In this episode we welcome Anne Ross, EMEA Equity Syndicate Manager at Fidelity Management and Research, our first guest from the buy-side. With her background at JP Morgan and now on the buy-side, Anne provides invaluable insights into the IPO process, from the role of bookrunners and strategic selection of banks, to the importance of understanding investor types and maintaining a strong shareholder base post-IPO, offering her view of what it takes to successfully navigate the public markets.
Anne also delves into the evolving nature of IPOs, highlighting the impact of market trends and the necessity of aligning management incentives with shareholder interests. She emphasizes the significance of timing and strategic planning, advising companies to be well-prepared and adaptable. Whether you’re a company considering going public or an investor seeking to understand the IPO landscape better, this episode is packed with practical advice and expert insights that are sure to enhance your understanding of the IPO journey.
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Disclaimer: The discussion in this episode is not financial advice, nor an investment recommendation, nor a solicitation to buy or sell any financial instruments or an offer for financial services or any other transaction. The information contained in the recording has no contractual value and is intended for informational purposes only. Amundsen Investment Management and the participants in this podcast may have holdings in the companies being discussed. Any views expressed are those of the guests only, and not of Fidelity Management & Research or Amundsen Investment Management.
Per: Today we’re welcoming Anne to the podcast. Anne is our first guest from the buy side and manages EMEA Equity Syndicate at Fidelity Management and Research, one of the world’s largest active equity fund managers and a very active IPO investor. Before joining FMR in 2023, she spent more than 10 years at JP Morgan managing ECM transactions as a member of their EMEA Equity Syndicate team. Safe to say, Anne has a lot of experience in the decisions that corporates need to make around an IPO process. And today we get to explore some of these key points: the role and choice of banks to manage an IPO, investor types and involvement during the process, and how to best engage with those investors in the time leading up to it.
Gautier: Anne, thank you very much for joining the show today. I’m very pleased to have you. I’d like to have you start introducing yourself in the first place, please.
Anne: Perfect. Now, I really appreciate the opportunity to be part of the podcast. I know I found the other episodes very insightful for myself. So in terms of my career, it has always been in equity capital markets. I started in origination before moving to Syndicate on both the sell side and now the buy side. I first joined JPMorgan Casanova at the end of the joint venture between JPMorgan and Casanova. So came into a team with a strong UK franchise with a bigger US headquartered investment bank. And the UK was a pretty dominant part of the business. So I got involved in a really wide range of transactions from the outset and really enjoyed learning and found that I came to love equity capital markets or ECM in general. So I spent time in the UK team before adding South Africa to the geographic coverage, and then had the opportunity to move into the EMEA syndicate team, so covering Europe, Middle East and Africa, broadening the geographic spread, but continuing to learn. It was certainly an interesting time to have made that move. So I was in that team for about a year before the pandemic hit, and we hit a pretty crazy time of equity raising. So I also had the opportunity to run a lot of the Middle Eastern transactions when IPOs were kicking off there. So a great opportunity to be learning lots. And then since the middle of last year, I’ve been at Fidelity Management and Research or FMR. So I kept the big American firm theme, but I’m still based in London and covering EMEA Syndicate.
Gautier: Perfect. So you moved to the buy side. And I’m very excited to have you today because I think that for the first time, we have actually a representative of a public equity manager. But as you say, you’ve been as well in the seat of the advisor, helping companies coming to the market and executing IPOs. So you really have both experience. So I’m sure we’re going to have a very interesting discussion. Thank you again. Maybe we should start with actually reminding our listeners, if they’re not yet familiar with the IPO process, what is actually an IPO book runner? What’s the role of a bank involved in an IPO process?
Anne: So I’d say a book runner definitely does a lot more than just running a book, which is what the name might initially imply. And in terms of the sorts of things that they might look to do, it’s anything ranging from the regulatory preparation side of things, through to finding relevant investors to target for achieving the best shareholder base to equity story positioning and valuation. Ultimately, you’d probably want to see a complementary set of banks on any IPO so they can bring different qualities. So they may initially have been selected on the basis of things like their sector expertise or their distribution capabilities in sales and research. So which investors they’d be able to reach, but ultimately their ability to successfully deliver the initial IPO, but hopefully then also life as a listed company on an ongoing basis.
Gautier: Okay. So you start early that role of advising the companies. Typically it will be four or six months of preparation work with the client.
Anne: Yeah, so inevitably these timetables always shift and move, but having kind of a core set of book runners early on to start that advisory process could be as far as six months out, maybe even longer, maybe a year in advance, depending on how well prepared the company is from the outset.
Gautier: And you said that you could be several book runners. There are a magic number of Northern Banks that should be mandated and helping the company in this process.
