The Main Players in Secondary Share Placements

Tuesday, 8th November 2016 08:39 - by Tom Britton

Beyond the company, who is, of course, the star of the show, there are a number of key players working behind the scenes to ensure a placement comes off smoothly. Given you might not be aware of just how many are involved in the process I thought I’d give you a look at who else is involved in the process.

 The Nomad / Sponsor

The Nominated Advisor, often referred to as a Nomad, is a corporate finance adviser approved by the London Stock Exchange who effectively guides a company through the IPO and placement processes on the Alternative Investment Market (AIM). The Sponsor acts in a similar fashion for companies that have moved into the main market. All listed companies must retain a nominated advisor or Sponsor to maintain their listed status.

Nomads and Sponsors provide a range of services to the company including, but not limited to, the following:

-          Undertaking extensive due diligence to ensure a company is suitable for the market

-          Providing guidance throughout the flotation process                                                   

-          Preparing the company for being on a public market

-          Helping prepare the AIM admission document

-          Confirming appropriateness of the company to the Exchange

-          Acting as the primary regulator throughout a company's time on AIM (this does not apply to the Sponsor).

The Broker

A broker is a securities house and a member of the London Stock Exchange who ultimately assists with the pricing and fundraising for the IPO / share placement. Their main functions are to:

-          Assess the level of investor interest in a company's securities for the IPO and placements.

-          Provides advice on market and trading related issues

-          Provides guidance on the pricing of shares

If the broker feels there is not enough appetite for the raise, or they believe the market conditions are unfavourable, they will make a recommendation to the Nomad and company that the raise should not go ahead.

It is worth noting that Nomads often act as brokers or will suggest a broker of choice for the raise.

Institutional Investors

Institutional investors play a key role in placements, just as they do in initial public offers. Months before a company aims to raise the broker/nomad will arrange a roadshow for the company to go out and meet potential institutional investors. These roadshows are used not just to gauge overall appetite but also to try and perfect the valuation at which the new shares will be issued. If there is not enough appetite from the institutional investors the broker will recommend the placement is either delayed or the price is adjusted down. In this sense, the institutional investors gain a fair amount of power in the process and can use it to leverage a better deal for themselves.

For secondary issues, companies may or may not engage additional advisors including Auditors, Researchers, Analysts and outside legal counsel. We’ll review the roles of these in a future article when we return to the IPO process.

The passive role of Retail Investors

Brokers and Nomads will first start to fill an order book with institutional investors in an effort to fill it out with as few investors as required so they offer these investors discounts to come in. Unfortunately, this means that a large number of placements, like IPOs, do not have any retail tranche and while the institutions make money from the discount they receive, the retail investor is left out of the gains. When retail investors do get to come in on a placement it is generally as a passive investor. The price and terms for the placement have already been set, by the broker with feedback from the institutional investors, so the retail investor is left to take whatever is on offer. While this does mean that they will benefit from any discount negotiated, wouldn't it be great if retail investors were given more of a say in the process? Things are set to change.

Additionally, for those who are not aware, we at SyndicateRoom are delighted to be hosting an event on November 24th with lse.co.uk where master investor Jim Mellon will give the keynote. While the event is free, spaces are limited so if you’d like to learn more about placements and hear from one of the UK’s greatest growth investors we invite you to come along.

Reserve your ticket here: An evening with Jim Mellon

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.