The aborted Hirepool IPO is an extremely positive development for institutional and retail investors.
It should enable institutional investors to be price-makers, as they ought to be under the bookbuild process, instead of price-takers.
This has positive implications for retail investors, as they have to accept IPO prices determined by institutional bookbuilds and some of these prices have clearly been too high.
With this in mind the Hirepool failure should bring some sanity to the IPO market.
IPO prospectuses used to be registered with the issue price already determined and included in the document. There were clear guidelines that investment bankers and management could talk only about information, particularly historic and financial data, included in registered prospectuses.
Analysts didn’t publish reports until the prospectus was registered and the financial projections in these broker reports had to be consistent with the prospectuses.
This process was fairly consistent with United States regulations, particularly the Securities Act of 1933.
US regulations require a prospectus to be filed and made public at the start of the process with any changes made in full public view.
The American IPO marketing process can begin only when the prospectus is publicly available, and connected analysts — analysts employed by investment banks associated with the IPO — are not allowed to publish any research for 40 days after the issue price is set.
This process was broadly followed in New Zealand until recently. Ironically, major changes began to appear during the Government’s partial sale of Mighty River Power, Meridian Energy and Genesis Energy.
Meetings with management were held before prospectuses were available, and broker reports were distributed to institutional investors at an early stage in the process.
Several media comments criticised the limited availability of these reports.
The IPO process has evolved even more dramatically in recent months and had a big influence on the failed Hirepool offer.
IPO companies have meetings with potential investors weeks and even months before a prospectus is registered.
The first is usually a non-deal meeting to assess institutional interest. Written material presented to investors usually has to be returned at the end of these meetings.
The next step is that brokers, including those associated with the joint lead managers, publish research reports on the company.
These are often published before the registered prospectus is available.
These reports have individual serial numbers on the front cover and usually include the statement: “This document is being furnished to you solely for your information and must not be reproduced or redistributed to any other person.”
The serial numbers and statements clearly show the reports are available only to selected investors.
This is an extraordinary development, particularly as securities industry regulatory regulations are based on continuous disclosure and the full dissemination of information to all existing and potential investors.
Company management can also have additional meetings with institutional investors before the prospectus is registered.
These meetings can be totally unsatisfactory because potential investors don’t have prospectus information on which to base their inquiries and questions.
Hirepool registered its prospectus on June 16 and the bookbuild process, which sets the IPO price, was due for completion eight days later.
The company continued to have meetings with institutional investors after its prospectus was registered.
This process is totally unsatisfactory for several reasons:
• Most of the briefings with management are now held before the prospectus is registered.
• The registered prospectus is available only in on-screen PDF form; printed prospectuses are extremely difficult to obtain. The Hirepool prospectus has 219 pages and many firms are reluctant to print copies for each member of their investment team. This reduces the amount of scrutiny an IPO receives.
• The gap between the date the prospectus is registered and the bookbuild is shrinking. For example, the gap was 33 days for the Mighty River Power IPO, 32 days for Meridian Energy, 14 days for Genesis Energy and eight days for Hirepool. This reduces the the opportunity for serious analysis.
• The shrinking gap between prospectus registration and bookbuild is a major problem when there are a large number of IPOs.
Investors should be extremely sceptical about any IPO that is primarily based on the sell-down of private equity holdings and it is up to the management team to convince potential investors that this scepticism is unjustified.
Hirepool’s management team failed to do this.
The indicative price range was $1.10 to $1.50 a share but many institutional investors seemed to believe 80c to 90c was more appropriate.
This was not a boycott of the issue, it was a disagreement over price.
Institutions should be the price-makers under the bookbuild process but Hirepool’s vendors wanted to effectively set the price. When they couldn’t, they withdrew the offer.
Between 2007 and mid-2013 more than 60 per cent of American IPOs were priced outside the indicative price range.
The British system is more rigid, and unfortunately we now seem to be following it, rather than the US as we once did.
The Association of British Insurers, whose members have more than £1.8 trillion ($3.5 trillion) under management, is highly critical of their country’s IPO process.
It says the regulations favour issuers and vendors at the expense of investors. It believes prospectuses should be registered earlier in the IPO process as “this will enable investors to be better prepared for the management roadshow and to give more incisive feedback on the company and its valuation” before setting a price range.
The association also believes independent research reports should be made available to all investors so they can make informed investment decisions.
The issue was highlighted on June 12 when the UK discount retailer B&M started trading on the London Stock Exchange on a conditional basis before the prospectus was registered.
Institutional investors had received a draft prospectus but a prospectus was not available to retail investors until later on June 12.
There was nothing illegal about this as a full prospectus has to be published in the UK only before unconditional sharemarket trading begins and this didn’t occur until June 17 as far as B&M was concerned.
The aborted Hirepool IPO is a positive development because it shows institutional shareholders are prepared to enforce their role as price-makers and are unwilling to allow vendors to totally dictate the price setting mechanism.
It has also highlighted the flaws in our IPO process, particularly as far as the public availability of prospectuses is concerned.
All IPO issuers should be required to make prospectuses publicly available at the beginning of the process on the NZX and/or FMA websites, even if they are in draft form. All subsequent changes should then be made in full public view.
This would significantly improve our IPO process and give a vital boost to investor confidence.
Disclosure of interest: Milford Asset Management invests in shares of Mighty River Power, Meridian Energy and Genesis Energy on behalf of clients.