Anne: So you’d probably have a variation depending on the company. So it would always be case by case. But in my experience, although there’s always exceptions, for example, if you had a multi billion dollar deal size, probably having a smaller number of banks involved could result in clearer messaging and a smoother process overall. Interestingly, having a look at some of the numbers since 2010, the syndicate sizes have gone up from around five to probably nine in total. And you have had an increase mainly in the global coordinator role. So the banks who are really leading the conversations and the dialogue, that has actually doubled from two on average to four. So you probably could see a few issues there in terms of just having consistency of communication and frank views and conversations directly with the client. So probably towards the smaller number as being a better outcome.
Gautier: Very interesting. Why this trend, you think, as being a bit heavier at the top?
Anne: So I guess it probably depends a little bit in terms of the company and what they’re looking to achieve. And I think as we touched on some of the distribution capabilities are important, and making sure that if you have a small cap company, you’ve got a bank who can actually tap those investors versus just having some of the bigger banks who have a very similar distribution capability. And the research coverage as well on an ongoing basis in the aftermarket is important. So perhaps if you have a smaller deal, you actually do want to have a bigger, broader syndicate. But keeping maybe just one or two global coordinators who are leading some of the initial conversations might make more sense.
Gautier: Yeah, that would make a lot of sense. And you say there’s complementary skills or tasks that each book runner will have. Where are they complementary coming from? Or what would that be? Can you give some examples?
Anne: Yeah, so you might have one bank appointed because they have a very strong sector banker who knows the industry incredibly well and will be very well informed to help Croft. The equity story. So making sure that you’ve got the key messages, they might know the comparable companies that investors will also be looking at very well. You might then have that complemented by a bank which has an incredible research analyst and is able to write really good, insightful, thoughtful pieces there. And then you may have a bank whose specialist salesperson has a lot of really good investor contact and engagement. So there’s probably a few different things that might be brought in there.
Gautier: I’m curious, how many IPO process you’ve been involved in in the past? Do you think you know the number?
Anne: Oh, that is a very good question. I actually don’t. And to be honest, I’m not sure I would even know how to count it because as an analyst, I would have been involved in a whole bunch of RFPs. And so the initial pitching for an IPO, obviously not all of those were necessarily successful. But that in itself is a learning process and you get to grips with different companies. But I guess I’ve been involved in… pitches than in actual executions. And sometimes even in the banking world, you get pulled in halfway through an IPO process. And even in the syndicate team, I remember deals which have maybe been on hold for a time period and the person who had covered them didn’t have the capacity. So you would end up stepping in sort of a couple of weeks later on to step in. So I probably put it in the hundreds, but that would definitely be a bit of a guest of it.
Gautier: Now, that’s a good sample. If I ask the question, because I’m wondering if to what extent, irrespective of the company and the investment quality and rational, if just by looking at the initial syndicate structure and which banks are involved and so forth, if you can already kind of guess when you start the process, okay, that’s going to be a tough process or a difficult one, or there’s going to be a smooth process with very good collaboration. I was trying to wonder if, again, you learn things on the way that were telling you very quickly and early that would be an easy process to run or not. based again on the syndicate structure?
Anne: Yeah, I guess that’s a good way of thinking about it. I probably would put it more down to the fundamentals of the business because when you’re starting an IPA process, if you’re one of the global coordinators, which was a stance that we did take at one point, you’re in that driving seat. And so it’s kind of up to you to get the process to work. And then you have to sort of figure out, actually, maybe we do need to add some co-leads because I think we’re going to need… this in the research distribution, or actually, we probably do need to plug a gap here and bring in a particular advisor, or you may find that you need to have someone who can help with presentation skills ahead of the management meetings with investors. So you probably do start to learn early on if there are certain tactics that you need to deploy, or if you’re just going to be facing a very difficult sort of market backdrop, maybe it’s you’re taking a pause in the process and revisiting in six months time.
Gautier: Okay, that’s very clear. And now as an investor, right, based on the discussion you had at the time with investors looking at IPOs, does it make a difference for investors to have different point of contacts and different banks they could actually interact during the process? Is that important for the investors to have multiple banks appointed? Or does it actually make the process more complex and complicated from an investor point of view?
Anne: I’d say again, it’s case by case. For larger deals, you can probably appreciate why a larger syndicate may make sense because there is more stock to distribute. However, in my experience so far, it’s certainly been a bit cumbersome if you have 15 different banks contacting you all trying to get the same information for you. So I think typically, I would look to just engage with a core set of the banks who are actually leading the process are going to be the best informed. and have clearly been appointed by the company to run the process. So I’d say you probably do want to keep it to a smaller number. Again, going back to that consistency of messaging, you don’t want to have 10 different people that you have to talk to on an ongoing basis and have some of the communication get a bit complicated. Having said that, it’s always helpful to get different perspectives. And one person may have a different take if they’re one of the local brokers and actually speaking with some of the local investors, that might be a very different picture to a bank who are speaking to a lot of global complexes. And you can get a different insight and take.
