It is hard to find independent analysis of IPOs because of the way the system works. This could finally be about to change, thanks to the FCA, says Jane Fuller
This article was first published in the July/August UK 2016 edition of Accounting and Business magazine.
When I review the way journalists approach the most common corporate stories, it is coverage of initial public offerings that leaves the most to be desired. It has taken a discussion paper from the Financial Conduct Authority (FCA), Availability of information in the UK Equity IPO process, to help me figure out why.
The problem is that the only people who have timely access to serious information about the company are its management and owners, and the investment bankers hired to help them with the marketing. Oh, and the analysts whose willingness to be positive about the company may have helped their employer win a slice of the action.
As if this were not bad enough, current UK practice gives these ‘connected’ analysts exclusive access to management for most of the run-up to the IPO, and their research is the only written material made available when the intention to float is announced – followed by a blackout period. Distribution of the unapproved ‘pathfinder’ prospectus is strictly limited and the full prospectus typically comes out on the first day of trading (unless there is an all-too-rare public offering).
If you tried to design a system that favoured insiders over outsiders, limited the availability of crucial financial information and promoted marketing over objectivity, you could not do better. The system has been roundly criticised, including by the Association of British Insurers, TheCityUK and Lord Myners in his review of IPOs in the wake of the Royal Mail flotation.
The FCA is at last aiming to put the approved prospectus at the heart of the process, making it available to potential investors when they need it. Unconnected analysts should also gain earlier access to both financial information and the management, making unbiased views available prior to pricing.
Other countries, including France and the US, already have a three-step process, starting with the publication of an approved registration document, followed by others with the price range and the final IPO price. So, the UK is playing catch-up.
Of the three models put forward by the FCA, all start with the publication of an approved prospectus; two would keep a blackout period but impose it on connected analysts so that their ‘unconnected’ peers could satisfy pent-up demand for an independent view. I favour the third model, which opens up access to both the prospectus and the management, and has no blackout period.
The FCA rather quaintly thinks that there will be a ‘quiet period’ while analysts prepare their research. I doubt that – but it does not matter. Like journalists, some will produce quick but shallow takes, and others will take longer to produce more considered analysis. The important thing is that there will be enough time for investors to decide whether they find the business case convincing and what price they are prepared to pay.
Whatever the detailed changes, these reforms cannot come quickly enough. After all, the big question facing market regulators is not so much how mature companies can gain primary listings, but how smaller and younger ones can gain better access to equity investors, including via crowdfunding. Welcome to the 21st century.
Jane Fuller is a fellow of CFA UK and serves on the Audit and Assurance Council of the Financial Reporting Council