From a capital markets perspective, there are three main objectives of an initial public offering ('IPO'):

• to raise sufficient proceeds for the company and/or for the selling shareholders
• to optimise the price at which shares are sold (this is important both for selling shareholders and to minimise the dilution impact of new money being raised for the company)
• to provide the company with a strong shareholder base for its future development.

In this chapter, we explore the process used to maximise investor interest and demand for an IPO on the Main Market, as this is critical in raising adequate funds for the company and the overall success of the transaction. There can sometimes be a conflict between maximising the price at which the shares are offered and optimising the shareholder base for the company's future. Whilst the ideal result would be an IPO which is priced highly with a very strong, long-term investor base, there is sometimes a degree of trade-off. To inform that debate, companies should build-up an understanding of the characteristics of different potential shareholders as the make-up of the register post-IPO is critical to the after-market and the company's ability to access the equity market in the future. Below is a list of some of the key investor qualities one should look for when establishing a strong shareholder base through an IPO:

• strong understanding of the company's equity story and its positioning – it is important that a company's shareholders should thoroughly grasp its investment case. Focusing the marketing process on investors who are thought leaders and highly experienced will make this a more likely outcome
• the ability to maintain a shareholding over the long term – investors with a long-term investment horizon will be less influenced by short-term trading considerations and are more likely to help the company achieve its future ambitions
• the ability to invest further in the aftermarket – the IPO should not be seen as the end of the investment process and certain shareholders will look to increase their holdings in the company after the IPO. Such investors lend important support to the stock in the after-market
• the ability to act quickly and participate in future equity raisings and/or sell-downs – the company may have requirements to raise additional equity at some point after the IPO (eg in connection with an acquisition) or there may be further sell-downs by existing shareholders. These transactions are likely to be best facilitated if the company's largest shareholders are able to react quickly and are likely to be supportive.

The overall goal of the IPO should therefore be to achieve transaction success whilst maximising the quality of the share register with which the company begins life as a public company on the Main Market.

In addition to the sponsor, who is responsible for advising the issuer on all market and regulatory issues and for representing to the FSA that the issuer has met its responsibilities, a bank/broker or number of such institutions will be appointed to market the offering to investors. It is typical for the sponsor to have a dual-role and also perform this function, but this need not necessarily be the case. For certain IPOs, it may be appropriate to have a single bank or broker performing the marketing role, but for larger transactions it is common to see a number of banks or brokers appointed. Such banks or brokers are often called 'bookrunners' because they are responsible for running the order book of demand which is built during the marketing process.
The two important questions relating to this topic which face any company considering an IPO are:

1. how many bookrunners should be appointed to handle the offering, and
2. which are the right bookrunners for the IPO?

Whilst increasing the number of bookrunners involved in the IPO will increase the syndicate's potential marketing 'reach' with investors, there is likely to be an optimal syndicate size for a given deal. Beyond this, the additional marketing 'reach' of an extra bookrunner will be outweighed by the additional complexities of involving another bank or broker in the process. The chart above illustrates the average number of bookrunners in a syndicate (for IPOs on the London Stock Exchange (the 'Exchange') of different sizes since 2000). It may help companies to decide on the optimum number of bookrunners required. In order to select the right bookrunners for the IPO, many companies and their shareholders will invite a number of potential candidates to a formal 'beauty parade' (so that they can hear the views of each and make an informed decision on the back of that information). This process has become more common in recent years and is well advised for any company considering an IPO. In certain circumstances, an independent adviser may be hired to assist in the process of selecting bookrunners for the offering.
Some of the criteria that can be used to assess the candidates are listed below, but this should not be considered prescriptive and each company will look for different qualities in its IPO bookrunners:

• quality of project team and commitment
• relevant credentials and distribution capabilities
• quality of research analyst and market credibility
• industry knowledge, understanding of the issuer and its equity story
• ability to support the issuer in the aftermarket
• views on valuation and positioning
• proposed level of fees
• company's relationship/rapport with the adviser.

