IPO Banks: Pitch, Selection and Mandate

IPO Banks

Pitch, Selection and Mandate

Philippe Espinasse

© Philippe Espinasse 2014

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First published in 2014 by

PALGRAVE MACMILLAN

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ISBN: 978–1–137–41293–5

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For Christelle

‘An emerging market is a market from which one may not emerge when it submerges’

Originally coined by Christopher Fildes

Contents

Preface

Acknowledgements

About the Author

Part I   Assessing Candidate Banks

1 The Paradigm Shift: The Negotiating Advantage

2 Using an Independent Adviser or Consultant

3 How an Adviser/Consultant Can Best Add Value

4 The Beauty Parade

5 The Invitation Email

6 The Confidentiality Agreement

7 Length of the Request For Proposal (RFP) and Weightings

Part II   The RFP

1 Market Conditions

2 Market Positioning

3 Valuation

4 Execution Considerations and Team

5 Marketing Considerations

6 Fees and Expenses

7 Credentials and Other Considerations

8 Checklists

9 Information on the Issuer

Part III   Interviewing Investment Banks

1 Interviewing Research Analysts

2 Drawing up a Shortlist

3 Obtaining Financing

4 Format of Oral Presentations

5 Dealing with Further Marketing Efforts

Part IV   Formally Appointing Lead Banks

1 How Many Lead Banks?

2 Selecting Investment Banks

3 Communicating Declines

4 Managing Leaks

5 The Engagement Letter(s)

6 Customary Principles for Placement Agreements

7 The Kick-off Meeting

8 After the Kick-off Meeting

9 Conclusion

Appendices

1 Sample Invitation Email

2 Sample Score Sheets

3 Example of Request For Proposal (RFP) Questionnaire

4 Example of Decline Email

5 Example of Request for Bank Financing

6 Example of Terms Sheet for an IPO

7 Example of Reminder on Confidentiality

8 Useful Clauses for Mandate Letters

9 Example of International Placement Agreement Principles

10 Examples of Items for Work Allocation Among Lead Banks

11 Other Parties to be Appointed for an IPO

Glossary

Notes

Index

Preface

I firmly believe that there is both a right way and a wrong way to go about the process of inviting, selecting, appointing and ultimately working with banks that lead an initial public offering (IPO). Unfortunately, many corporates fail to understand how investment banks function, what makes them and their executives tick, and to what extent they could make their lives so much easier by being even slightly more directive in their dealings with financial institutions, saving themselves much pain and misery in their run up to listing on a stock exchange.

As an equity capital markets investment banker, I spent a lot of time pitching for new mandates. Among these were many IPOs, either large privatizations or private sector flotations of all sizes on behalf of families, or institutional or private equity shareholders. Sometimes these pitches were well rehearsed and followed a strict protocol, down to a very precise script for each of the members of the presenting team. In some cases they featured what were (back in those days) innovative devices, such as the playing of video segments featuring colleagues who could not – for compliance reasons or otherwise – be present on that day, and who chimed in to express their enthusiasm for the proposed offering. On other occasions, these were very much last minute affairs as my employer and I desperately tried to elbow our way into a deal for which other houses had already been engaged.

I also had the opportunity, under various circumstances, to sit on the other side of the table, and to interview investment banks vying to be hired for an IPO, which I have always found fascinating. The variety of the presenting styles and arguments often made it plain which firms knew what they were talking about (or at least it came across that way) and which ones seemingly had no clue about the ins and outs of the transaction that was up for grabs.

I saw executives within a single firm arguing with each other when trying to make a point. I also saw bankers introducing themselves to each other prior to entering the boardroom where the presentation was being held, a clear indication that no rehearsal had been conducted in that particular instance. I had to listen to bankers apologizing that they probably were widely off the mark in terms of the valuation for the company, a sure sign of the lack of robustness of their arguments, while others painfully read their PowerPoint slides line-by-line, oblivious to the fact that the whole audience had realized they were probably looking at these for the very first time. I similarly recall an episode when I was inadvertently copied on an email sent by the managing director of a firm to one of his juniors, one or two days prior to the bank’s interview by the company, frantically asking whether the pitch book was ready for him to look at, leaving me in no doubt as to whose thoughts and input we were about to be subjected to. And in a blatant case of pitch material recycling, an investment bank even included one of the selling shareholders in a list of target investors for the IPO. You get the picture.

Conversely, some firms came across as very assertive in their recommendations and relaxed in their presenting style. They were able to convey so much more than their competitors, within the same imparted 60 minutes. For example, they could refer to many relevant examples of past transactions they had been involved in to illustrate a particular issue, thereby conveying a vast experience. Their representatives were also seamlessly able to interact with each other, giving an impression of harmonious team work, not forgetting to add the occasional dose of humour, always welcome (and a relief) when one has to sit through a dozen or so ensuing presentations on the same subject.

