No investor is an island

Dear Frau Schuh

You’ve nailed some harsh truths about the IPO process. It’s a maddening blend of overcomplicated deal engineering and a chaotic influx of hedge funds muddying the waters. The result? A drawn-out circus instead of a straightforward fundraising exercise. Everyone complains about it.

But let’s face it. You can’t change the game. What you can do is master it. Focus on what you can control and navigate the market as it is, not as it should be.

First, grasp the motivations of the key players. Bankers and advisors work for the issuer or vendor, not you. Sure, underwriters want investors to make money to garner some goodwill for future deals, but their priority is to impress the company and its owners, secure any discretionary “incentive” fees, and position themselves for future business, such as follow-on offerings. They care about the aftermarket inasmuch as poor performance generates bad publicity and hurts marketing for their next IPO pitch.

Independent IPO advisors, present in some European listings, aim to show their clients they add value. That means taking a lightly and slightly contrary position to the underwriters on allocation, often expressed by championing “long-only” fund managers as more virtuous than hedge funds. You can complain that the distinction lacks nuance or smacks of caricature, but it does resonate with clients wary of investment bankers’ blandishments.

As for the issuer and vendor, their motivations depend on the circumstances. Sometimes they are all about maximising price and just pay lip-service to aftermarket performance; other times they know the value of leaving money on the table. Understanding their motivations and incentives reveals as much about an IPO as the financial statements.

Remember, the IPO process isn’t a one-off event. You’re engaging with the entire deal calendar, and so building relationships is crucial. Spend time with syndicate personnel, take their calls, offer your perspectives, share your views. Engage with IPO advisors even where there’s no deal on the horizon. Meeting management and private equity owners ahead of time can pay off. The potential IPO pipeline is no secret, and proactive engagement can set you apart.

The new issue business thrives on relationships. To stand out from the common ruck of hedge fund chancers, you have to cultivate these connections diligently.

It’s also crucial to reshape the perception of your fund. Without misrepresenting your strategy, you can market yourself effectively. For example, say something like: “We’re a fundamentals-oriented fund looking at key value drivers and we have a track record of supporting management. We run a concentrated portfolio and we are on the lookout for high conviction long positions.” You can craft similar statements; the key is to highlight your role as a valuable capital markets partner going forward.

Regarding the time consuming nature of the European IPO process, recognise that banks compete on investor engagement metrics like the former East Bloc countries used to boast about tractor production. Underwriters ask for detailed feedback and multiple meetings to demonstrate interest. This can be a time drain without guaranteed returns, but understanding this context can help you manage your expectations and participation more strategically.

Focus your time on building relationships that matter. Make a lasting impression on management; most CEOs and CFOs weigh in on allocation. Turn on the charm for them. By contrast, the “investor education” meeting with the analyst is a box-ticking exercise just to show you’ve done the work. Delegate it to juniors or interns. It’s great training for them and saves you time. And accept meetings from one or two syndicate analysts max. The key is to be seen as having taken an investor education meeting when the underwriters present management with the proposed allocation.

The ECM business is a throwback: it is analogue and relationship-driven and requires a high EQ as well as IQ to generate portfolio alpha for investors. You can’t operate in splendid isolation with your models. Think tactically about whom to meet, when to meet them, what to say, what feedback to give. Remember, you’re not on the hook until the end. You have options, and you might as well use them.