"The U.K. equity IPO process, where investment banks have until now held tight control over the flow of information, is ripe for reform. As part of a wider project to improve the efficiency of the country's capital markets, the Financial Conduct Authority (FCA) is seeking to reform the availability of information in the IPO process. While this may open doors for analysts within non-syndicate banks and independent research houses, MiFID II uncertainty may stifle growth in IPO research in the short term" – Edison Investment Research
Earlier this year, the (FCA) published a proposal to shake-up the IPO process by improving the availability of information on companies looking to float. The intention is to address existing City concerns about the timing, sequencing and quality of information for potential investors. The FCA proposes to “improve the range, and timeliness of higher quality information that is available to investors during the process.”
The FCA is concerned that connected research, coordinated by appointed banks, is dominating the market of information available to investors during the key stage of the process. On top of this the late publication date of the pathfinder prospectus adds to restricted access, which in turn results in non-syndicated and independent analysts having little information to produce research. The FCA’s new proposal aims to bridge the gap and increase the diversity and independence of the information available to investors during the education period.
Motivated by the need to address the issues surrounding the disclosure of information during the IPO process, the FCA has proposed potential changes. It will follow the example of the US, which it believes offers a more transparent process.
Bringing forward the publication date of the prospectus, “… which should be the primary source of information”, is one of the changes proposed. This change is necessary in order to avoid conflicts of interests that may arise from research carried out by analysts connected to the Company’s investment bank. It would give unconnected analysts more time to carry out research on the company before it floats and to make more informed decisions.
The FCA also proposes changes to its Handbook guidance to ensure a more balanced investor education and price discovery. It would require the appointed investment bank to offer any communication with the issuer’s management team equally to all analysts. This would include the option to communicate independently with the issuer’s management team prior to research being published.
The role of financial communications
Opening up the process to unconnected analysts should be treated carefully. With increased volume of information available, companies will need to strengthen their narrative and present a solid and clearly articulated investment case. The earlier companies can build and begin communicating a solid narrative, the sooner analysts and investors will be able to get on board.
While investors will benefit from IPO transparency, companies will face greater scrutiny and interrogation from media and analysts. So it will be more important than ever to maintain effective communication with key audiences.