And I am always astonished at the ability of senior investment bankers who have failed to give signs of life for, sometimes, years to suddenly become your best friend, leaving innumerable voicemail messages on your mobile as soon as a request for proposal – invariably known within the investment banking industry as an RFP – hits their email in-boxes!

However, engaging brokers is not all about how well they come across. As an investment banker, I was always amazed at how little negotiating power issuers and their shareholders realized they could muster with potential lead banks. In many cases the firm would have accepted the mandate on lower fees, had the company bothered to ask or even agreed to absorb a high amount of transaction or out-of-pocket expenses if that had also been requested.

There is always a tipping point in the relationship between a company and its IPO banks where the negotiating advantage shifts, and that is when the banks become formally mandated. At that point, they will gang up to protect their own interests, making it so much more difficult for the issuer to impose its views. On the other hand, prior to that particular stage, there is so much that can actually be imposed (within reason) on prospective lead banks, yet few IPO candidates, except perhaps those working with advisers or consultants, take this opportunity to make the process more efficient and quicker. Indeed, taking full control of the process at the pitching stage simply results in a speedier IPO, and also in one where considerable cost savings can be achieved, not to mention a much healthier handle on potential liabilities, as a result of pro-active involvement in the drafting of the various contracts to be entered into with the banks and other parties.

In this practical guide, I have de-constructed the engagement of IPO lead banks into several key building blocks, explaining at each stage how best to manage the process and the various participants. I have used many real-life examples based on my experiences as a former investment banker, as well as on my ongoing dialogue with industry participants and members of the media. I have included sample documents (invitation email, score sheets, request for proposal questionnaire, IPO terms sheet, clauses for mandate letters or international placing agreements and so on), all actually used on real flotations, as well as checklists for issues such as the allocation of work among multiple, senior investment banks or the various parties to be appointed alongside the bookrunners in an IPO. Everything that is included in this book is based on actual transactions – nothing has been invented.

This book is mainly concerned with the early stage of the IPO process, mostly before the banks and other key participants actually come on board. While I do touch on some of the IPO execution issues, these are dealt with in much greater detail in my previous book, IPO: A Global Guide, published in 2011. I have since given more than a hundred interviews and talked at many conferences. I have also lectured at Hong Kong University and various professional institutes, including the Hong Kong Securities and Investment Institute for which I have jointly authored the study manual for the new IPO sponsor examinations in Hong Kong. I am very grateful for the positive feedback I have received. I thought it would therefore also be useful to unearth what happens – or rather what should ideally happen – as banks originate IPO mandates, an area that few understand beyond the investment banking industry and which has hardly been explored and written on by other authors before.

According to database provider Dealogic, global IPO volume stood at just above US$173 billion and 934 transactions in 2013.¹ Among these, 38 IPOs representing more than US$1 billion each accounted for 37 per cent of the total, the highest activity for such ‘elephant’ deals since 2007 and an indication that primary equity volumes are on the up after the lean years that followed the recent sub-prime crisis. IPO revenue in 2013 totalled US$5.7 billion for investment banks. However, in boom years such as 2006, 2007 or 2010, annual global IPO volumes reached some US$300 billion raised by issuers through, on average, about 1,500 transactions. At the time of writing, considerable, additional IPO volume had taken place in the fourth quarter of 2013 and investment bankers expected the volume of new stock market listings to continue to increase in 2014.² Behind each potential IPO are probably a dozen or more houses actively competing to be mandated for a share of that fee pool. I have therefore sought to provide tips and ideas for issuers and their shareholders to make the most of that contest.

As usual in the world of finance, circumstances change and new rules and regulations are enacted on an ongoing basis, so this book does not in any way whatsoever include investment, investment banking, corporate finance, advisory, legal, taxation, accounting, actuarial, regulatory financial or other advice of any kind in any jurisdiction. No responsibility or liability, with respect to any action, omission, recommendation or comment in relation to any matter or anything contained herein will be accepted. On a more friendly note, however, I am always keen to hear from you whether you are a prospective IPO candidate, an equity issuer, an equity capital markets professional, an investment banker, a private equity practitioner, an investor, a journalist or a student in finance.

I hope to have uncovered some of the mysteries of what goes on behind the scenes as RFPs are drafted and issued, and as investment bankers prepare for battle to win new business, a phenomenon that is sure to persist in developed markets and emerging and frontier markets alike, amid the hot pursuit of equity capital.

