View from the City: Have the IPO reforms achieved their intended goal?

Since new rules were introduced by the Financial Conduct Authority (FCA) to reform initial public offerings (IPO), it is not entirely clear they are achieving what was intended. Regulators and stock exchange officials should be far more concerned about the decline in market efficiency for IPOs in the UK and across Europe than they are. There were at least 14 new listings across Europe worth upwards of $250m that were pulled last year, among them that of Sky Bet. Having reportedly employed the services of an array of investment banks to run the IPO, majority owner CVC ultimately sold Sky Bet to The Stars Group for $4.7bn. CVC was not alone. Towards the end of last year Czech lottery operator Sazka also shelved plans for a London stock market flotation.

The new rules were designed to encourage greater engagement with independent parties. They bring the publication of the admission document/prospectus significantly earlier in the IPO process. This gives the public earlier access to the prospectus, meaning the education phase ahead of the management roadshow takes place on more of a level playing field.

Some actual stock market debuts have been spectacularly unsuccessful, particularly those of Aston Martin and Funding Circle – down 74% and 76% respectively on their IPO price. Part of the problem lies in the fact that the broker market has experienced years of consolidation, which has shrunk the choice of advisers to run an IPO considerably. This has left a void into which bulge bracket banks have stepped, despite not necessarily having local market franchises outside the larger, liquid stocks. While the regulations set out by the FCA were a step in the right direction, without further support companies and investors alike will lack the protection they deserve. How banks are incentivised and how they win business can also push an IPO price higher than it ought to be.

An IPO should go to a premium in its first week, not just because advisers need to look after their buyers but because a premium needs to be justified. If an IPO stock goes to discount, the consequences can be punishing, setting a company back years and stunting growth. So far the intended effects of IPO reforms have had little effect on deterring inflated valuations and protecting investor’s interests for long-term growth. Better preparation and foresight is needed for the post-IPO life of an organisation, based on further widening the window for independent equity research.