Treating investors like idiots?

02.09.2010

Andy Berry

The Financial Times recently reported that “investors are sick to the back teeth of being treated like idiots” following some less than stellar performance by recent IPOs. Might those investors perhaps be pointing the finger of blame in the wrong direction when describing companies as “too greedy”?

It is right for companies to seek to secure the best possible price on their IPO - that at which there is sufficient investor demand to get the deal away, but with enough left on the table for investors to show a profit in the aftermarket.

It is then for investors to decide whether they wish to purchase shares in a company joining the market. Indeed, the bookbuilding methodology now widely adopted for the pricing of new issues means that the price is set - or at least very significantly influenced - by the very institutions that are now crying foul. If the price is then deemed too high by some, they can always decline to buy.

It is also interesting that the reported backlash from investors follows market outperformance by the IPO clients of even the poorest performing investment bank. Isn’t that what investment managers’ clients want them to produce?

Now more than ever, companies looking to join the market will need to have a compelling investment case and ensure that they tell their story well. It is then for fund managers to sort the wheat from the chaff, but it does them little credit to moan after the event about over-optimistic pricing.

This blog first appeared as a letter in the Financial Times on 1st September, 2010.

Posted by Andy Berry

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