Buy Side Demands Independent IPO Research

Shanny Basar

Asset managers have told the Financial Conduct Authority, the UK regulator, that they are wiling to pay for research from non-syndicate banks during UK initial public offerings, especially for large transactions.

The FCA published a consultation today on possible changes to the UK IPO process. At present only analysts employed by the book-running syndicate are able to access the information they need to produce research on an offering, while there is no access for third-party research providers.

“The result is that so-called ‘connected research’ written by analysts within the book-running syndicate is the dominant source of information available to investors during a crucial stage of the process,” said the consultation.

Christopher Woolard, executive director of strategy and competition at the FCA, said in speech at Bloomberg in London today that the market study on IPOs confirmed investor concerns that the prospectus, which should be the primary source of information, is currently made available very late and only connected research is available.

“This is of particular concern given the conflicts of interest and associated conduct risks that arise during the production of connected research,” added Woolard. “This includes analysts coming under pressure to produce favourable coverage of the issuer in order to secure a place for their bank on the book-running syndicate.”

Woolard said the regulator is considering re-sequencing the IPO process so that a prospectus or registration document is published, and third-party analysts have access to the issuer’s management, before connected research is released. The FCA also wants to prevent analysts within prospective syndicate banks from interacting with the company’s management and advisers around the time pitching efforts are taking place.

In the consultation the FCA found that only one of the 169 UK IPO transactions between January 2010 and May 2015 included the publication of unconnected research. This was due to the lack of availability of the approved prospectus until the first day of trading and the lack of access for unconnected analysts to the issuer’s management. Therefore the FCA has suggested that the prospectus is published earlier and the analyst presentation should be opened up to unconnected analysts to meet the issuer’s management.

The FCA said: “Feedback from buyside investors was unanimous in supporting our aim to create the necessary conditions for unconnected research to feature in the IPO process. A number of buyside firms have said that they would like to see more unconnected research available during the IPO process, and they would be willing to pay for it, particularly on larger transactions.”

In addition, independent research providers told the FCA they are frequently approached by existing or new buyside clients with requests for analysis of an IPO, but they are almost always unable to satisfy that demand due to the lack of access to available information on the issuer.

Fund managers also said they need to receive unconnected research by the start of the management roadshow and book-build for it to be useful. “Ideally it would come earlier to support investor education and initial price discovery,” said the FCA.

The majority of buyside firms told the FCA they would prefer that all information on the IPO (i.e. a prospectus or registration document, along with connected research and unconnected research) was released simultaneously at the beginning of the public phase of the process.

The FCA also found that corporate finance advisers typically analysts about their views of the sector and its prospects, and that advisers consider a positive research message conveyed by analysts as being one of the main factors when advising the issuer on which banks to appoint to the syndicate.

“The nature of this engagement heightens the risk of bias being imparted to connected research, noting here the 2014 enforcement case in the US surrounding the Toys ’R’ Us IPO in 2010, where ten US broker dealers were found to have used their equity research analysts to win investment banking business by offering favourable research coverage,” said the FCA.

Comments on the consultation paper are due by 1 June 2017.

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