Gautier: And it’s like a relationship driven industry. And therefore, you can build up certain rapport with different people and individuals and just have a slightly different dynamic and relationship. And therefore, the sorts of conversations you’d be having might be slightly differentiated as well.
Anne: Okay. And maybe that’s maybe a repeating question, but just to close the loop on that, because at FMR today, obviously, you’re a very large investor, you invest in IPOs. I guess you also invest in private companies. You have a private mandate somewhere in the firm?
Anne: Yes. So we do have pre-IPO investment opportunities and there is somebody who runs that side of the process. But there will be assets that come to IPO where we’re existing shareholders as a crossover account.
Gautier: And so if there’s a CEO coming to you and say, Anne, do you have a view on which banks I should mandate? Do you think you have today a good answer to give to a company about how to pick up those banks based again on your experience, but today as an investor, there’s some criteria you will recommend the management to look after when they’re choosing their advisors?
Anne: I’d say it probably comes down to the actual company and what will be best suited for them. You probably do want to be thinking about which sector they’re in and therefore which banks have good capabilities there. the geography as well of where they’re looking to list and therefore where the relevant local shareholders will be. Probably a couple of things that should be thinking about for that.
Gautier: You had this role over 10 years at JPMorgan Kazanov, the ECM team and syndicate team, that’s right?
Anne: Yes, I think I was there for 12 years on the sell side before moving over. Time flew by.
Gautier: And so how much innovation have there been in the IPO process over those 12 years? If I ask the question, it’s because from my experience in my seat, I haven’t seen much innovation, strangely. The IPO process has been pretty much run the same way today as I think it was 20 years ago. There’s been a lot of talks about how to change the documentation process, making the prospectus available earlier. The IPO process has not really happened in Europe. did change a bit in the UK, but not much questions about retail participation. It’s actually going the other way around. I think the last two IPOs in France at least didn’t even have a retail trench anymore. You know, there was a talk about more direct listing and so forth. But to be fair, this IPO process hasn’t been prone to innovation. I don’t know why. I cannot explain, but maybe you have a view or can you comment on that?
Anne: Yeah, I think I would agree. I think there have been some changes, but not enough to fundamentally transform a lot of these processes. I think one thing that has probably evolved over the time that I’ve been in equity capital markets is the deep dive session concept, which has now become standard practice, I would say, in the IPO process. But I think in that regard, that’s probably diluted its benefit in some ways. Because you would typically have some early introduction meetings with a small subset of investors to try to get some early feedback and an early read on how the equity story is presented. And that tends to be some of the more thought leading accounts and the more relevant ones for the IPO. And if they’re interested and engaged, then that’s a good sign, albeit early. And then once the company is ready to present to the bank syndicate research analysts, you have a much more comprehensive presentation. And a subset of that. can then get used with the investors at what has become deemed this deep dive session. And I think there are benefits to it because as an investor, you’re going to want a lot more detail on the financials. You get to meet with a wider bench of the management team. So you might have sections that are headed up by, say, the head of strategy or legal or tech. So that can definitely bring some benefit. However, if you’re a research analyst as an investor or portfolio manager that has covered the sector for 15 plus years, say. and it’s a relatively simple to understand business, or there are lots of comparable companies out there that you’re already familiar with, having four hours of your day sat what is now on a video conference is perhaps not the best use of time. Maybe if you can add on a site visit, and actually, it’s a really important thing to be able to see the business on the ground, there is still relevance. But perhaps some of these sessions are better targeted at generalists. or focused on companies which actually are pretty complicated and you’re really going to need to get under the hood to be able to figure out how to value them appropriately. So I’d say that’s probably one development, which maybe is a bit more mixed in terms of its benefits.
Gautier: Yeah, I mean, you know, this deep dive, which is basically, as you say, a long presentation by management to go through in more details. You know, you need buy-in aids and strategy and financials, obviously. So it can be three, four hours, as you said. And that’s very much happening in Europe, that much in the US, right? In the US, they will release the S1 filing weeks, months before a potential IPO. It seems that this deep dive has been here to compensate for this lack of public information available before an IPO. But I’m not really sure indeed that the deep dive is as valuable as having a prospectus release earlier. Not as prospectus, but a filing note at least released earlier. Because at the end of the day, there’s a lot of information in those notes available. And the deep dive process is actually still… a selective process, right? It’s a discretion of the book owners who they invite to the process. So in a way, you may be limiting even your audience of investors actually doing the real work, no?
