Jerry Maguire could have been talking about an IPO process when he referred to representing Rod as being an ‘up-at-dawn, pride-swallowing siege’, before imploring Rod to help him. Most management teams feel the same when planning for an IPO. Looking at their advisors, they implore them for help. In amongst the sound and the fury, a conversation about marketing inevitably takes place.
Within the conversation, retail participation is brought up… Management might think it would be good for the company’s profile, good for liquidity in the aftermarket, good for demand and good to support the price, but more often than not these arguments are ignored. The facts speak for themselves:
- At the beginning of April this year, there had been more than 30 IPOs (over £100m) in the UK in the previous 12 months. Only five had traded down at that point
- Out of all of those IPOs, only two had a retail tranche
- Since the start of 2016 there have been more than ten IPOs on AIM, none of which had a retail tranche
Of these IPOs, Hotel Chocolat, a household name, with retail bond holders IPOed only a few days ago. Its shares increased by over 33% on day one. Hotel Chocolat would have clearly benefited from retail participation for a number of reasons – not least because some additional demand might have helped the company leave less money on the table. Retail investors would have gobbled up the shares and the company’s customers would have become long-term shareholders and supporters.
The old IPO adage is that everyone should leave the process with a balloon (the company, the advisors, the investors), and it looks like the institutional investors got away with an enormous helium balloon with spots on. As ever, retail got nothing.
An untapped pool of capital
Crowdfunding has demonstrated that there is significant demand among individuals to invest in equities. In addition, there is sufficient risk appetite among those investors to back companies at a very early stage and this capital is patient enough to take a long-term view – often a longer-term view than institutions. This investment pool has been fundamental in funding some of the most exciting and fast-growing companies in the UK. We believe that we can harness this pool of demand for the public markets in the same way that we have done for crowdfunding.
Retail is often overlooked for a number of reasons, but this status quo does not necessarily serve the needs of the companies looking to IPO. This means that a company that is undertaking an IPO:
- Does not have access to the broadest possible pool of demand
- Speaks to an ever-diminishing group of investors contacted by the banks and the brokers
- Misses the opportunity to use their capital raise to increase their profile
- Misses the opportunity to engage with potential clients, customers and supporters, and make them shareholders
The perceived wisdom that retail demand is flaky and short-term is not born out of fact. Retail demand is often sticky as investors are better placed to ride out a cycle more effectively than some fund manager who needs to demonstrate returns on a short-term basis. Analyse any IPO with retail demand and I challenge you to find an example where retail has been responsible for big swings in the aftermarket share price.
However, a management team will also be told that a prospectus would be required if an offer is made to retail. But on the Main Market a prospectus is required even without retail, while on AIM if a deal is structured correctly a prospectus is not required. But if there is retail participation a prospectus needs to be approved by the FCA at the start of the marketing period, I hear you say. Even without a retail tranche, the prospectus will be in near final form when it is sent out at the start of the marketing period and approved by the FCA at the end, so it has no material impact on marketing or timing.
‘Ok, but if there is a material change during the marketing process, a supplementary prospectus would be required, which results in investors having withdrawal rights.’ This may be the case, but if the change is so material that investors withdraw their order, it will not be retail demand that makes or breaks the IPO. In most Main Market IPOs institutional investors are free to withdraw their order at any time anyway.
UK investing habits
We undertook a study that was published on 9 May: Bridging the Equity Divide. In this report we demonstrated that over 70% of respondents could be motivated to invest in equities and that over 60% felt that managing their own investments is appealing but difficult. Of the respondents that knew what IPOs were, almost 40% would have invested in an IPO had they been given the chance. Over 73% believe that crowdfunding has helped democratise the way people can invest in startups. We want to broaden this democratisation to the public markets.
It’s a crazy world where retail can invest in illiquid early-stage companies at the click of a mouse, but is locked out from liquid de-risked equity at IPO. It’s also crazy that the accepted advice is that when it comes to public market fundraising, companies should do this without offering shares to the broadest pool of demand. It is desperately frustrating that there is a group of investors that have risk appetite and are passionate about long-term investing but are untapped and unloved.
We will continue to present our members with exciting primary opportunities, and we will do our best to fight the good fight, so that retail investors get a fair deal and companies get access to these investors.
Those who do not see retail as a vital part of the public equity ecosystem would do well to heed the advice of Dicky Fox, Jerry Maguire’s mentor: ‘If you don’t love everybody, you can’t sell anybody.’
Want to learn more about investing in IPOs? We have a guide for that, and you can download it for free right here.