“It’s not me – it’s you”
November 18, 2014
Every quarter my colleagues here at PwC produce our IPO Watch report. Now a staple publication in the industry, it’s a great read, and a look through previous editions gives a good sense of how the IPO cycle has moved. In the first half of this year the writing team were busily thumbing the tattered standard-issue thesaurus to find fresh superlatives, so busy was the IPO market both in terms of number of issues and amount of money raised. A bumper crop…a stellar period…and so on.
A “healthy” phase for the market
The mixed performance of those IPOs, and a rise in global market volatility, has cooled the ardour of the IPO market in the second half of the year. That may be no bad thing: as one Head of European Equity Capital Markets remarked to us lately, the market could now be described as “healthy”, with due rigour being applied and high quality companies still able to get deals done.
“Management is the most important thing” – so what?
In this healthier, more rigorous market, investment bankers and independent advisers like me are very focused on helping potential issuers ensure that they are putting their best case forward on all fronts. One piece of advice that is very frequently given is that the number one factor for investors is the quality of the management team. That is both absolutely true and at the same time enormously unhelpful. Let’s take it as a given that there is a top class team in place – what are investors actually assessing in those meetings and what can make a difference?
Owning the strategy
An initial observation would be that the CEO who goes on the road to sell a deal needs to be absolutely on top of the detail and to “own” the strategy. This may seem obvious but there are many circumstances (private equity and family businesses) in which the top team changes in the period going into the IPO. Owners of those businesses and their board Chairs need to factor in enough time for new CEOs to get fully integrated and to set their own stamp on the organisation, and that can take longer than is sometimes appreciated. The now-common practice of scheduling “early look” meetings some months before the formal marketing should be part of that thinking.
“He tells it as it is”
One of the most effective CEOs I have ever known in marketing an IPO was also one of the least well-polished. He was abrupt in manner and memorably chain-smoked Rothmans throughout the roadshow, including while at the podium handling Q&A at the London group presentation. His effectiveness was due to the fact that he was transparently open and honest about where the business had succeeded and, importantly, where it had failed and the strategy had to be adjusted. Time and again investors would say they liked him because “he tells it as it is”. The temptation is often to work up the history and the data to make it appear that everything has always been plain sailing – but investors know that is almost never the case in real life. Being candid as to past failure can feel risky but can really cement credibility and add to confidence that this business can overcome future setbacks.
The elevator pitch
Having said that one of the most effective CEOs was one of the most unpolished, I will now contradict myself slightly by saying that time and money spent in preparation and training of management teams for the roadshow is usually well spent. There are a range of consultants in the market who provide coaching to CEOs and CFOs, and this can often be extremely helpful, not least in enabling the individuals to articulate the crisp 2 minute “elevator pitch” at the start of investor meetings. It is vital to preserve the authenticity of a CEO’s passion for the business, but this needs to be channelled into those elements which will mean most to a potential investor. That is not always intuitive.
“They eat their own cooking”
I struggle to recall an IPO in which institutional investors were not focused on ensuring the management team’s interests were fully aligned with their own. Appropriate attention needs to be given to incentive schemes such that reward is properly tied to creating shareholder value. There also needs to be a careful discussion around the level of secondary sales of shares by founders and management at the time of IPO. It becomes a different and better conversation if investors feel that they are speaking to a management team who act as fellow owners and who “eat their own cooking”.
A short blog such as this cannot pretend to anything like comprehensiveness on such a large and sensitive topic. However, if issuers start to put themselves in institutional investors’ shoes at an early stage of IPO planning, then the management dialogue when it starts will be that much better.
Have you encountered some of these issues as you have prepared businesses for markets? Are there other factors you would cite as being key to management credibility? Can management teams be overly candid to the detriment of the positioning of the business? Please feel free to comment or contact us to schedule a meeting on this or any other aspect of IPOs.