UK looks to overhaul European listings

Shanny Basar

TheCityUK, an independent body which promotes UK financial services, has recommended that investors receive information at an earlier stage during an initial public offering as part of its proposals to improve access to European listings, especially for growth companies.

The annual average number of IPOs dropped to about 670 between 2001 and 2011, from 1,170 between 1993  and 2000 according to a recent report from the European IPO Task Force. As a result the total value of capital raised nearly halved from an annual average of $132.7bn to $69.9bn over the same time period.

The European IPO Task Force said IPO markets continue to function well for larger companies but are becoming increasingly inaccessible to smaller companies.

TheCityUK, supported by law firm King & Wood Mallesons, today published its report, Capital markets for growing companies: a review of the European Listings Regime report. The study includes 26 detailed recommendations from a steering group which included senior practitioners from Citigroup, Fidelity, Lloyd’s Banking Group, Deloitte, KPMG, Morgan Stanley, Oliver Wyman, City of London Law Society and King & Wood Mallesons.

Harriett Baldwin, economic secretary to the Treasury, said at the launch of the report that the UK government has been supportive of a Capital Markets Union in the EU which improves and diversifies companies’ access to funding across all 28 member states.

She said: “We believe there is significant scope for the EU to help complement bank finance with broader options for market-based financing.”

According to the European Commission, firms employing under 250 people account for 85% of job creation in Europe and rely on banks for 80% of their funding, which led to reduced financing after the financial crisis.

“A Capital Markets Union could be game-changing for them,” Baldwin added.

The report said investors need to be encouraged to provide risk capital by providing them with better information on the creditworthiness of SMEs and appropriate tax and other incentives.

A key to providing better information is for the issuer to publish a core registration statement earlier in the admission process.

“This would give investors more meaningful access to management; better investor dialogue leading to more robust pricing; shorter, more focused, research; and shorter offering periods further reducing market risk,” added the study. “The current market practice of analyst research on the issuer being published first, to help educate investors, followed by a self-imposed two week ‘blackout period’ before any form of prospectus is published should be abandoned.”

The study argues that prospectus is not fulfilling its purpose as the document on which investors base their decision on whether or not to invest and at what price.

In the UK, if a company wants to go public it makes an Intention to Float announcement and the offer will usually be priced and allocated four weeks later. The first two of these weeks is for ‘pilot fishing’ as research analysts from the lead IPO underwriters brief potential investors and the banks receive initial feedback on the price. After pilot fishing, the issuer publishes a pathfinder prospectus for management presentations to potential investors before the underwriters set the price range and run the bookbuild process to decide on the final pricing and allocation.

The report said: “While the practice of pilot fishing has developed to enable issuers to receive as well-informed pricing feedback as possible in the absence of a prospectus, the availability of a prospectus would enhance this process. It would also potentially enable feedback from a wider pool of investors.”

The study has also recommended the ending of the blackout period for publication of research from analysts who are independent of the underwriters.

“No one has felt able to break ranks and make the first move. It is acknowledged that the practice was introduced at a time when there was much less regulation in relation to the independence of analysts than there is now,” added the report. “Yet some now point to guidance in those rules in relation to conflicts of interest as being a reason why they feel they cannot unilaterally eliminate the gap altogether.”

Nick Anstee, senior director, King & Wood Mallesons and chairman of the steering group, said, in a statement:  “This report, based on contributions from many stakeholders from across the City, looks at the challenges and developments needed to develop an equity culture across Europe by 2019 that is capable of providing deep and liquid pools of capital across EU Member States.”

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