Inside Track: Investors: How best to avoid being shut out on listings
CITY folk often have long memories and until very recently there was an average chance that if a private equity group tried to bring a company to market it would be hit by a barrage of cynicism.
The disappointing performance of several stocks in the noughties, including Debenhams, ensured that for a good while whenever private equity wanted to offload shares onto the public markets, it was a fair bet that institutions would look the other way.
This sentiment began to change last year when the private equity backers behind the estate agency chain Countrywide successfully floated the group and private equity has been on something of a roll since.
The most recent charge levelled against private equity, most evident in the flotations of AO World and Poundland, is not from institutions complaining about being stuffed with over-priced stock. Rather it is from some institutions who feel they have missed out on stock after being zeroed out or after getting a below average allocation in the distribution process.
One UK fund manager told me he felt his recent experience in both AO World and Poundland led him to feel very negatively towards the new issues process.
“You go to meet management early, you do research on the company and assess its forecasts and then speak to analysts,” he said. “And then you end up with no stock in the issue. That seems a very poor use of one’s time.”
Others say they would like to see more transparency in the allocation process so they know what they need to do if they want stock.
My understanding is that some of the advisers from the Poundland flotation, which include Rothschild, JP Morgan and Credit Suisse, will endeavour to speak to some of the disappointed would-be Poundland investors over the next few days to explain how they did the allocation process, which resulted in hedge funds taking an unusually small (around 25 per cent) proportion of the placing in favour of long only buyers.
They will say that what they’re looking for are leaders in the process, by which they mean investors who meet management early and all but sign up to the issue at the earliest stage.
“There’s no real mystery to this,” said one adviser. Those who allocate stock say they want consistency from the buyers from the earliest stage.
Creating an understanding with the institutions is crucial to the continuing success of the market. A breakdown in trust between buyers and seller led to the door being slammed on the IPO new issues market three years ago. That mustn’t be allowed to happen again.