Anne: Yeah. And I think your point around having access to the prospectus, it’s probably having those detailed financials because it’s until you’ve got that, there is still that lack of information to allow you to do that fundamental valuation work. And I think that probably is one of the ongoing challenges of an IPO. It’s asymmetry of information. And that’s certainly something that I’ve seen a lot more visibly now sitting on the buy side. It’s really trying to understand a lot of the kind of rationale and incentive as to why a company is looking to IPO. And having that historical track record of financial information is really important to make sure that you have understood it’s not just the last three years that the company has managed to grow. It’s that they’ve been managing to grow consistently over time. And that’s also very important as you become a publicly listed company because… you will be consistently under scrutiny from the public markets in that regard.
Gautier: Indeed. And the IPO timetable is quite compressed. And to ask investors to form a detailed view and commit to the investment within four weeks, it’s a bit of a challenge and the deep dive process helps. But we still think that releasing financial information and prospectus earlier will help a lot. That’s our take, at least, that Adam mentioned as well. Moving on to the topic of who are the investors participating in IPOs. Could you help us categorize the different group of investors engaging actively in the IPO process?
Anne: Yeah. So I think as we sort of touched on when running through the meeting process for IPOs, there probably will be a core set of thought leading accounts that you would want to engage early on. And it’s going to be those investors whose feedback probably matters the most because they’re ultimately most likely going to become long term shareholders. And so I think making sure that those accounts have the information they need, maybe that is the detailed financials that we’ve been talking about. But ultimately, they’re going to be hopefully the long-term believers in the equity story of the business, participate in the IPO and then in the aftermarket as well, which is beneficial for share price, liquidity, etc. However, there could be some of those longer term investors who, for one reason or another, aren’t comfortable investing at the IPO. maybe they do want to see more of a track record in the public market. It can still be helpful to build up those relationships so that they can see that consistency of financial performance over time and build up that rapport with management. It may just take longer than the IPO process itself allows for, but that could be supportive for ongoing life as a listed company. And I think management teams can hopefully get a pretty good read over the course of the IPO process which of those investors they’re going to be wanting as their long-term shareholders and have really understood the nature of their business. I mean, I think that’s just one of the benefits of having these early look processes and getting to know the investors over a period of time.
Gautier: And again, have you seen observer change over the years in the nature of the investors participating?
Anne: I think you’ve always had investors who would be deemed as long-only, long-term shareholders. I think you probably then also have the hedge fund community who are also relevant in transactions and now have numerous strategies, some with different time horizons. And I think you then would probably be less likely to have index accounts at the point of your IPO. But over time, that’s an important cohort of a shareholder base as well. And I think it’s particularly relevant in a European context where you are more likely to get the inclusion in maybe MSCI or the FTSE indices earlier on, unlike in the US where that can often take a lot longer period of time. And I think you’ve certainly had people on the podcast before talking around that particular dynamic.
Gautier: Yeah, I was reading again this morning a note from your ex-employer on the research side and they talk about the rise of passive AUM taking over active AUM as of last year already, actually. And clearly, you must have seen that as well in your previous seat that the share of active management has come down. Has it an implication in the IPO process? Was it more challenging to actually engage with investors?
Anne: I’m not necessarily sure it would be the kind of the passive versus active for the IPO process. I think there has probably been cycles in terms of sentiment towards IPOs in general. And I think it tends to be the if. if IPOs are performing well and good companies are looking to come to market, you do get a positive momentum and it’s easier to get investors to engage on situations. Whereas if there’s a feeling that IPOs just aren’t working or they’re being brought at the wrong valuations, I think it’s at that point it gets more challenging to get the engagement from investors. And I think over time as well, if an investor has AUM to be putting to work, then there is more money to be… put into new companies and looking for new ideas. Whereas if things aren’t performing as well, and IPO companies are hurting the listed portfolio of portfolio managers, they’re less inclined to then want to try and engage and get involved in new IPO situations as well.
Gautier: I remember in my times at Norges, which is a big, big sovereign fund and most of the active managing global multi-billion dollar funds, right? So basically just looking after the very large gaps. which means little participation at the time in IPOs from an active mandate perspective just because the IPO market tends to be more towards small and mid-caps by definition. I think the average IPO size in Europe is around $300 million and market cap probably around $2 billion. That’s an average number. But my point is it was a challenge to get some of the active PM engaging in IPOs. And we’ve seen as well the underperformance of small mid-cap managers over the last six years basically. with a lot of outflows as well. So I would think actually it’s still a bit of a challenge to get active PMs in the small mid-cap engaging and participating in IPOs. And I thought the comment you made that you need to engage with local brokers or book runners in the IPO and mandate more banks to make sure you have the coverage of the market and local coverage was related to this point. But are you saying you didn’t necessarily observe that from your seat at J.P. Morgan at the time?
