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Time to bin pre-IPO research

13 Dec 2011

Should independent banks and brokers be invited to produce pre-IPO research? It has occasionally been done in the UK and the London Stock Exchange wants to see much more of it as it looks for ways to improve its IPO market. But perhaps it’s time for an altogether more fundamental rethink of pre-deal research.

The London Stock Exchange made a series of recommendations last week for fixing what many involved in European IPOs now think is a broken market. Among them, a recommendation for more independent pre-IPO research caught the eye.

Let's leave aside the question of whether banks will advise clients to invite independents. And whether those clients in turn will want to open themselves up to scrutiny. And even whether the independents would want to write about a company that in volatile markets has only a marginal chance of making it to market.

There is a much more important question to be asked: is there any point to pre-IPO research at all, whoever provides it?

The US market operates perfectly well without it — indeed, the nine IPOs that priced in a short window a few weeks ago served to show how a streamlined process puts lumbering Europe to shame.

And what function is pre-deal research supposed to serve? Investors might appreciate a tightly-written précis of the offering circular — particularly if it comes from a research analyst that doesn’t feel under any moral obligation to present a bullish case.

But investors are capable of coming up with their own valuation — if only they got enough time to run the numbers. Pre-IPO research, by delaying the publication of the deal prospectus, makes that more difficult.

Some companies might still prefer to have research analysts out there selling deals for them. But others will be more comfortable with a deal structure that allows them to take advantage of whatever market window is available. Research-free IPOs could well be on the way to the LSE in 2012.

13 Dec 2011