining its strategic rationale and investment case.

This is followed by so-called “connected research”: analysts at the banks mandated to coordinate the IPO process publish their views on the offering based on exclusive financial data.

It is only two weeks later that selected institutional investors receive the draft, or “pathfinder”, prospectus, a preliminary version of the document containing all of an issuing company’s financial and corporate information.

This kicks off a management roadshow, upon which basis potential investors make a decision on interest and pricing.

The full prospectus is published only later, once the bookbuilding period is all but complete.

So what’s the problem?

As many City commentators have noted, this isn’t the most transparent of systems.

While the FCA stopped short of making any accusations, connected research could be regarded as an inherent conflict of interest. A situation could arise whereby sell-side analysts could be pressured into producing favourable research to support their corporate finance counterparts on the bookrunning syndicate.

It also means that, following the ITF, analysts outside the syndicate are not able to access anywhere near as much information as the banks connected to the IPO. This in effect renders them unable to publish anything during the bookbuilding process, allowing it to go all but unchallenged.

In short, the system is asymmetrical. Investment banks marketing a company’s shares have considerably more information available than the investors who are buying them.

Add uncertainty around Brexit to the mix, and investors may start to eschew London listings in favour of the tighter regulatory environment offered by the United States.

And there is some evidence to suggest that this has already started. LSE data shows that 2016 was the worst year for London IPOs since 2012, with only 62 companies listing and £3.47 billion of new money raised. Most recently, rumours emerged that UK financial software developer Misys was considering a U.S. listing on Nasdaq, after last year’s plans to float in London were scuppered by a cocktail of market turbulence and Brexit uncertainty.

And what’s the solution?

The FCA wants to create a system whereby the prospectus takes on a more central role, potential conflicts of interest are nullified and a culture of unconnected IPO research is fostered.

In the future, an issuing company would be required to produce a “registration document”, essentially a full prospectus without pricing information, before its ITF.

It would then be required to present this information to both connected and independent analysts, who would be free to publish research following the release of the ITF. Publication of a full prospectus, including pricing information, would have to occur immediately before the management roadshow and two weeks prior to the start of trading.

The aim of these changes would be to ensure that investors have just as much information on the issuing company as the sell-side banks, and can make fully informed decisions on the value of its shares.

How will this affect communications?

The early stages of the listing process in the UK are often cloaked in secrecy. Untimely leaks notwithstanding, the first whiff the market gets of a flotation is on the day of the ITF.

Under the proposed new system, the IPO communications timeline would become longer, tougher and more unpredictable. Once a registration document appears, advisors would be tasked with addressing enquiries from a fully briefed, independently minded pack of unconnected sell-side analysts and media. In other words, there would be significantly more opportunity for critique.

This has significant repercussions for the financial communications supporting an IPO. Firstly the ITF becomes a less relevant document.  Instead of kicking off the marketing effort, it will become merely a stepping stone in the process towards listing.  Companies will have to build confidence with a broad range of investors, media and analysts well in advance of any listing, which in itself should be seen as a logical and expected step in the company’s corporate history. Expect companies to discuss going public long before the listing actually starts, so they can get going on the education and relationship building process that they will subsequently depend on.

Companies should consider acting the part of a public company while still private, months before becoming listed, and opening up channels to a broader set of stakeholders. Publishing annual results, as well as commissioning a more thorough annual report will become more prevalent. Additionally, direct engagement with relevant sector analysts would build trust within the broader sell-side community.

To this end, the first challenge would be to create a robust messaging platform long before listing day, explaining the company’s strategic direction and position in the market. This messaging platform would form the basis of the gradual development of an external positioning, driven through regular newsflow and social engagement.

And as more opinion leaders and stakeholders start talking about the company, aligning the investment case and this corporate story under a ‘one-voice’ policy would become essential.

The FCA’s consultation period comes to an end on June 1, and while it is unlikely that any regulation would be ratified before the first quarter of 2018, it is already clear that some form of change is inevitable.

Both private companies with half an eye on the capital markets and their communications advisors should prepare for a new world of financial and corporate transparency and increased management scrutiny. It’s no good waiting for decisions to be made later down the line – they will have to start preparing now.

Matthew Thomlinson

Matthew Thomlinson

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