Anne: I think you’re absolutely right for the smaller and medium-sized companies. That local factor is definitely much more relevant. And I think when they were seeing outflows, that was probably when the IPOs were the more challenging ones to do. So I guess it’s probably more related to the flows. And if it is the case that you’re seeing outflows from active management into passive, then I guess that is definitely a compounding factor.
Gautier: And I want as well just to come back on one thing you mentioned, and the long-term, long-only investor. And then you referred as well to the hedge funds as if there was an opposition. But if I was the question of, are long-only investors really long-term? It’s just because sometimes I have the impression as well that there’s a bit, people are mixing the notion of what is a long-only investor with the duration of the investments. Long-only basically means you’re an investor and you measure your performance against a benchmark. So you long the market. And the hedge fund is supposed to be hedge and more or less market neutral and runs more absolute return strategies. So actually the duration of your investment is not necessarily related to your mandate in terms of long-only versus hedge funds. But it always seems to me that this classification of your long-only or your hedge fund is very present within the syndicate. And this is what the management, the companies kind of think about the market. There’s long-only and there’s hedge funds. One is long-term, one is short-term. Have your views changed as a result of you going to Fidelity? How should we think about this distinction of long-only versus hedge fund in the IPO context?
Anne: I think you’re right in the sense that that’s a very easy sort of fault to fall into. It’s those categorizations, which are just deemed a blanket catch-all. And I think it fundamentally comes back to who believes in the company’s equity story. And I think actually, you’re completely right in terms of just categorizing someone. I think, yeah, it was always when you’re doing a kind of a book bill process, LO for long only, HF for hedge fund. And that probably isn’t an accurate representation necessarily of how much work an investor had done on the business. And I think that is definitely a risk of if you’re a management team and you’re presented by something with a whole bunch of acronyms just thrown at you, I think that can be very unhelpful. And actually really going into the weeds and understanding who is that investor, what’s kind of behind that. Because even within that, there are multiple different strategies and there will be… one order in the book. And actually, you may have four or five different fund managers from FMR behind that. You may have a global fund, a small cap fund, a sector fund. And therefore, actually, it’s really understanding the investor’s specifics rather than an unhelpful generic categorization in that regard.
Gautier: Yeah, exactly. And I guess the management, when they meet investors, has also the means and the tools to understand who are the investors they’re interacting with and who is actually engaging and with whom they want to. to continue interacting after the IPO. So always encouraging management as well to have a bit of ownership around this allocation process eventually down the road and understanding your shareholder base as well. Talking about allocation and shareholder base, there’s one question as well regarding the participation of US investors in European IPOs. Is it very important to have a global participation from the US investors? There’s a lot of comments in the press about the lack of liquidity in Europe and more and more issuers going to the US for that reason. Is that the case as well, that European IPOs are relying on US investors or not really?
Anne: So I think many of the larger US investors are global complexes. And so they do have teams who are able to invest internationally. And therefore, if you’ve got a good company, you should get the relevant demand. Having said that, I think there’s definitely, as you say, been a lot of commentary around Europe versus the US or UK versus the US. And I think that’s potentially a bit of a misnomer that, you know, by default, you can get a better valuation if you’re a US listed company. There’s a lot of caveats around that you’ve got to be relevant in a US market context. So there will be a subset of companies where that probably is more relevant, but there’s a risk that you could become a small fish in a very big pond. And you’re not necessarily by default going to get a better valuation. And you also don’t necessarily have some of those benefits such as index inclusion, at least initially. So I think there are certainly some considerations around listing location and thinking about what makes sense for a business. So, again, very case by case, it needs to be assessed in that context. I think your point around liquidity is a very relevant one. And I think although there is an acceptance in general of. you can end up having low liquidity. I think even some of the small cap portfolio managers were quite surprised when I shared some data late last year from the tactical hedge fund team at BTIG on European IPOs, running it from 2010 through to 2023. And actually, the average daily traded value one month after IPO had a mean of just over a million euros a day. So really not particularly liquid. And that doesn’t change hugely if you then look at it three months post IPO as well. So I think going into it knowing that you could be in a low liquidity stock is just something that factors into the IPO process and portfolio managers thinking when they’re looking at IPOs.
Gautier: Yeah this point on liquidity is fascinating and the statistic you mentioned about the low ADV from 1 million euro a day is quite paradoxical to the fact that the average free flow that IPO in Europe is twice this. as big as in the US, say is I think 30% on average in the European IPO, you know, the percentage of the company you’re floating versus 10 to 15% in the US. So you will think by listing more, you should get better liquidity. But actually, the data show the opposite. Do you have an explanation for that?
