IFR IPO Roundtable 2011

IFR: We often hear bankers say there is a lack of conviction in investment decisions, which is demonstrated by the discrepancy between the book at pricing versus the performance in the aftermarket, and where the turnover has been. LAW: That might be an allocation issue. LEACH:: There are thousands of investors in IPOs and lots of them are only interested in momentum. But I think the target shareholders that you want in an IPO for a growth company will not care about the momentum in a book if they see a deal they like in a quality asset at a good price. They want to own the assets. NACHTIGALL: I completely agree, but all sides, the banks and the investors, should come a little bit closer together than they are at the moment. I concede that in certain cases there has been a little bit too much finessing with the messages that banks have given out. But at the same time, all too often in the bookbuilding process some very large investors come very, very late in the process. If they are not in the book I, as a banker, can’t provide the transparency. I understand that investors want to get to know the company as well as they can to make an informed decision. There is no question they will want to have had the roadshow meeting and maybe another couple of days to plough through the material and make as informed a decision as they can. But at the same time I would like to believe if there is a positive fundamental attitude towards the company, that the order is not withheld artificially. It might help me in the momentum game and it might help me not to push up the price. If the transparency is there bankers and advisers can do a better job steering the process, and not rely so much on the hot money that sometimes comes in. Once the deal is subscribed once or twice, all of a sudden the floodgates open and it goes to three or four times covered in no time. All that demand coming in at that point is usually not fundamental demand, it is coming in because somebody thinks this deal is going to go up by 10% or 15%. IFR: That is the challenge then? Those 15 to 20 key guys you desperately want to be in there at present are not enough to cover the deal and that is why you have to have half an eye on the coverage message and getting the momentum. Is this where the US model is better? Would you rather see the deal scaled to a more sensible size that would bring in just your key guys? So the IPO isn’t the exit, it is the introduction. Then you see the larger sales in the follow on. LEACH: If the big 15 to 20 guys are in then it is going to be a blow out and everyone is going to follow. BENNETT: There is some truth in that. But equally, if the 15–20 guys don’t cover the deal and there aren’t other people coming in there, then the deal is the wrong structure. It is demonstrably the wrong size. There is a real opportunity to create more flexibility around the deal size. Starting off with smaller deal sizes with upsize options – not just the greenshoe – but an upsize option. If the deal is going well and it looks like there is the demand to increase the size of the transaction then we should be looking to address that. From our perspective a lot of the companies that come to market are growth companies. That is typically why companies IPO. There are a few yield plays that do come through too, but they are mainly growth companies. As an investor, we want to give those companies the money to carry on growing or to allow them to grow at a faster rate where the opportunity is there. We want to provide growth capital. So we are keen to see companies focus their IPO issue size on the primary side, not the secondary. As has been said, the IPO is the start of a new life, a new part of the company’s lifecycle. It is not an end in itself, it is a start. KKR have shown us there are multiple exit points. So let’s focus the IPO on a primary. Let’s get the company growing and give it the capital to do that. Let’s get a properly covered deal from the leading investo

IFR: Sometimes it can be very clear from the pre-marketing what price an issuer is aiming for, and there is no room for negotiation. How much of an impact does that have on your engagement in the process? OAKES: And to what extent will you be happy to be an anchor investor in that situation, knowing that the top end of a range may include an ambitious element? LEACH: Clearly more companies are focused on selling their IPO at fair value than at a discount to fair value than in the past few years. We want that discount because that is where we make a return for our investors. That used to be well understood but it has been lost. This came up at the start of the year in one well-known situation. We pilot fished several weeks before, we actually had an analyst that used to cover the stock when it was previously listed, so we knew the company well. But the bank involved was not happy with our feedback and valuation. They wanted me to see the company again, they thought I would come to their way of thinking on valuation. So they came in to see me, and I had the same opinion. Speaking afterwards with other investors, everyone was in the same ballpark. Then a range went out which was 10% or 20% above where the feedback was. They were shooting themselves in the foot. If you give 10% away at your IPO and then you do a small issue, you make most of your money back and you have a good shareholder base. But there are also great issuers, like Brenntag, Kabel Deutschland and Amadeus. There are some good examples of people doing things properly with high-quality companies. They should be the benchmark of how we do these things. BENNETT: Rob hit the nail on the head. The bankers don’t seem to realise that we sell stocks at fair value. We don’t buy there. That is fundamental… LEACH: It is our duty to fundholders and investors. BENNETT: …I can understand why an issuer wants to sell at fair value, but you just can’t expect us to buy it. NACHTIGALL: Investment bankers understand that. But the debate is what is fair value? What is the right peer group? How much premium or discount? This should be a healthy debate. I have no doubts that an institution like Fidelity is not low-balling, and is giving honest feedback. But when I look at the feedback we get on transactions, it is not uncommon that we see gaps of 30% to 40% between the lower and higher feedback. So clearly somebody in that panel is low-balling. So it falls to the bankers to establish who means what he says. As advisers, we push investment banks very hard on quality feedback. We sometimes get pre-marketing or roadshow feedback saying: “Likes the story, is still doing the work.” What does that mean? It doesn’t mean anything to me. It means probably that a sales person has picked up the phone and spoken to the investor and the investor has said “I haven’t made up my mind yet,” and put the phone back down. So we need to go back and push for real feedback. BENNETT: But that is a fair response. They may not have made up their mind. LAW: Feedback, process and valuation are to some extent at the core of the debate. The best way to look at the IPO is as a transition of ownership from private to public markets, when the IPO occurs the seller is going to be a larger shareholder than pretty much anyone else in the book. That is how people should think about it. When monetising an asset through the public market, ultimately the seller makes their profit on the investment on their last sale, not on the IPO. Unfortunately not everyone has that mentality when they come into the public market. As KKR, we spend so much time with our portfolio companies. We spend years preparing and developing them, working with them to optimise their strategy, to create value around the assets. We know the asset itself extremely well. We will always have a different view on value versus the public market, and that is a function of us having spent time nurturing these investments throughout our period of ownership. The pit

