Conflict of Interests / IPOs

IPOs is an area where the independent research houses are still facing an uphill battle, because the issuing banks often do not provide access to the company or the detailed written information early enough for non-syndicate analysts to do proper research. In the old days some investment bank analysts were accused of being deliberately over-optimistic and regulators have done well curbing the real excesses. However this alone is no substitute for unbiased research.

Would Investors Value Independent Research On IPO’?

The Independent Research Think Tank Report (February 2005) interviewed 31 investors with combined AUM of EUR 1.9 trillion and found that fund managers definitely think there is a gap in the market. However this is being blocked by an access issue. This seems to be low on the agenda of regulators – France being an exception – which seems strange to us. Below we show the Euroirp letter to the FSA.

IRTT found that 84% of respondents indicated that a properly researched independent report would be valuable during an IPO and respondents rated the input of the independent analyst as more useful versus the input of the syndicate analyst by a ratio of 17 to 1 (see pages 11-13). However investors also frequently cited lack of access for non-syndicate analysts as a problem e.g. “More independent due diligence would be welcome. There is a lack of independent research pre-IPO. Advisers appear to stop companies from utilising independent brokers.”

What Did The EU-Commissioned Forum Group Report Say? This independent panel of experts seem to agree with IRTT. “Companies should encourage and not restrict the attendance of analysts at financial information meetings organised in connection with an offering (for example by making attendance conditional on agreement not to publish or to submit research for review by the issuer), nor discriminate in terms of provision of information to analysts.” (Executive Summary Page 4

What Did The EU-Commissioned Forum Group Report Say? This independent panel of experts seem to agree with IRTT. “Companies should encourage and not restrict the attendance of analysts at financial information meetings organised in connection with an offering (for example by making attendance conditional on agreement not to publish or to submit research for review by the issuer), nor discriminate in terms of provision of information to analysts.” (Executive Summary Page 4)

Why Is Independent Research Useful?

For the investment banks and the issuing companies their initial interests may veer towards a rich pricing whereas the potential investors are looking for a fair price (or even cheap). There is a definite role for the neutral analyst to influence market thinking by indicating what a fair price might be.

What About Inside Information?

Sometimes the argument for restricting non-syndicate analyst access is given as “inside information”. This seems illogical to us.

  • With IPOs the shares are not quoted so the issue of price senstive information can hardly be relevant.
  • By the time of the IPO information avaliable to syndicate analysts should and must be avaliable to the market or these analysts will remain permanent insiders. So why, pre-IPO, should there be a distinction between analysts?