Anne: So I guess one factor could be actually how liquidity is looked at. And I think there are lots of market structure reports out there that maybe challenge how liquidity stats are run in Europe. Just taking the kind of high level initial volume on Bloomberg or whichever sort of data provider you’re looking at, maybe isn’t reflective of the actual underlying volumes which could be traded on different platforms or in different venues. So that’s possibly one consideration. It’s the actual recording of the data. You do also just by default have more fragmentation. There are more geographies, there are more different countries within Europe versus just kind of the one US side of things. So those are probably two things to factor in. But I think overall, it’s probably an ongoing challenge that investors in Europe just have to get comfortable with.
Gautier: In terms of the liquidity, there’s another interesting stat, which is the percentage of the shares allocated to the IPO, which exchange hands on the first week, I think is around 40% in Europe. Again, it would be case by case, but that’s just an average. That tells you or should tell the management that there’s a lot of investors in the IPO that wouldn’t be investors for long. and that you wouldn’t meet again. Do you think that’s important for management to have good control on their shareholder base day one and to get involved in allocation or not?
Anne: Yes, I think as we’ve touched on before, I think management are going to be wanting to build that long-term shareholder base. And I think it’s always important to remember that the IPO is the start of a journey. It may seem like an incredibly long process that requires an awful lot of work, but actually that’s the starting point of life as a listed company. And having that supportive shareholder base, maybe it’s because you do have an overhang and there will be future secondary sell downs or you’re going to need to come back to shareholders and do a primary equity raise. Having that shareholder support is going to be incredibly important. So you’re going to want to have it for that purpose. And it’s also these are going to be the people that you’re having to speak with on quarterly results. You’re going to probably want their feedback and views and judgment calls as you go. So you’re going to want to have those people that you. trust and really appreciate the views and feedback on. So I think it is definitely important to have the management team involved and knowing their investor base going forward.
Gautier: How many investors would typically participate in an IPO? Again, it will be case by case depending on the company size, the IPO size, but I think you’ve seen anything from kind of a very concentrated, almost club deals type IPO where you probably only got a sort of maybe a dozen or so investors there. And that will clearly be a very concentrated register, probably for a smaller market cap company through to you could easily have sort of 500 lines of investor demand in a book, maybe even more for some of the larger cap companies. So there can be a huge variance there. And I think it can be very difficult as a management team to try and then figure out who is sort of really doing the work on a company. But that again, is where some of those early look processes hopefully do factor in. the book runners should be helpful in terms of providing them with a shorter subset of list. And you really are going to want to be focusing in who you want as your top 20 shareholders, maybe even the top five, top 10 as the most relevant or leading accounts.
Gautier: Interesting. So you need to have that visibility on the 20 accounts and engage with them actively, as you said. Now back to the point on liquidity and you need probably a broader participation of the market and investors in an IPO process, which, as we say, is not easy because the timetable is quite compressed. But what do you think are the main hurdles for the average investor to actually participate in the IPO?
Anne: So I’d say when thinking about whether to invest or not, every portfolio manager or investor is going to be faced with a wide range of an opportunity set. And therefore, the company has to stack up versus that. So. it will be things like the fundamental equity story, maybe what’s the company’s competitive advantage. You are buying into the management team, they’re clearly the ones that are going to be running the business. And so you want to understand if they’re in it for the long term. And I think we talked a little bit around some of the asymmetry of information. So understanding why a company is looking to IPO, why now, and maybe if there is a selling shareholder, who is it? Why are they looking to sell? sort of the rationale around all of that. And I think that’s certainly something which I’ve seen a lot more vividly since moving to the buy side. And I think making sure that the incentives are aligned between the company, pre-IPO shareholders, the new public market investors as well. And I think the company’s financial profile is clearly incredibly relevant and needs to stack up consistently over time. Investors are looking to get a return and making sure that they’re comfortable that the company can deliver. on that. And then it will fundamentally come down to valuation at IPO, even if it’s the most brilliant company, but you can buy something else in the market that maybe will offer the same return. You need to make sure that you’re comfortable with some of those risks that we’ve talked about around the IPO process. Maybe it’s that uncertainty over how they’ll perform as a public versus private company, or the uncertainty around liquidity. I think that does typically warrant a discount at IPO. And so… coming to terms with the fact that you may list at IPO at one particular price. If you can get that right, then you can absolutely grow into a kind of more fully distributed or what’s deemed a fair value valuation over time. And I think the importance of having strong early trading is incredibly relevant. And you definitely don’t want to be just holding water or trading down on day one. That leaves a bad taste in the mouth and can be very difficult to recover from.
