Getting the Best Out of an IPO

Private Equity News

A private equity-backed IPO is a high-stakes event. A company offering its shares to the public market for the first time only gets one chance for success and failure can be catastrophic for both reputation and business alike. However, the opaqueness and seemingly unpredictable nature of the capital markets make a successful IPO a challenging prospect. Even private equity firms, who typically possess a great deal of corporate finance expertise, rarely have in-depth ECM experience across all partners and therefore a helping hand can be invaluable.

Done correctly, an IPO represents an excellent way to exit an investment and realise value, but when done incorrectly a lot of money can be left on the table and a turbulent aftermarket can destroy value. With IPOs getting done again, the question is how private equity firms can ensure they get the most out of these transactions.

While there is no such thing as a "perfect" IPO - as every ECM transaction is different - there are certain common factors that can help contribute towards a positive result. Ideally, the result should be a "win-win" for every participant - the issuer, sponsor, investors and the investment banks that make the deal happen.

To achieve this "win-win" requires the issuer and sponsor to have transparency in the IPO process. This is important because ultimately an IPO is an opaque auction and like any auction it can be vital to know the composition of those interested in buying. Are they experts that will be a long-term home for what you are selling? Or are they speculators looking for a quick sale? Do the buyers have concerns that can be addressed? Are there any conflicts of interest between the different participants? Is it possible to manage these different interests?

The key to answering all these questions is transparency, or in other words data. Investment banks working on an IPO gather a great deal of information on which investors they can educate, who they feel should be in the book, what feedback those investors have about the deal, the price range and a myriad of other factors. This information can bestow a tremendous amount of power to the issuer and sponsor of the deal if used correctly.

Firstly, it can allow the selection of a banking syndicate with the optimum coverage and expertise for the transaction. By using the bank's own assessment of where their key relationships lie and correlating this with the rankings of analysts by the investors, it is possible to construct a complementary group of banks.

Secondly, it allows the empowerment of the banks to identify and educate the broadest possible market, minimizing multiple calls to the largest investors. By using the banks' own data on the demand for a particular share in a particular industry and geography, the issuer can build a map of the total market and help ensure that allocation is provided to solid long-term investors.

Thirdly, a broader education of investors helps create a stable and healthy aftermarket. While it is natural that not every investor that is educated will enter the book at strike, an investor that knows about a stock and receives research on it is much more likely to subsequently buy it further down the line.

Finally, assessing all this data on a daily basis allows the issuer and sponsor to react to investor feedback, and identify any potential issues before they become problems. Once the IPO prices, such data can be used to reward each bank based upon their performance and contribution to the final outcome.

The end result of this is an IPO that has an optimised price, a broad book of long-term investors, and a strong aftermarket. While not an easy task, the transparency ethos helps ensure that all parties are moving forwards together as one - issuer, private equity firm and the banks - for the "win-win" result.

9 September 2013

Expert advice to the most sophisticated issuers.