The IPO market in London is currently booming. IPOs provide some of the most interesting work for investment banks, which may take the role of underwriters, coordinators or advisers.
1. Attracting The Client
- Banks must first pitch to clients in order to be selected as their advisor (or one of their advisors) for a particular transaction. This first involves banks pitching their ideas to prospective clients. Pitchbooks form part of a bank’s pitch to senior decision makers of companies and contain information including an overview of the investment bank (including experience, capabilities and accolades relating to research, corporate finance, sales and trading) and the ways in which the team can add value to M&A transactions. Deal-specific pitchbooks are tailored to specific transactions (such as IPOs or acquisitions).
- Banks work on a relationship basis with corporate C-level (CEO, CFO etc.) executives and will often approach businesses with ideas for M&A transactions or corporate finance transactions (although businesses also sometimes approach banks with their own ideas). Bankers must use their knowledge and understanding of a market to convince a business of the viability of an idea in order to be mandated as an advisor or underwriter (and thus get paid). IPO pitchbooks often contain a projected valuation of the business and an insight into the equity market, for instance an estimation of the level of demand likely to arise for a new equity issue from the business.
- Companies may then invite banks to present their pitches at a ‘beauty parade’. Although many of the factors discussed in the investment banks’ pitchbooks are considered, the final decision is typically based upon a range of factors including: the relationship (prior or formed throughout the pitching process) between the prospective client and the investment bank; the reputation of the investment bank and its experience handling previous advisory mandates on similar transactions; and the bank’s estimation of the amount of capital it believes it can help the prospective client to secure. Banks will often look to provide debt finance for M&A deals in parallel to providing advisory services. Both services can provide significant revenue for banks and as such, banks may offer one service for a cheaper price in order to secure an invitation to pitch, then whilst pitching attempt to generate additional business (and thus additional profit) by cross-selling other services.
- The client will typically select one or two banks as lead underwriters (or lead bookrunners), in addition to other banks to form the underwriting group (or syndicate).
2. Building The Team
- Underwriters are the investment banks responsible for sourcing investors. Underwriters assume liability for a deal, agreeing (for a fee) to:
(1) Purchase all the shares in advance and subsequently attempt to sell them on to investors (temporarily taking the company’s equity onto its own Balance Sheet); or
(2) Purchase any unsold shares post-issuance; or
(3) If the parties enter into a ‘best-efforts’ contract, use their best endeavours to sell all issued shares, whilst taking on no obligation to purchase any that remain after the sale.
- The number of underwriters will vary with the size of the deal. More banks are often necessary if a larger quantity of equity is to be sold, as additional underwriters will likely provide access to a greater number of potential investors. The lead bookrunners (underwriters) are often known as ‘lead-left bookrunners’, as their names are written on the left hand side of the deal prospectus front cover.
- The underwriters’ sales forces assist the financial advisor(s) in determining an offering price for the shares. Contracts and fee structures are arranged, often including ‘performance fees’ for banks that are dependent on the final price of the offer.
- Lawyers will take an integral role in the drafting of the prospectus, ensuring that it is compliant with the extensive regulation by which prospectuses are governed (regulation may govern, for instance, the content and the structure of prospectuses) and that it accurately encapsulates the commercial decisions made by the client and its financial advisors.
- Help to create or verify companies’ financial statements and analyse the financial state of a company for the purposes of valuation and risk analysis.
3. Conducting Due Diligence
Due diligence refers to the process by which the client’s advisors carry out in-depth investigations into many aspects of the client’s business in order to ensure the prospectus contains information that is accurate and well informed. This in turn ensures investors are able to gain a solid understanding of the company in which they are considering investing. Once due diligence has been completed, bankers and lawyers work on the prospectus.
4. Drafting The Prospectus
The prospectus advertises the issue to potential investors and contains the facts and forecasts investors require to make informed investment decisions. This includes information about the issuer’s business (such as how the company operates; how its management plans to take it forward; and how the company is expected to perform over the next few quarters), in addition to any potential risks of which investors should be aware and the terms and conditions of the issue.
5. Marketing The IPO
Once a deal is filed with the appropriate authorities, the details of the upcoming IPO are made public. In the UK, the deal must be cleared by the Financial Conduct Authority (FCA). In the US, the deal must be cleared by the Securities Exchange Commission (SEC). Copies of the prospectus are printed and then the roadshow begins.
Using the prospectus (in addition to other supporting documents), Sales teams from the investment banks enlisted to manage the deal contact the institutional investors with which they have relationships and schedule roadshow meetings. Members of the bank’s investment banking division will typically escort the CEO of the client’s business as they travel across the country (or globe) meeting prospective investors. The process of accumulating potential orders is known as ‘bookbuilding’.
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By Jake Schogger - City Career Series