Is life too short to read an IPO prospectus?
What is the purpose of an IPO prospectus? A multi-hundred page legal disclaimer, or the key information document for investors? It should be the latter, but in our experience it is drafted as the former. The Financial Conduct Authority is asking for submissions on the question as part of its broader Investment & Corporate Banking Market Study. We have sent in our analysis of a recent FTSE100 IPO prospectus. Like most prospectuses it is long (over 300 pages) and repetitive. We found the income statement presented on six different pages, and a data point repeated seven times. Prospectuses are issued too late to meaningfully digest before having to decide whether to invest and analyst forecasts are not publicly available ahead of flotation, as they are for publicly listed stocks. It’s time for a refresh – the FCA’s intervention is timely.
We took a look at the 2015 Worldpay IPO (initial public offering) prospectus, a company that is now a FTSE100 index stock. It is 336 pages long. We suspect the key investor information could fit on fewer than 50. This repetition gives the impression of a bulk of data that is simply not truthful and at the same time impedes the speed at which investors can digest the prospectus content. We were unable to obtain a copy until after the flotation had taken place.
It is very repetitive.
The Consolidated Income Statement, or a summary thereof, appears six times, on pages 8, 125, 146, 154, 185, and 196.
In the same prospectus, the phrases
- “leader in global payments”
- “diverse set of merchants”
- “deploys the platform to optimise business”
- “offering over 300 payment methods”
appear first on page 2 and then re-appear on pages 69 (Business description) and 132 (Operating and financial review)
The data point:
- “146 countries” is repeated on pages 2,34, 69, 71, 80, 87, and 132,
- “400,000 customers” is repeated on pages 2, 69, 71, and 132.
- “126 transaction currencies” appears on pages 2, 69, 71, 80, and 132.
This isn’t a dig at Worldpay, they didn’t set the prospectus drafting rules, and our experience tells us that the same could be found in most prospectuses.
In our submission we listed other common gripes about the UK IPO process. Decades old rules prescribe a blackout period between publication of IPO syndicate bank analyst research (“connected” analyst research) and the publication of the prospectus, leaving too little time for investors to process the document before a decision to invest needs to be made. We’ve always thought it odd that connected analyst research isn’t an accompanying process to the prospectus.
This late publication creates a dearth of independent research. No wonder there is so little research written by independent institutions who can’t analyse the company without the detailed prospectus information.
The connected analysts publish earnings forecasts. These are seen by institutional investors but no-one else, and these analysts are prohibited from publishing their forecasts usually for 40 days after the IPO, again for long-forgotten reasons. This is surely disadvantageous to the broader investor universe.
In any case, the hollowing out of the equity analyst population driven by falling equity trading commission means research analysts as a whole are less experienced and have to cover more companies. We have often written that the burden of efficiently articulating company stories to investors is more and more resting on the shoulders of companies. The IPO prospectus should be the launch document of record for a public company and it falls well short of this aim.
We welcome the FCA’s investigation into the IPO process.
Oakhall FCA response
FCA Investment & Corporate Banking Market Study
FCA Discussion Paper: Availability of Information in the UK Equity IPO process
Oakhall The Growing Equity Research Gap
Oakhall was established by top-rated equity research analysts to help CEOs and CFOs better analyse their own business and strategies, and articulate them to stakeholders. Founder Andrew Griffin spent almost two decades as a technology equity analyst, ultimately as managing director of European technology equity research at Bank of America Merrill Lynch, before working in investor relations, corporate development and market intelligence for a UK listed software company.