Getting the Right Information to Clear Up IPOs

U.K. company officers have pronounced themselves generally happy with investment banking services. These are grown-up professionals who shouldn’t be in their jobs if they’re not capable of looking after the interests of their firms and investors.

The hundreds of pages of analysis on competition in investment banking from the U.K.'s Financial Conduct Authority can thus be safely trashed. The shock revelations that league tables are marketing tools with limited value or that balance-sheet banks use cheap lending to try to win investment banking business will surprise no-one. The regulator hardly needs to ride to the rescue of Goldman Sachs or Morgan Stanley on the latter point.

A more interesting area is the FCA’s views on initial public offerings and particularly on the dissemination of information about companies looking to list. Cozy arrangements mean only analysts from banks involved in IPOs get to meet management and publish research. Also, final prospectuses aren’t made public until the last minute. Both things hand float sponsors too much control in the marketing process.

There may be cases where companies decide ultimately not to list and thus would want their financial details to remain private. But this seems a small price to pay to ensure that when trading in a newly listed company begins, the stock enters a well-informed market where early investors aren’t able to unduly benefit from a quick flip.

That also plays to another point: the regulator wants to examine IPO allocations to ensure that favored clients don’t get too much special treatment when it comes to deciding who gets shares. This is an issue that has also been raised elsewhere about bond allocations.

The problem here is surely not that regular transactional relationships beget more transactions – that is a fact of all business life. The problem arises if favorable allocations beget financial advantage either through too much control of stock – cornering a market – or through knowing more than the smaller guy who has not been part of the process but still wants to own the stock or bond.

Sponsors of stock or bond deals have a duty to ensure that their work leads to a functional market and that insiders or early investors don’t get to exploit any advantage in a sale. Information as the FCA recognizes is the answer. Beyond that, all’s fair in love and listings.