Anchor Investors in IPOs
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1 Anchor Investors in IPOs Amit Bubna, Indian School of Business Nagpurnanand Prabhala, University of Maryland, College Park December 2013 Amit Bubna Bankers on Anchor Board IPOs December July 2013
2 Outline Motivation Research agenda Data and Results Conclusion Anchor IPOs December
3 IPOs and IPO Pricing Key step in firm lifecycle IPO pricing is critical Issuing firm Insiders Outsiders Pricing accuracy lowers uncertainty Anchor IPOs December
4 VA Linux 30 Offer Price Anchor IPOs December
5 Alternative IPO Mechanisms Fixed Price India Auction Pure France Dirty Dutch India Discriminatory/Uniform price: Taiwan/Singapore Bookbuilding India, USA, UK Anchor IPOs December
6 Key Mechanisms: Summary Fixed Price Auction Bookbuilding Ex ante Information Road Show Initial Price Fixed Reserve? Price Band Investor Interest Bidding Bidding Book of Interest Final Price Market Clearing Limited Discretion Share Allocation Proportional Proportional Discretion Anchor IPOs December
7 Motivation: Should Underwriters Control IPO Allocation? Can improve pre-market price discovery Benveniste and Spindt (1988) But these powers are a recipe for cronyism and corruption Allocations are secret. Underwriters can do what they please with no formal oversight. This secrecy lets underwriters control enormous rents $135 billion in US, How are allocation powers used in practice? Very little data due to secrecy of books. Anchor IPOs December
8 Research Questions 1 Implications of giving underwriters allocation powers Extends insights in Bubna and Prabhala (JFI, 2011) They have data on Indian IPO share allocations Findings: Allocation powers are used extensively Allocations depend not just on bid but also on bidder types (FII, MF, FI) Allocation powers improve pre-market price discovery Current research Implication of discretion with transparency in share allocation Data from a unique type of sunshine bookbuilding Marquee ( anchor ) investors identity and allocations visible to all public bidders Anchor IPOs December
9 Research Questions 2 This research We now have allocation powers with transparency Marquee ( anchor ) investors identity and allocations visible to all next-stage public bidders This mechanism is probably what regulators want. Reduces cronyism Yet gives flexibility in allocation that underwriters want for bookbuilding. Same set of questions Pricing and price discovery We want to build a structural model of auctions to generate right counterfactuals. Anchor IPOs December
10 Literature: Brief Review Theoretical lit stylized Benveniste and Spindt (1988) Empirical lit sparse Cornelli and Goldreich (2001, 2003) Jenkinson and Jones (2004) Anchor IPOs December
11 Why Indian IPOs? Laboratory Distinctive IPO process No possibility of cronyism in retail segment, who potentially play only an information role Anchor IPOs December
12 Pre- Nov. 2005: Bookbuilding in India Bookbuilding with allocation discretion ( dark bookbuilding) Post- Nov to present: Bookbuilding without allocation discretion (Dirty Dutch) Post- July 2009 to present: Bookbuilding with anchors, followed by Dirty Dutch (anchorbacked bookbuilding) sunshine bookbuilding Anchor IPOs December
13 Anchor-backed Bookbuilt IPO Features Stage 1 Bookbuilding Price band and available shares announced Anchor institutional investors submit bids Price is determined Underwriters allocate shares with discretion Announce anchor names, shares allocated and price Stage 2 Dirty Dutch Offering open to the public Bids submitted and price determined Allocation done proportionally Anchor investors pay Max(Stage 1 price, Stage 2 price) Anchor IPOs December
14 Anchor-backed IPO key rules Anchors institutions (QIBs) Maximum anchor allocation - 30% of QIB bucket At least one-third to domestic mutual funds Minimum # Anchors 2 for issue size up to Rs million 5 for larger issue size REVISED? Max 2 if issue< 100m, (2,5] if issue (100m, 2500m], with minimum allocation Rs. 50m/anchor (6, 25] if issue > 2500m Anchor lock-in for 30-days from allocation date Anchor IPOs December
15 Empirical Agenda Descriptive analysis of IPO book This is useful given the limited data on IPO allocations. # anchors, identity of anchors, allocation across anchors. Relation to subsequent bidding, underpricing, volatility, and long-term returns. Heterogeneity How bookbuilding is implemented matters. Counterfactual analyses Anchor versus non-anchor bookbuilding Sunshine versus dark bookbuilding Anchor IPOs December
16 Data IPOs offered from Prime database IPO date, issue size, price band, oversubscription Pricing method, IPO grade, underwriters names Anchor names, allocation and price CMIE Prowess Financials and stock prices Bulk and block deals Anchor IPOs December
17 Indian IPO Market Anchor BB Non-anchor BB TOTAL Anchor IPOs December
18 Summary Statistics Anchors Anchor IPOs December