The bookrunners will be able to advise the issuer on the specific characteristics of individual investors but an understanding of the target investor community and its different constituents will assist the management team to prepare itself properly for the marketing process. We set out below general comments on the main investor groups for a UK IPO although in practice the lines between the long-only and hedge fund investors is blurred. Many long-only investors have in-house hedge funds and many hedge funds run long-only funds and have long investment horizons and rigorous, research-based investment processes.

UK 'long-only' institutions

The term 'long-only' is used to refer to investors that only take long positions in securities. A long position is one which generates a return to the investor if the share price increases. Long-only investors are typically traditional institutions that are seeking to generate a return on their investments over a relatively longer time horizon than certain other market participants. Such investors include pension funds, insurance companies, investment trusts and mutual funds. They include investment advisers who manage assets using long-only strategies on behalf of both institutional and retail clients. UK long-only investors manage equity assets representing approximately 45-50 per cent of the total UK market and are therefore of paramount importance to any company seeking to raise equity capital in the UK. Many of these investors will only have a mandate to invest in UK equities. In most IPOs on the Exchange, UK long-only investors are the single biggest provider of demand.

International investors

There is often a grey area between what might be considered a UK investor and an international investor. A number of global investment institutions will have offices in London, some of which may only invest in the UK, making the distinction even less clear. However one treats international investors with offices in London, there is also a separate class of investors that only operate out of offices overseas. The most important regions for UK IPOs have tended to be the US and Europe and it is common for companies to market their offerings in both regions (this is something that needs to be reviewed by the legal advisers as it impacts the due diligence exercise and the offering documentation). Many of those non-UK investors that are interested in UK equities have a mandate to invest only outside of their domestic region and, in certain cases, they may be running funds that solely invest in the UK or Europe. These types of fund managers are often as well-versed in UK equities as domestic, long-only institutions and they form an important pool of additional demand for IPOs on the London Stock Exchange.

Sector specialists

While most investors will be interested in companies in a variety of industries, some investors are sector specialists that will only invest in certain sectors. This specialism can sometimes be at an institutional level, but is more common at a fund level. So, for example, within some of the largest asset managers, there may be certain funds dedicated explicitly to investing in mining companies. Other sectors which lend themselves to specialist funds include real estate, financials and technology. For companies in these sectors considering an IPO, it is critical to tap into this additional pool of demand and in-depth understanding during the marketing process.

Hedge funds

Hedge funds are investment vehicles which explicitly pursue absolute returns on their investments. While long-only investors target outperformance relative to their benchmark indices, hedge funds target positive returns to their investors, irrespective of the wider market backdrop. Such funds are able to employ strategies that allow them to generate positive returns when security prices are falling. The term 'hedge fund' has come to incorporate any absolute return fund applying non-traditional portfolio management techniques (including shorting, leveraging, arbitrage, the use of derivatives and so on).

These funds have become increasingly significant in the market place. Whilst historically there has been scepticism about their motivations among some corporates, it is important to note that a number of these funds are extremely long-term in their focus. Indeed, many of the most sophisticated asset managers in the investor community are now employed in such institutions. Furthermore, the distinction between long-only institutions and hedge funds is getting increasingly less clear, as many investment advisers now manage funds which employ both types of strategy. Lastly, these types of investors can provide a significant amount of demand and liquidity in an IPO and will always form some component of the final book of demand.

The marketing of an IPO can be divided into a number of stages, not all of which are equally public in their nature. The process described in this section is a common one, but slight modifications to it will be made in some instances.

Syndicate analyst research and the process to publication

Outside of the IPO process, investment banks employ research analysts to monitor the performance of different companies that they 'cover' in a certain sector and to make investment recommendations to their investor clients on those stocks. In most IPOs, the bookrunners' research analysts will write detailed research notes on the company in order to educate investors before the company's management markets the transaction. The company's management team typically presents to the syndicate analysts early on in the preparatory process. This ensures that they have sufficient background information and understanding of the company and its prospects to write a research note.

This is an important part of the preparatory process for the IPO. Ensuring that the analysts properly understand the company's business model and prospects is critical to ensuring that the investors have a good grasp of this before meeting management. Whilst investors carry out their own detailed analysis ahead of making an investment decision, the work, forecasts and views of the syndicate analysts will be important in informing investors' opinions. As such, it is essential for the company's equity story to be effectively conveyed to the syndicate analysts in this presentation.

