Rothschild: IPO practices harm market

SPECIAL INVESTIGATION: CITY AT WAR

THE way that some investment banks allocate stock to investors in new floats has damaged the aftermarket, contributing to the breakdown of Europe’s initial public offering (IPO) market this year, according to independent advisory Rothschild.

In response to a letter to investors from Bank of America Merrill Lynch (BoAML) on the IPO process, Rothchild’s co-head of equity advisory Adam Young told City A.M. that the note, while “helpful”, still “doesn’t address Rothchild’s main concern”.

“In current sideways markets, the usual marketing and book-building approaches are failing to identify clearly enough which investors have conviction… and which investors are as likely to sell as to buy more stock,” he said.

This leads, he says to “allocation distortion – to the detriment of the aftermarket”. The worry is that too much stock is given to hedge funds rather than long-term investors.

Independent advisers and bulge bracket banks have been at loggerheads for months over the high failure rate of Europe’s float market this year.

A special investigation by City A.M. last month revealed that relations between some advisers are in a state of war, with boutique firm STJ Advisors suggesting that some banks’ allocation practices could damage floats.

Since then, banks have gone to great lengths to charm investors and improve their access to issuers.

But relations between advisers are still strained. In a shot across the bows of independent advisers, BoAML warned them to avoid appearing as “a force for conflict in a sensitive process”.

However, others argue that it can often be the job of an independent adviser to rock the boat if they disagree with stock allocation decisions.