Bankers are increasingly using confidential talks with investors to ensure that their US initial and secondary public offerings are successful as market conditions become more challenging.
(Bloomberg) — Bankers are increasingly using confidential talks with investors to ensure that their US initial and secondary public offerings are successful as market conditions become more challenging.
At first glance, the practice seems unfair to the traders who are left out of the secret conversations. But dealmakers say the strategy is legal, when done properly, and crucial for getting deals completed in an economy that’s on the brink of a recession.
“In times of volatility, the market really struggles with how to accurately price a transaction,” said Keith Canton, head of Americas ECM at JPMorgan Chase & Co. “When times are tough, that’s when you really need to lean in on investor relationships, and make sure you’re getting the right context of the market, and are delivering that context and advice to your issuer clients.”
The secrecy is unusual compared with other corners of the stock market, where public disclosure rules are designed to level the playing field. But in the world of equity capital markets, where the largest exchanges of shares tend to occur, it’s become the standard way of doing business during periods of uncertainty.
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One method is so-called wall crossings, where investors are given access to material, nonpublic details on the potential stock sale, financial results and even data from drug trials. In exchange, they promise to keep the details a secret and refrain from trading on them.
Confidential IPOs
Some companies even go as far as publicly announcing that they are confidentially filing for an IPO, a seemingly oxymoronic event that helps generate buzz while keeping issuer’s financials and other disclosures within the prospectus secret. Firms that have confidentially filed for IPOs this year include KKR’s BMC Software Inc., driverless technology startup Guangzhou WeRide Technology Co. and BioXcel unit OnkosXcel Therapeutics.
After companies are public, their shares could change hands through unregistered block trades. Managed by the same bankers who conduct IPOs and follow-on offerings, these sales can comprise several weeks of normal trading volume — yet they don’t appear on the tape and typically aren’t disclosed through any press release or regulatory filing. Unregistered block trades this year have included shares of Charles Schwab Corp., US Foods Holding Corp. and Keurig Dr Pepper Inc., according to people familiar with the transactions.
All these tactics aim to maintain deal flow in the face of market signals that typically push investors toward safer plays. The US initial and secondary public offerings market just concluded its quietest first quarter since 2009. The uncertainty continued into this week, as stocks fell early Monday on expectations of another interest-rate hike before rallying late to eke out a slight gain at the close.
Beyond the market implications, the slowdown in dealmaking is also creating an economic bottleneck. Proceeds from would-be deals are commonly earmarked to create jobs, fund medical research, repay debt and finance acquisitions.
What’s more, not using market secrecy can cause cause unforeseen consequences. For instance, the collapse of Silicon Valley Bank, and the weeks of ensuing market chaos related to it, could have been mitigated if the firm’s last-gasp stock offering had been more fully negotiated in private.
“The mistake that was made in the SVB offering was that they announced their capital need publicly before they had secured capital,” said Steve Maletzky, head of equity capital markets at William Blair & Co.
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