This article was written by David Friedlander, Joseph Muraca and Amanda Isouard.
- We were nervous about this one because of the recent obsession with regulators playing bad cop more often and because the report was being issued so close to Christmas. And on release of the report, there was a degree of tough-talking by the regulator. But what the report details, in a very methodical way, is that ASIC is not seeing a lot that needs to be done differently.
It does comment on instances and practices in isolated cases that evidence conflicts of interest such as allocations to staff of some mid-size broking houses, examples of mis-messaging in bookbuilds and some hint of mis-pricing, but the Commission has not found any reason for fundamental change in the way allocations take place.
We feel this is OK, because over the course of our experience, we have seen Australian equity capital markets operate much better than we hear from our international colleagues and the last thing we need in 2019 is another part of the eco-system pulled apart.
- On the mis-pricing point, ASIC observes that in initial public offerings over a four year period the first day volume weighted average price exceeded the issue price by an average of 11.6 per cent and a median of 5.6 per cent. For placements, that delta was lower at 5.4 per cent and 4.1 per cent respectively. ASIC comments that this indicates that issuers “may not be considering the terms on which securities are issued as actively as they should”.
- We do not share ASIC’s view on that data. Rule #1 in business is always leave some money on the table unless you only want to play in a market once. Entities who list on a stock exchange or who raise capital once listed will inevitably raise capital down the track and it is important for both them and the market that investors who bid into a book and securityholders have positive expectations. Volatility in securities markets means that price discovery is hard and the type of metrics that ASIC has identified are in a very reasonable “tolerance” band.
- The other area in the report that we will definitely be commenting on is a list of “better practices” on messaging by brokers during the bookbuild process. For example, to send messages to investors at the same time or as close together as practical. The key to building a book is being artful and personal. It is an inevitably aural (by phone) process and will often involve both information and strategic periods of silence. It is like any negotiation. If messaging is too regimented, pricing will suffer. Only the issuer will come off second best.
What’s next? ASIC has flagged that its next focus will be Debt Capital Markets.
Read ASIC’s report in full.