The analysts will have a period of one to two months to write their research note. During that time, they will be in regular dialogue with representatives of the company (including the CFO) to have their questions on the business addressed. Draft research notes will be submitted to the company and the lawyers for a review of their factual accuracy. The research note will need to be completed by the time the company issues its 'Announcement of Intention to Float' as at that stage the analysts will begin a process of investor education, which is described further below.

Initial meetings with potential investors ('pilot fishing')

This exercise is one part of the marketing process which certainly does vary from deal to deal. The purpose of carrying out 'pilot fishing' meetings with investors is to introduce the company to them before the transaction is publicly launched so as to obtain feedback on how the market will assess and value the company. Such meetings also help to build relations with potential key investors early on. However, they are not always carried out and may not be required if the company has a simple business model with known, listed peers and limited valuation outturns. To the extent that such meetings are held, they would be organised by the bookrunners and limited to a very small number of investors so as to maintain the transaction's confidentiality.

Announcing the intention to float

The announcement of the intention to float is the formal start of the public marketing exercise. The content of this announcement should be carefully considered because it is likely to include a summary of the company's investment case and information on the offering, potentially including its size (though that may still be undetermined at this stage). It is usual for a number of meetings to be held with the media on the day the announcement is released. This ensures the most positive media reaction to the company and the IPO.
On the same day, the bookrunners (and any other banks in the syndicate which have written research) will publish their notes on the company. This day marks the beginning of what is usually a two-week process of investor education.

Investor education

Investor education is the process through which the market is educated about the company and its investment case. This is carried out by the research analysts of the various syndicate banks, together with their equity sales forces. Equity salespeople are individuals at an investment bank who are responsible for discussing investment ideas with the bank's investor clients. They leverage the work of the research department in these client conversations. In the IPO process, it will be common for the equity salespeople to book a series of investor meetings in different regions.These provide the research analysts with an opportunity to educate their institutional clients about the company. Feedback from the meetings will be collated by the analyst, the salesperson responsible for that client and by the equity capital markets teams. The feedback is used to refine the company's thinking on and presentation of the investment case in its subsequent meetings. This is also the point in the marketing process when meaningful conversations about valuation begin to be held with investors.
Ultimately, the feedback from this exercise needs to be used to set a price range for the shares that will be offered in the IPO.

Management roadshow

The final stage in the marketing process is also the most important. During this stage the management team (typically the CEO and CFO) will meet with a significant number of investors (usually over a two week period) to explain the business, the investment case and the rationale for the IPO. Depending on the size of the transaction and the legal restrictions around the offering, this roadshow will take place in a number of regions. For larger IPOs, it is common for the management team to hold meetings in the UK, Europe and the US. In certain instances there will be more than one team of presenters attending these investor meetings. Almost all investors will want to have spent some time with management before committing any meaningful amount of capital. These meetings are therefore fundamental to the entire process. The analysts will have educated the market on the company and the investment case, but it will ultimately be the management of the company that must 'sell' its equity story to the investors. This is crucial for encouraging them to participate in the offering at an attractive valuation for the company.

Participating in an IPO is an investment decision. Investors first need to establish whether they 'believe' in the investment case before deciding how much they are prepared to pay to buy the shares being offered. Since there will be no public market value for the business to inform them of the 'right price', their challenge is to establish what that public market value should be. The existing shareholders will be looking to maximise the valuation of the business, either to minimise their dilution or to maximise the proceeds of any shares they sell (or both). Having said that, existing shareholders and the company itself will know that it is also important to establish a strong (but not excessive) share price performance in the after-market. There are therefore a number of dynamics which impact the pricing process and managing these is one of the key roles of the bookrunners on the IPO. The process of pricing an IPO involves a number of stages – discussed in detail below.

Syndicate analyst research valuation range

The research reports written by the syndicate analysts will typically each include a valuation range. These ranges will be the market's first public attempt at putting a value on the company's equity. The methodology used to value the company will vary between companies, sectors and even analysts, but there are a number of common methodologies which are often applied. In many cases, these methodologies will be similar to those used by the analysts to value the company's listed peers. Examples of the techniques used include applying the multiples at which the listed peers trade (or potentially a premium or discount to those multiples depending on the company's investment case); using a discounted cash flow analysis, or using a valuation of the group's individual businesses to arrive at a combined 'sumof- the-parts' valuation.