IFR: Isn’t it fair to say that the hair on some of the transactions has been obvious earlier on? Everyone went into Ocado with their eyes open, and Pandora took forensic accounting in order to build historical results. So is it always a surprise? LEACH: The markets tell you they were a surprise. When the markets drop a lot, it is by definition a surprise because otherwise the market would know already. You have to take risk in investments. Part of our job is to take calculated risks. What we don’t like is when there is something that should have been uncovered by the diligence process that hasn’t been uncovered. Let’s take some examples. Cadogan didn’t actually have proper ownership of the assets. Or Sino-Forest, outside Europe, where the analyst didn’t actually get on the plane and visit to make sure they had the assets they said they had. These small boutique research outfits like Muddy Waters and Citron work it out within days, so why can‘t the due diligence teams at the investment banks work it out? BENNETT: Ocado is an example that is relatively close to Fidelity’s heart. We are the largest institutional shareholder in it and we were the largest investor at the time of the IPO. Clearly no one likes a stock price that goes down post-IPO, but we added to our position since the IPO because we believe in the long term story. That is our view, and we have gone out there and done the due diligence on it. But there is a difference between two investors having opposing views about the correct price for a stock, and a situation where you make an investment and three months later something becomes public which the management have kept quiet, causing the stock to drop 50%. NACHTIGALL: You are hitting the nail on the head. This debate seems to imply that every IPO trading down is viewed as the bankers doing something wrong. There is no question that in some deals that is the case, where companies have been dressed up as something that they aren’t. But not all deals. Preparation is key. In the cases where we come on board as advisers, that usually happens over a period 12 to 18 months prior to the IPO, to prepare the company for the process. Sometimes we advise a company not to do a deal. LAW: To some extent the ECM market has been spoilt by the relatively benign conditions that prevailed in the period leading up to 2007/2008. Some of that old good judgement and the skills associated with managing the early stages of an IPO and anticipating problems have been lost. At a general level, people might be too focused on running the process, and not enough on figuring out whether that process is actually going to be successful or not. Consequently, so many deals are being launched which subsequently fail. It is ridiculous that half the deals that are being launched are trading down in price. Something is fundamentally wrong with people’s ability to anticipate or judge the appropriateness of the asset in the market. Or maybe it is mismanagement of expectations around pricing. But all of these problems could be anticipated. HAMPTON: I suspect in some cases people do not wish to derail a transaction in a difficult market. I am in the real estate and gaming world, so I have red flags around a lot of things that we do before we start. These days you have a hugely competitive bake-off process to start with, contested by a number of very proactive and aggressive investment banks. You know which ones have the best intentions of getting a transaction done, but within that context you invariably have different underwriters who have more experience of the company than others, or maybe a better understanding of certain elements. It does become very awkward when you are one voice among six in a room that is trying to raise an issue, which can lead to a situation where the only thing you can do is resign. That has public reputational consequences because the market can see it. IFR: Reinout, you presumably are quite well positioned to see those various vi