Gautier: Yeah, I know we have endless discussion on this. I guess that’s also the notion of the IPO discount, right? So the valuation at IPO versus the fully distributed valuation and to what extent you get an agreement between the owner and the seller and the market about what’s the right pricing at IPO to make sure there’s a good start because that’s very important, obviously, for the aftermarket performance and the interest, broad interest from the market into the stock. And because, as we said as well, there’s more and more passive money and indexation and index events are very important. And for having those events, you need actually positive performance in the stock. So there’s a lot of arguments for pushing for a very strong aftermarket. But I guess this point of IPO discount and valuation, do you have enough feedback from the investors during the process based on your experience around the actual? you know, pricing sensitivity or there’s too much momentum and optionality played by investors? What’s been your take and your experience on collection of evaluation feedback and pricing an IPO?
Anne: I think it’s a matter of being realistic about what information the investors are being given at each point in time. I think at the early look stage, it is very much a kind of high level intro meeting with limited financial information. And so actually it would probably be remiss of an investor to try and give reliable valuation feedback on the business at that point in time. However, once you are through to the stage where they’re engaging with the bank’s research and analysts following the intention to float announcement, it’s at that point where you would hope that they’re starting to get a better feel and a better read of where they’re coming out on valuation. And I think that’s certainly one of kind of my key parts of my role here now at FMR is to navigate the internal structure and try to… present a simple coordinated view to the external parties. So I’ll work with the international analysts and portfolio managers, negotiating on their behalf with global coordinators through the transaction, including sort of the IPO process, and try to provide kind of reliable views at each point in time as to the current status of thinking and appreciating that that can absolutely evolve as we get new information. If, for example, once we do get the prospectus and the detailed financials. actually, you’re looking at one of the elements, one of the line items, that could definitely change your view. Or if something comes up in the risk factors that you hadn’t previously been made aware of, or the management incentive package is actually not how you might have initially thought it could have been structured. Those things mean that your thought process can evolve as well. And so I think it’s very much a two-way dialogue between the book runners and the investor. But it is a matter of having the information that you need in order to make that decision.
Gautier: Yeah, indeed. And in my previous role as well, and all just my experience today as well at FMR, is interacting with all the PMs as well, looking at the similar transaction. And it’s never easy to align everyone’s views and get everyone sharing transparently as well what’s their approach to valuation and price limit. There’s a bit of gaming from different investors. And it’s obviously not helpful for the issuer or for the investor as well, because you’re probably not maximizing actually the out. that you call from an allocation perspective. But that’s a challenge. And we still see, interestingly, some IPO process being launched even after the investor education process or the PDA phase with a sell-side analyst and suddenly being pulled as if suddenly the valuation feedback was very different from the expectation at the time of launch. So there is still an element of uncertainty even when a client or corporate pull the trigger and go out there with an IPO process.
Anne: I think it’s definitely an important role for the book runners to try to get as clear a picture as possible. But I think it does also come down to how much information has the investor got, how reliable that can be. I think you sort of trying to do a detailed valuation waterfall when you are only getting feedback from investors who have had the limited subset of financial information could arguably be a bit misleading because they don’t have all the facts to hand in order to give that view. You’ve talked about the IPO timetable being compressed. Equally, you can say that a four-week time period in markets, a lot can change and things can move around. And so I think it’s important to have that two-way dialogue and see how the conversation can evolve as you see how markets develop and then also as investors get more information. But I think to your point, it’s important at each point that the book runner has all the book runners have a clear view as to what investors are thinking and convey that honestly into the management team so that they can assess at each point. Because if you ever are getting a clear mismatch in expectations and it’s just too big a bridge to gap, that’s probably a clear sign that you maybe want to pause the IPO process because it’s unlikely that that bridge is going to get narrower over time.
Gautier: Back to the role of the management in the IPO process. Based on your experience, again, have you seen any best practices when it comes to interaction with investors or marketing and anything you learned over the years about the chance of success and advice you could give to management, marketing a company in an IPO process?
Anne: So I think there are probably a few things in my experience that I’ve come across, which are probably quite helpful to have thought about earlier on. And I think we’ve talked about, you know, maybe pre-IPO investors and some of the crossover ones who can point to various different things that they’ve seen in public companies. And so help to craft the equity story or give some of the key performance indicators early on that management need to be focusing on and making sure that they hit. I think one other thing is thinking about when you hire in an investor relations person, because you clearly don’t want to add additional cost to the business too early. But equally, you want them to be bedded down in good time and really understanding the business. And they can also take some of the strain off the CEO and CFO, because IPO processes are intensive on management time. And the last thing you want to do is have your key leadership team losing focus and not successfully running the company itself. I think it may sound obvious, but actually just having proper financial reporting practices in place and being able to show a consistent financial track record is something that you need to get comfortable with. And being able to answer some of those questions from investors that may appear more challenging at the outset because you’re not familiar with them, actually, it can just come down to being able to pull that data really quickly and really easily from a financial reporting software.
