You’ve spent the last 12 months preparing for your IPO and life as a public company, selected bankers, and have finally flipped your S-1 from confidential to public. But what’s next? As you prepare for your first salesforce in-house presentation, the roadshow, and ultimately the deal pricing, here are a few tips to keep in mind.
The in-house presentation provides a great opportunity to tell your company’s story to the bookrunners and co-managers’ salesforce, who will in turn help tell your story to potential investors. These in-house presentations will likely be your final presentation before meeting with investors. By this point in the process, you should be well-versed in your slide deck and fully prepared for a tough Q&A session following the presentation. Many of the salespeople have deep sector knowledge and can anticipate, or may already know, the questions their clients will be asking. This time can be instrumental in preparing you for anticipated questions.
Roadshow 1-1 Meetings
The roadshow will entail several types of one-on-one meetings with key audiences. These can range from meeting with a single analyst to a sit-down with multiple PMs and analysts. For the roadshow, we encourage you to remember two things: you’ll encounter varying levels of engagement, and this is just the beginning of life as a public company.
Roadshow meetings run the gamut in regards to audience engagement. Some accounts will not be fully prepared, need to see the full roadshow presentation, and will finish up with few questions. On the flip side, other meetings may involve a PM who has completely marked up the prospectus and wants to dive in with granular questions. Keep in mind, though, that regardless of initial engagement, either of these accounts could end up being your largest buyer. We have seen clients come out of a meeting thinking there is no way the account was interested, only to have the account be a large participant in the IPO and aftermarket. Regardless of perceived interest, give each account your full attention and treat them like they’re already your largest shareholder.
This is just the beginning
It’s also important to remember that this is just the beginning of your life as a public company. You’ll be coming across the same investors in the future through conferences, non-deal roadshows, and possibly follow-on offerings. And while an account may choose not to participate on the IPO, they may turn around and become your largest shareholder buying in the open market or participating in a follow-on offering.
IPO pricing is more of an art than a science, as it requires blending both quantitative and qualitative feedback from the roadshow. On the quantitative side, some of the metrics considered include:
- Subscription Levels: On one end, a deal that is subscribed one to three times is likely to be priced at the low end of the filing range or below while a deal that is more than 10 times subscribed has a chance to price at the high end or above. There is no exact subscription level to pricing formula, but this is a good metric to predict demand for the deal.
- 1-1 Conversion Rate: 1-1 meetings typically consist of the biggest accounts that are most relevant in the space. The higher the 1-1 conversion (where an account does put in an indication of interest as opposed to saying no), typically the stronger the deal.
Here are a few qualitative metrics to consider:
- 1-1 Meeting Schedule: Some of the earliest feedback on the deal’s interest will be in the quality of the accounts taking 1-1 meetings. Ideally, the schedule will be filled with the highest quality accounts that are active in the sector and shown to be long-term investors.
- 1-1 Meeting Feedback: During the roadshow, and up to pricing, feedback from the 1-1 meetings gives a sense on whether an account plans to build a long-term position or plans to flip their allocation (if any). The more positive feedback from larger accounts with a proven history of building large positions in the space, the stronger the deal.
- Market Conditions: While market movement and comps can be tracked quantitatively during the roadshow, this will not always have an impact on pricing. However, a weak market or a sell-off in the comp group can spook investors into not taking new positions, and thus passing on the deal.
Allocations can drastically different depending on IPO pricing and how investors received the deal. Here are a few variables to consider:
- Cold IPO: In a deal that prices at the low-end of the filing range or below, allocations will typically be given to fewer investors and be heavily top-weighted. In this situation, the book-runner will inform accounts that indicated interest that they may receive a large percentage of what they have indicated for. This can lead to various outcomes, including the account canceling its indication and choosing to pass on the deal. On the flip side, an account that had initially indicated for 10% (a common way of expressing interest) may express interest in taking a much larger position.
- Hot IPO: For a deal that prices at the high-end or above, the allocations will typically be spread among more accounts. One reason for this is that the broader demand will see more accounts interested in building long-term positions. In addition, more stock will also be allocated to accounts that are known to be short-term, or who will flip the stock. The flippers, or those that will sell the stock on the first day or shortly after, help by creating a liquid trading market (a goal of any IPO).
- Long-Term Holders: When making allocations, it is impossible to predict who the long-term shareholders will be with 100% accuracy. An account that was initially expected to be an anchor shareholder may sell due to market conditions, thesis switch, or a host of other reasons. Ultimately, as a small-cap company ($300MM to $2B market cap), there won’t be enough float for more than 10 to 25 accounts to have meaningful positions. As insiders sell stock over time, the market cap grows and there are further events such as a follow-on, the shareholder base will broaden to include more investors.
The above items are just a few you will encounter during the IPO process. For more detail on any of the above and other things you can expect during the roadshow, pricing, and allocation of your IPO, contact us.
Tom Brennan, CFO
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