Throughout the process of investor education, the bookrunners' analysts and salespeople will discuss the valuation range contained in the research note with investors and this will allow the bookrunners to assess the market's reaction to that valuation.

Investors, at this stage, will still not have met management and some may still be familiarising themselves with the business model, so these initial discussions should be interpreted accordingly. In many cases, there will be scope for the investor's valuation to increase from this point.

Setting the price range

At the end of the investor education exercise, the bookrunners, the company and its existing shareholders will discuss the feedback from the investors meetings and agree a price range within which the offering will be marketed. In certain cases (especially fund offerings), the IPO will be at a fixed price, but for most corporates a price range will be used.

The price range is used to generate a competitive auction for the shares to ensure that pricing is maximised, subject to having a stable aftermarket. There are different strategies for setting a price range, but the 'textbook' approach is to set the bottom of the range where there is broad 'buyin' from the investor community. This allows the bookrunners to generate sufficient demand to 'get the book covered' (ie have demand for all the shares being offered) quickly. From this point on, competitive tension between buyers can be established to increase the price. If there is no 'hook' at the bottom of the range, there is a risk of insufficient momentum, which potentially means that the book might not be covered. Typically, the price range is set before the management begin their roadshow, but in certain circumstances it may be appropriate to delay the setting of the range by a few days. This both reduces the period of 'market risk' and can allow for a higher and tighter price range, if early feedback from the management meetings is highly positive.

Building the book of demand

Once the price range has been set, the bookrunners begin taking orders from investors. This process allows the bookrunners to build a book of demand, showing how much demand there is for the shares being offered at different prices. The system is electronic and pooled between the bookrunners to give the company and each bookrunner a view of the combined demand generated. This process of bookbuilding lasts for the full duration of the management roadshow. Orders can come in various styles – some investors may put a price limit on their order (ie a cap on the amount they are willing to pay such that they have no demand above that price), others may give an unlimited order and some will give stepped orders throughout the price range (ie giving precise amounts of demand at different prices).

Setting the offer price and allocating the shares

At the end of the bookbuilding process and management roadshow, the time will come to set the price of the shares in the offering. A meeting to agree that price will be held with the bookrunners, the company and certain of the existing shareholders. Sometimes this will be a short discussion – in the ideal scenario, the book will be many times covered by high-quality investors at the top of the range. However, there is often a balance to be sought between price and quality of investors. The debate will be about where to set the IPO price so that proceeds to sellers are maximised and/or dilution minimised, consistent with providing the company with a strong shareholder register and stable aftermarket performance. Having agreed on the price, the bookrunners and the company will then agree on the allocation of the shares and these allocations will be confirmed to the investors the following morning, before the shares begin trading.

Typical trading patterns post IPO

It is common after an IPO to see some turnover in the shares in the first few days. Certain investors may be looking to buy more stock whilst others who have participated may trim their exposure. The average volume of shares traded in the first day post the IPO is 23 per cent of the shares offered in the transaction (based on IPOs on the London Stock Exchange over the last five years). This number increases to 34 per cent for the first week post-IPO. Over time, trading will settle down and come more into line with the typical levels seen elsewhere in the secondary market.

Stabilisation

Because there is a heightened sensitivity to the share price performance immediately post-IPO, regulators internationally permit one of the bookrunners to support the share price in the after-market ('stabilisation') through buying shares in the open market. In the UK, such stabilisation is only permitted for a period of 30 days and the bookrunner selected to carry out this activity is only allowed to buy stock in the market if the shares are trading below the issue price in the IPO, and only for the express purpose of supporting the share price. To allow the stabilisation process to occur, the bookrunners initially over-allot shares in the IPO (up to a maximum of 15 per cent of the total number of ordinary shares which comprise the base offer in the UK). The proceeds from this overallotment may then be used to buy back up to that number of over-allotted shares if stabilisation is required. By way of example, if the offer has been set at 100 shares, the bookrunners may actually sell, say, 115 shares to investors. They would borrow 15 shares from an existing shareholder to deliver to new investors at the time of the IPO. If the share price drops below the IPO issue price, the stabilisation bookrunner may elect to buy up to 15 shares and return these shares to the original owner. If the shares trade above the IPO issue price, no stabilisation will be carried out and the proceeds of the sale of the over-allotted shares will be paid to the original owner.