IFR: Whichever seat you are in, it has not been an easy year on the IPO side. What are your initial thoughts on the European IPO market? DANIEL OAKES, COMMERZBANK: One of the recurring themes is how Europe has fared versus the US and Asia, in terms of opportunities and post-IPO performance. It is interesting today to see that Ducati and Graff are both looking at Hong Kong as a possible listing venue, despite both being European-domiciled corporates. Some key questions are: Why is it that European IPOs have had generally lacklustre performance? and Why are issuers of more interesting Asia-focused growth stories, choosing non-European listing locations even if they are European headquartered or with European histories? UTE GERBAULET, COMMERZBANK: In the German market we have seen quite high volumes this year. Even in the beginning of this year when the market was still very stable and receptive, IPOs saw difficulties. So it is not only the macroeconomic sentiment and the high volatility, but structural issues affecting IPOs in Europe. RALF NACHTIGALL, ROTHSCHILD: I would echo what Ute said. Both banks and investors have had a tremendously challenging year. While consensus seems to currently suggest that China is managing a “soft-landing” and the US economy is slowly improving, the big question mark is obviously Europe. The extraordinarily difficult environment and very high volatility levels we have seen in the last couple of months have been overlaid with some particular issues relating to specific transactions. This has led to what I would describe as unhelpful finger pointing between the investors and the banks. The market practitioners need to come back to the table and look at the process in order to move things forward in a constructive way, which would clearly be in the interest of all of us. REINOUT KOOPMANS, JEFFERIES: That is the theme. There are a number of issues we can’t control, like the volatility, the lack of growth – all the external macro stuff we hear so much about. And then there are a number of items that we can fix, can control ourselves. And one major example of this is that, I believe, the IPO model in Europe is broken. It needs fixing. There has been a serious breakdown of trust between issuers, investors and intermediaries. That needs addressing. Even if the volatility came down and growth came back in Europe, the model would still be broken and the distrust would still be there. ROB LEACH, SAC: As an investor, my main concern is that IPOs in Europe are no longer a profitable business. Years ago they had great attractions and made lots of money for institutions but over the last three years they have destroyed a lot of value. Of all the major IPOs in Europe, roughly €7.7bn of value has been lost in IPOs to date. We are clearly living in a very, very tough market, which doesn‘t help anyone price deals correctly. But there are also some serious issues relating to the quality control of deals coming through. There are some structural issues in terms of the way transactions are done that can be addressed and there are some great discrepancies in pricing. I think meeting investors’, issuers’ and advisers’ expectations on price has become increasingly hard and this has led to the market coming to this standoff. Generous pricing for investors achieves a lot – not only on the investors’ side but also for the company in the long term, in terms of establishing a stable shareholder base and getting that relationship off to a good start. IPOs should be a good experience for everyone, not just for bankers and issuers. ED LAW, KKR: We haven’t been an issuer this year, but as a firm we are very active users of the public markets and of the IPO markets – probably more so than our peers. We have been extremely active in the US this year. But the overall context in Europe is definitely frustrating. Too many deals have been launched that have failed. That isn’t good for the market and it isn’t good for issuers. The deals

Ute Gerbaulet Commerzbank Corporates & Markets Ute Gerbaulet is head of Equity Capital Markets at Commerzbank focused on advising mid- and large- cap customers in Germany and Europe on all their equity-related needs. Ute has 17 years’ experience in investment banking and an MBA from the University of Michigan. Reinout Koopmans Jefferies Reinout Koopmans joined Jefferies as co-head of European Equity Capital Markets in September 2011, with 16 years of investment banking experience. He joined from Deutsche Bank, where he spent 10 years and was most recently head of ECM for the Natural Resources sector and previously co-head of ECM for Emerging Markets. Reinout holds a PhD in Economics from the LSE. Dan Oakes Commerzbank Corporates & Markets Dan Oakes is head of International ECM Origination at Commerzbank and has over 16 years’ experience of origination and structuring across all equity and equity-linked products. He has held senior positions at several international banks and an independent equity advisory firm, focusing particularly on German-speaking countries. Simon Hampton Jefferies Simon Hampton joined Jefferies in 2010 as European head of Real Estate, Gaming and Lodging Investment Banking. Previously he spent 14 years with Bank of America Merrill Lynch covering the same sectors for EMEA. He was named as one of Institutional Investor’s “Rising Stars of Real Estate” in 2008. Ed Law KKR Edward Law joined the Capital Markets team of Kohlberg Kravis and Roberts in 2010 as head of European Equity Capital Markets. He has worked in ECM since 1993 and was formerly head of Western European Equity Capital Markets at Deutsche Bank. Greg Bennett Fidelity Investors Greg joined Fidelity in 2007 as head of EMEA Capital Markets, working on block trades, IPOs and capital raisings. Previously, Greg spent 14 years at Cazenove & JP Morgan Cazenove, where he was a Partner and Managing Director, working in ECM and Equity     Syndicate. Greg qualified as an ACA and holds a MA from Oxford University. Rob Leach SAC Global Investors Rob is a Partner and Portfolio Manager for SAC Global Investors in London, managing a Global Capital Markets Portfolio and a Global Relative Value Equity Portfolio since 2005. Previously, Rob worked in both ECM Origination and Syndication at UBS Warburg and in Corporate Finance at HSBC. Rob graduated from Durham University in 1996. Ralf Nachtigall N M Rothschild & Sons Ralf Nachtigall is currently serving as Vice Chairman of Equity Advisory at Rothschild. Previously, he was team head of Rothschild’s equity advisory business in Germany, Austria and Switzerland. Prior to his tenure with Rothschild, Ralf was head of Merrill Lynch’s and before that Paribas’ ECM division in the German speaking region. To view the Digital Edition version of this Roundtable please click here.