Gautier: And from the asset owner perspective, those are the private equity or corporate or state owning companies that they would bring to the market in an IPO context. What’s the level of sophistication and knowledge those investors will have about the IPO process in general? Have you seen a difference, again, in the level of sophistication? And did you approach the IPO process differently based on the nature of the owner?
Anne: I’d say I probably do try to take each IPO as an individual sort of company, selling shareholder base, and you’d look at that based on kind of what you’ve experienced previously, and then also understanding the case by case context of the market that they’re looking to IPO. And so I think I would definitely say that you’ll have some who are more experienced in IPO processes. If it’s a private equity firm, they’ve likely executed a number of IPOs before. Having said that, you may well have a partner at the private equity who’s responsible for that business that hasn’t done an IPO before. and they may have a capital markets person who’s advising them. But understanding those dynamics are definitely important in terms of how you then think about the broader IPO process itself. You may also then have, as you say, some government entities who there may be additional public scrutiny, and you’ve got to think about how that might then factor into their thought process. Or you may have a family office who they grow in the business, it could be a founder-owned business, and therefore they’ve just lived and breathed the company. but haven’t necessarily done an IPO process themselves before and therefore relying on an IPO advisor or the book runners a bit more. So it definitely comes down to the individual case-by-case setup.
Gautier: Back to the role of management, there’s been a bit of, I think, a trend. Maybe I don’t have enough data, but it seems that, again, a lot of management from companies just listed tend to leave pretty soon after the IPO for different reasons. It can be as soon as 12 months after the listing. You know. two years as if the IPO was also an exit for them. And it can be an exit because a lot of those management team have invested a lot of money and the time to get the listing done. But it’s true that for public investors, it’s not necessarily good news to see the management leaving very quickly after the IPO. It’s something you have observed as a trend again in your previous seat and today at FMR, how you assess again this IPO rational and duration of management post-IPO, how important it is from your perspective.
Anne: So the management team is definitely an important factor when thinking about investing or not in an IPO. And I think understanding the history, what they’ve done with the company, and then also their vision as to where they want to take it. And to your point around staying with the company, I think you would want to have a reasonable degree of confidence that they were going to be there three, five years out from IPO. Or if not, there was clear messaging actually at the time of IPO to set expectations. and make sure that they have a credible succession plan in place. And I think the management incentive structure is also an important factor in that regard. And not only because it’s then also seeing whether that’s going to be aligned with the new shareholders. So as us coming in as an investor, you would want to make sure that how the management were incentivized was in a similar regard to how you would be thinking about the returns for the business as well.
Gautier: We’re getting to the end of the recording. And again, based on your long experience in IPOs, I’m sure you’ve seen a lot of fun facts during the IPO process. Anything you’d like to share with us during one of these IPO processes?
Anne: I would say it’s hard to pull out one. I feel incredibly privileged to have worked with so many exciting companies and with so many smart, interesting people. I think I’ve just always really loved getting to know companies more and better. And I think the IPO process being a longer one enables you to do that. So I think it’s whether it’s been learning about the Icelandic economy and how that impacts the banking sector there or thinking about how train ticketing might evolve over time. I think an IPO process can be the perfect way to do that. I think IPO processes are never smooth either. And you’ll almost always have some curveballs along the way. So you’ve just got to hope that they’re not too major and you can pull together as a broader team. And those are quite formative moments when you do have to try and figure out solutions. And certainly an area that I don’t think I’ve ever seen work out is timing. And so I think patience is certainly a virtue that gets. That’s much talked about in the investment world. And I think it’s very relevant for an IPO process. But ultimately, being ready to tap a window when it comes up is an important thing to be ready for.
Gautier: Important and pretty impossible, right? Timing the market when you have a six-month process, that’s a challenge. Thank you very much, Anne, for sharing your thought with us today. That was great. Thanks for your time.
Anne: Great. Thank you very much indeed.
Gautier: Thank you for listening to IPO Stories. In future episodes, we will host CEOs, CFOs, advisors, and other participants in the IPO process to learn from their experience, like from Anne today. If you’d like the show, please follow us on Spotify or Apple Podcasts and share the show with people around you. If you have questions about the IPO process that you’d like us to address with future guests, please get in touch at contact.ipostories.com and follow our LinkedIn account, Amundsen Investment Management.
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