19 Anchor Investors Funds versus Families Anchor AXIS MUTUAL FUND-AXIS EQUITY FUND AXIS MUTUAL FUND-AXIS INCOME SAVER AXIS BANK LTD. TREE LINE ASIA MASTER FUND (SINGAPORE) PTE.LTD. T.ROWE PRICE INTERNATIONAL STOCK FUND (MANAGED BY T.ROWE PRICE INTERNATIONAL INC.) T.ROWE PRICE INTERNATIONAL DISCOVERY FUND (MANAGED BY T.ROWE PRICE INTERNATIONAL INC.) EMERGING MARKETS GROWTH FUND INC. Family AXIS AXIS AXIS TREELINE TROWE TROWE ASHMORE EMSAF-MAURITIUS (MANAGED BY EMERGING MARKETS MANAGEMENT LLC) ASHMORE Anchor IPOs December
20 Summary Statistics Anchors Anchor IPOs December
21 Univariate statistics Anchor versus non-anchor BB Anchor BB Non-anchor BB Proceeds (Rs. million) 4,182 1,002 Age Underwriter reputation Average IPO grade Pricing Top Band Oversubscription All Oversubscription QIB Oversubscription Retail Underpricing 5.88% 2.25% 1-year Returns % % Volatility (30 days) 39.30% 54.60% Anchor IPOs December
22 Regressions 1 Underpricing Anchor IPOs not priced differently in the short-run. Anchor IPOs December
23 Regressions 2 Oversubscription Anchors stimulate bidding by QIBs. Effect stronger in more opaque IPOs. Anchor IPOs December
24 Regressions 3 Long-term Returns Anchors are associated with superior long-term returns in opaque IPOs. Anchor IPOs December
25 Regressions 4 Volatility Anchor-backed IPOs have lower market-adjusted 1-month volatility, especially in more opaque IPOs. Anchor IPOs December
26 Counterfactuals (if instead of Anchor BB?) Transparency in book appears to lower underpricing. Anchor IPOs December
27 Regressions 5 Type of anchor matters - oversubscription Anchor-backed IPOs with Less concentrated allocation Smaller offering Top family participation Greater oversubscription (retail, QIB) Greater oversubscription (QIB) Anchor IPOs December
28 Regressions 6 Type of anchor matters - underpricing Anchor-backed IPOs that have Fewer unique investor families Connected investor-underwriter Lower underpricing Anchor IPOs December
29 Flipping Little evidence of anchor flipping after lock-in period. Anchor IPOs December
30 Conclusion IPO pricing is critical. Bookbuilding is the dominant IPO mechanism. Key feature: allocation discretion, usually secret Unique experiment in transparent bookbuilding in India. Data reveal that Anchor-backing induces more bidding. Anchors do not appear to create short-run bubbles in IPOs. Anchors lower volatility. Many effects greater for opaque IPOs. There is little flipping after the lock-in period. Anchor identity matters. Anchor reputation and affiliation with underwriter related to better IPO outcomes. Anchor IPOs December
31 Conclusion In progress Measures of anchor quality IPO books from dark and sunshine bookbuilding To be done Structural model of bidding This work in progress. We seek and welcome comments. Anchor IPOs December
32 Motivation Bookbuilding Pricing of proposed offering is critical Lowers cost of capital for issuers Lowers uncertainty post-issue for issuers and investors Lowers speculations and bubbles Bookbuilding mechanism is dominant. Anchor IPOs December
33 Motivation Bookbuilding Process Underwriter arranges a road show to build a book of business Set final price Allocate shares Trading starts Underwriters are initially the dominant market-makers and provide analyst coverage after a quiet period ( 25 days) Anchor IPOs December
34 Bookbuilding in India Pre- Nov. 2005: Bookbuilding with allocation discretion ( dark bookbuilding) Post- Nov to present: Bookbuilding without allocation discretion (Dirty Dutch) Post- July 2009 to present: Bookbuilding with anchors, followed by Dirty Dutch (anchorbacked bookbuilding) Anchor IPOs December
35 Anchor-backed Bookbuilt IPO Features Stage 1 bookbuilding Price band and available shares announced Anchor institutional investors submit bids Price is determined Underwriters allocate shares with discretion Announce anchor names, shares allocated and price Stage 2 Dirty Dutch Offering open to the public Bids submitted and price determined Allocation done proportionally Anchor investors pay Max(Stage 1 price, Stage 2 price) Anchor IPOs December
36 Anchor-backed Bookbuilt IPO Key features 2 key features: Transparency of book ( sunshine ) Price announced after stage 1 Anchor IPOs December
37 Mechanism: Fixed Price Ex-ante Information Production? Price Set Bidding Starts Allocations Made No Discretion Anchor IPOs December
38 Mechanism: Auction Ex-ante Information Production? Reserve Price Set? Bidding Starts Offer Price Set? Allocations Made No Discretion Market-based, Transparent, Bidder Anonymity Anchor IPOs December
39 Mechanism: Bookbuilding Ex-Ante Information Production Set Filing Range Build Book IPO Manager Sets Offer Price IPO Manager Allocates Shares Discretion Anchor IPOs December
40 Anchor-backed IPO time line Ex ante information production Stage 1 Set filing range Anchor offer opens Anchor price and allocation determined and announced Public offer opens Allocation Discretion Stage 2 Bidding Starts IPO Manager Sets Offer Price Allocations Made NO Discretion Anchor IPOs December
Anchor Investors in IPOs 1
Anchor Investors in IPOs 1 Amit Bubna Indian School of Business Gachibowli, Hyderabad, India 500 032 Nagpurnanand Prabhala Robert H. Smith School of Business University of Maryland, College Park, MD 20742.
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