Acknowledgements

I am grateful to the many finance professionals who have shared their time, war stories and anecdotes with me. It is always tricky to quote advisers and bankers in a book that focuses on the pitching of new IPO mandates, and in particular to what extent issuers and their shareholders can negotiate the terms of engagement of investment banks. These market participants shall accordingly remain nameless, but I would like to thank them here for their frankness and insight into what really goes on behind the scenes in the murky world of equity capital markets – they know who they are.

Thank you also to friends and members of the media for our regular dialogue and numerous print, radio and television interviews since the publication of IPO: A Global Guide, which help me with my research and keep me on my toes and up to speed with IPO developments: Tom Allard, Sameera Anand, Elzio Barreto, Christopher Beddor, Jonathan Browning, Cathy Chan, Emily Chan, May Chan, Ray Chan, Florence de Changy, Shu-Ching Jean Chen, Jean Chua, Zach Coleman, Robert Cookson, Stanley Correy, Bryan Curtis, Shireen Farhana, Anita Gabriel, Ansuya Harjani, Aiko Hayashi, Rico Hizon, Katie Holliday, Fox Hu, Netty Ismail, Nick Jacob, Joyce Koh, Konh Hoi Ni, Amélie Laurin, Yves-Marc Le Réour, Sharanjit Leyl, Susan Li, Juliana Liu, Bernie Lo, Jasper Moiseiwitsch, Lisa Oake, Kei Okamura, Jennifer Pak, Dhara Ranasinghe, Gwen Robinson, George W. Russell, Rishaad Salamat, Ellen Sheng, Alison Tudor-Ackroyd, Mike Weeks, Christopher Wilson and Andrew Wood.

Thank you to Christelle Espinasse, Jacques Espinasse and Georges Culioli for reading through the manuscript, and for their constructive comments and suggestions and to Pete Baker, Gemma d’Arcy Hughes, Sue Hunt and their colleagues at Palgrave Macmillan – it has been a pleasure working with you on this project.

About the Author

Philippe Espinasse spent more than 19 years working as a senior investment banker, including as a Managing Director, Head of Equity Corporate Finance and Head of Equity Capital Markets. Throughout his prior banking career, he has successfully completed more than 140 corporate finance transactions and has marketed to issuers, and/or executed, capital markets offerings across some 30 jurisdictions.

Philippe lives in Hong Kong, where he now writes and works as an independent consultant. He is also Honorary Lecturer at the Faculty of Law of the University of Hong Kong (Department of Professional Legal Education). He is the author of IPO: A Global Guide (Hong Kong University Press, April 2011, also published in simplified Chinese character with China Financial & Economic Publishing House, August 2012) and a co-author of the English/simplified Chinese character IPO Guide 2012 (LexisNexis, January 2012) and Hong Kong IPO Guide 2013 (LexisNexis, December 2012). Philippe is the joint author, with Syren Johnstone, of the study manual for IPO sponsor examinations in Hong Kong (Hong Kong Securities and Investment Institute, September 2013).

He contributes or has contributed regular columns to Dow Jones Banking Intelligence, the South China Morning Post and France’s leading financial daily L’Agefi. His articles have also been published in the Wall Street Journal, on the website of BBC News, in the Nikkei Asian Review and in the China Economic Review. Philippe has been interviewed by, or has featured in, a variety of publications, including Bloomberg, Singapore’s Business Times, the China Daily, The Edge Singapore, EuroWeek, FinanceAsia magazine, Financial News, the Financial Times, the Hong Kong Economic Journal, the International Financing Review, Le Monde, Quartz and Treasury Today. He has been a keynote speaker at a number of events and conferences and has also appeared on Bloomberg Television, CNBC, BBC World News Television, the BBC’s World Service radio, Australia Broadcasting Corporation radio, and Hong Kong’s RTHK 3.

Visit Philippe’s blog and website at www.philippe-espinasse.com

Part I

Assessing Candidate Banks

1

The Paradigm Shift: The Negotiating Advantage

Choosing the most qualified candidates for the job is clearly an important consideration, but understanding how much can be negotiated with them as part of their appointment is key to achieving the best possible offer terms, as well as – importantly – a smooth IPO (initial public offering) process devoid of politics, and one where the banks fully focus on the tasks at hand.

To newcomers or the uninitiated, engaging lead banks for a private sector IPO, or for a privatization, at first glance seems like a straightforward exercise: anyone should in theory be able to invite a selection of firms to present to a company and its shareholders, and to select those houses with, what looks like, the best credentials and the lowest fees. However, mandating the wrong candidates can have far reaching consequences: transactions may need to be pulled, postponed or otherwise delayed if insufficient or inadequate investor demand has been gathered, thereby affecting corporate plans for further development. Similarly, a completed but botched offering may ultimately preclude companies from later raising capital, or