The ongoing role of the corporate broker

The IPO is the beginning of the company's life as a listed entity. A critical component of that life is managing the company's relations with the market – with research analysts, investors, the London Stock Exchange, the regulators, the media and so on. Whilst the company's corporate broker will be responsible for advising the company on regulatory aspects, the broker will also be an important 'voice' for the company and will act as the company's eyes and ears in the market. The corporate broker's research analyst will disseminate the company's equity story widely to maximise the investor following and understanding of the story in the market. The salespeople will ensure the message is disseminated to a generalist audience as well as to the sector specialists who will also be the focus of the research analyst.

The corporate broking professionals at the firm will advise the company on all aspects of the company's interaction with the market, including the development of key messages and how they are best communicated to the market. Their role includes capital markets and corporate transactions advice and strategic non-transaction advice such as dialogue on the company's investment case, being a sounding board on key strategic issues (strategy, capital structure and dividend policy) and providing support around key investor events.

The corporate broker will also provide its clients with relevant market intelligence such as share price movements, trading strategies, key market themes and macroeconomic events. In addition, a corporate broker will carry out investor targeting exercises, organise investor meetings and collate feedback from investors.

It is usual that the banks or brokers selected for this role will be some or all of those that acted as bookrunners in the IPO. In many ways, they should be the firms that best understand the company's investment case and are therefore best-placed to present that to the rest of the market on an ongoing basis. In order to perform the role well, the corporate broker must be thought of as a 'trusted adviser' by the company and this is the relationship that is best forged from the outset of the IPO process.

Retail offerings

In some instances, the company or its existing shareholders may wish to make the offering available to the general public, or to a subset of it – the company's customers, for instance. These offers were a common feature of government privatisations. In most cases, the public will participate on the same terms as the institutional investors. Sometimes a discount or other reward is given to encourage public participation. Retail demand can be meaningful in IPOs of certain types of companies. It is most applicable where the company has a strong brand presence and level of customer loyalty. A retail offer can be made as an offering to the public, through public application forms (which has certain technical implications on the timetable and documentation), or as an intermediaries' offering which is made available to clients of private client brokers only.

Employee offerings

These are similar to the above, but are only made available to the company's employees. They are relatively simple to execute and facilitate increased employee ownership of the business – often a positive for the company and its staff. If this is being considered, it is important to ensure that the appropriate legal steps have been taken where the employee base is international as this can constitute an offering into other jurisdictions (giving rise to regulatory implications).

Additional considerations for international issuers

The Exchange is a popular listing venue amongst international issuers. Being incorporated outside the UK is typically not an issue from a marketing perspective. It may, however, encourage the bookrunners to adjust the regions in which the investor education and management roadshow are carried out to reflect potential investment interest from the company's home country. Aside from this, and certain technical considerations around ensuring that the company is eligible for FTSE index inclusion, there are limited differences to the marketing process on an IPO of a UK incorporated company and an international issuer on the Exchange.

The Exchange provides an excellent platform for marketing any IPO. Optimising the marketing exercise is critical to the IPO's success and will ultimately impact the valuation achieved for the company and its shareholders. This exercise needs to be carefully designed by the bookrunners to achieve the objectives of raising sufficient proceeds for the company or its shareholders, optimising the price at which shares are issued and establishing a strong share register for the company's future. The key areas to focus on, as discussed in detail in this chapter, are as follows:

• ensuring the right bookrunners are appointed to market the offering
• positioning the investment case in a way which effectively demonstrates the attractions to equity investors
• meeting enough and the right type of investors on the management roadshow; and
• setting the price range to generate momentum and a successful bookbuilding exercise.

Getting these critical points right is the key to achieving a successful listing on the Main Market of the Exchange.