South China Morning Post interview

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I was interviewed by Deputy Editor Jasper Moiseiwitsch in the South China Morning Post‘s “Money Post” supplement on 13 June. The article was introduced as “Confessions of an IPO banker” on the cover of the supplement, and the title was “In deal search, simplicity counts”.

Click below to see the interview, which is reproduced with permission.

In deal search, simplicity counts

-by Jasper Moiseiwitsch

Like the idea of IPOs? Unsure of how to invest?

Philippe Espinasse, a former co-head of Asian equity capital markets for the investment bank Nomura and the author of IPO: A Global Guide, has some words of wisdom.

He begins by noting the best deals usually have a simple story. He notes that when brokers sell IPOs to professional investors, they usually do so with the aid of a double-sided laminated cheat sheet that lists out a deal’s main talking points. And while the larger fund houses will do a long in-house analysis of a deal and will ask to interview the management, smaller funds will often decide to buy into an IPO based on a five- to 10-minute phone call with brokers.

To Espinasse, this is how it should be. In affirming the behaviour of the many Hong Kong investors who leave listing prospectuses stacked at the doorsteps of distributing banks, he says the most compelling IPOs can typically be boiled down into a short, sharp narrative. “If you can’t find three or four obvious things that stand out about the deal, it may not be attractive enough. If the points are not obvious, it’s often too complicated,” he says.

Investors should be looking out for the features that the fund houses like, such as whether a firm has large market share, star management, a lengthy and stellar track record, high growth, lots of profitability and a strong balance sheet.

Equally, investors should be wary of a complicated risk story. “Look at the risk factors in the prospectus. If it’s boiler plate, it’s reassuring. But if it’s 30-40 pages long and very specific, it rings an alarm bell,” Espinasse says.

Investors should also note a deal’s offer structure; specifically, the size of the deal, which party is raising money and use of proceeds. For example, if the major shareholder is looking to sell most or all of its shares in an IPO, or if the deal mainly takes the form of a selldown rather than raising new money, pricing will probably be expensive.”That’s often the case with private equity shareholders. But the Prada IPO is also a case in point, where more than 85 per cent of the deal is a selldown by existing shareholders. So the valuation is being pushed to a high level,” says Espinasse of the impending Hong Kong listing.

In an ideal world, an IPO should be of a reasonably large dollar amount, a significant proportion of the funds raised should go towards the firm (not exiting shareholders), and there should be detailed and credible use of proceeds that will add a lot of value to the company.

The offer structure can detract from otherwise completely decent IPOs. Espinasse points to the recent listing of used-handbag retailer Milan Station. The IPO was a record 2,179 times subscribed. However, the small size of the HK$270 million offer limited the number of shares available to trade in the company after the listing, which was a negative for any new investor looking to buy in size.”An institution holding the shares could have difficulty selling down three months later. The free float is too small, and the company will not attract a significant sell-side research following,” Espinasse says.

He adds investors should be mindful of the timing of a listing, which speaks to the amount of buzz an offer may have when it is marketed to investors. Equally, investors should be wary of an IPO that struggles through its marketing period, regardless of the fundamental strengths. The monster IPO for Glencore that closed on May 19 drew a lot of comment, not all of it positive, and its aftermarket performance has been disappointing.

Similarly, the Hong Kong IPO for Resourcehouse, which was pulled the weekend before last, was an example of an attempted listing that suffered from lacklustre investor sentiment and demand. The issuer had previously failed in three attempts at listing.

The final point Espinasse flags is pricing. It is telling perhaps that he looks at this factor last: pricing cannot help an IPO dogged by dire sentiment, and a hot listing can be sold for planet earth. Most IPOs are priced at a 10 per cent to 15 per cent discount to comparable listed firms.

(c) 2011 South China Morning Post Publishers Limited, Hong Kong. All rights reserved.