Lessons to learn from the CAB Payments debacle
An IPO crash course in equity, transparency and accountability
“I need a hero,” sings Bonnie Tyler. “I’m holding out for a hero ‘til the end of the night.”
The embattled London market has been looking for an IPO to validate its place as a key listing venue. The flotation of Turkish soda ash producer We Soda was reckoned to be a “ray of light”, but it foundered over valuation. I wrote in June that “it seems absurd for City champions to have invested so much hope in [the We Soda] IPO”.
Just a few weeks later another hero came along to burnish London’s credentials. “London Stock Exchange welcomes CAB Payments,” posted the LSE on July 6. It was “a very special moment for the company and the fintech sector,” according to FINTECH Circle. The company boasted high growth and high margins, and the offering had the support of a powerhouse investment banking syndicate, led by JPMorgan Cazenove and Barclays, with STJ hired as financial adviser to make sure the deal was a success.
But London’s “newest tech unicorn” has become the latest puny-corn. As MainFT writes:
Shares in CAB Payments plunged as much as 74 per cent on Tuesday after the fintech warned on profits less than four months after listing in London. The company, which specialises in foreign exchange and payment services for businesses that send money to emerging markets, slashed its revenue forecast for the year by 17 per cent. It blamed changes to market conditions in some of its key currency markets, including the Nigerian naira, for hitting margins and denting volumes.
Happily for the private equity firm Helios Investment Partners, it escaped much of the carnage by selling 40 per cent of its stake at 335p to raise nearly £300mn. But with CAB shares closing yesterday at 60.80p, investors who didn’t sell out can hear only the whistling sound of wind passing through their ears as they tumble through the trapdoor.
Like every equity capital markets banker, I’ve worked on my share of duds and disappointments, but never anything quite like this — an 82 per cent fall from the offer price, making it “the world’s worst major initial public offering this year”, according to Bloomberg.
There’s a lot one can say about this fiasco, but as FT Alphaville is a family-friendly forum, I will highlight just a few issues.
The first is that stock market flotations have evolved from providing growth capital to enabling insiders to take money off the money. This vitiates the public benefit that robust and functional IPO markets are supposed to provide. As the New Financial think-tank wrote in 2021: “Private equity firms in the UK sell a significantly higher chunk of their investment in the IPO than they do in the US, and a high proportion of new shares is used to pay down high levels of debt.”
There’s not much point in reviving London as an IPO market if it entails only the transfer of wealth from fund managers and retail punters to privileged insiders. And if the fundraising is designed only to enable insiders to reap a bonanza, it’s not really a surprise that investors aren’t buying what’s on offer.
Second, it’s impossible to know from CAB Payments’ cryptically vague announcement whether the 22 pages of “Risk Factors” in the IPO prospectus had provided adequate disclosure. The company said yesterday (emphasis added):
In recent weeks, the Company has seen a number of changes to the market conditions in some of its key currency corridors, on top of the ongoing uncertainties surrounding the Naira, which are impacting both volumes and margins; most notably, the Central African franc (XAF) and West African franc (XOF). At the present time, these market conditions are compressing margins and reducing trading volume. These challenges are recent but continuing.
So the stock, which had already fallen 35 per cent below IPO price, dropped another 72 per cent yesterday because of . . . ch-changes”?
One broker attributed the profit warning to the mandate from African central banks that firms in West Africa should transact with local banks, and not with intermediaries such as CAB Payments. The implication is that much of CAB Payments’ growth and high margins derived from trading offshore in African currencies subject to exchange controls. If local authorities intervene to stifle the alternative trading venues, trade volumes and margins get crushed.
If this accurately summarises what happened, I don’t think it has been conspicuously disclosed in the Risk Factors. Here’s the summary of the Risk Factors; decide for yourself:
The prospectus does say that recent changes to the Nigerian Naira may hurt spreads, but that the company had already reflected this contingency in its financial targets (emphasis added):
On 9 June 2023, the Nigerian president suspended the governor of the Central Bank of Nigeria and on 14 June 2023 the Central Bank of Nigeria issued a press release indicating a change of policy to move towards a more free-floating Naira. While . . . it is too soon to determine the impact this change in policy has on the Group’s current trading, the Directors believe that it is likely that the gap between the onshore bank rates and offshore parallel market rates which have historically existed in Naira FX trading may narrow in the short term. Furthermore, the Directors believe the policy change may result in a decline in the take rate the Group can obtain on the Naira-related FX transactions it performs to pre-mid-2021 levels. As the Group’s total income targets assumed unrestricted trading in Naira, the change in policy announced by the Central Bank of Nigeria on 14 June 2023 is in line with the Group’s assumptions for its total income targets for 2023 and for the mid-term.
One can debate, Aquinas-like, whether the risks were clearly disclosed or buried in a pile of turgid legalese. Suffice it to say that investors, including Fidelity and BlackRock, didn’t see it coming — and so soon after the IPO.
Third, the “CABastrophe” highlights, awkwardly, an advantage to listing in London or elsewhere abroad over the US: the lack of class action lawsuits when newly floated companies miss their numbers. If CAB Payments had listed on Nasdaq or the NYSE, it and its underwriters would already have been served with papers. But outside the US it’s a different story, and class action suits are extremely rare.
But with the lack of (sometimes frivolous) lawsuits comes a lack of accountability. In theory, the company and its directors can be held liable, but in practice “no one ever is to blame.” As for the advisers, it’s unlikely any of them will be summoned to explain their decision-making.
The UK tries to enforce standards via the “sponsors regime”. Acting as IPO sponsor is an onerous responsibility, requiring detailed work on the working capital statement and business model, and most relevantly a determination “whether the admission of the shares would be detrimental to investors’ interests.”
The sponsor on the CAB Payments IPO is JPMorgan Cazenove, probably the most experienced and blue-chip name in UK corporate broking. Its recent track record, however, isn’t unblemished, as it has acted as Sponsor for such disastrous IPOs as Finablr (another emerging markets fintech company), Aston Martin Lagonda, and Made.com.
And there’s a legitimate question not only whether the relevant risks were adequately disclosed, but also whether this company should have been taken public in the first place. A company may not be fit for listing if an important business line can be halted from one week to the next by government fiat. If (as seems the case) CAB Payments’ business model was acutely vulnerable to unpredictable intervention by African central banks, it would make forecasts almost impossible.
So will the UK Financial Conduct Authority weigh in? After all, its remit is to ensure that IPO sponsors (and arguably global coordinators) are vetting companies to protect against investor detriment.
Don’t count on it. Yes, the FCA conducts periodic reviews of the work that sponsors carry out, and it’s painful paperwork preparation for all involved. But it is difficult to expect the FCA to crack down on advisers for bringing companies to the market when it is under pressure to attract new listings. Indeed, in a bizarre intervention from a watchdog, the FCA’s director of regulatory oversight recently said that the UK media are “very negative” about homegrown issuers, insinuating it should be more supportive of issuers and entrepreneurs.
The FCA has a fit-and-proper test for employees and senior managers at financial firms, but do they have one for underwriters and advisers? Five years ago the Hong Kong regulator SFC banned UBS — the strongest IPO house at the time in the Greater China market — from sponsoring IPOs for 18 months after a series of major mishaps. It also fined several other banks. Not a perfect remedy, but it focused minds. No bank wanted to follow UBS into the penalty box and to miss out on dealflow.
The list of London flops is long, and if this debacle can happen under the aegis of the top-ranked bank in the business, what hope do investors have? After all, they have worse information than the insider sellers. They can kick the tires and take a peek under the bonnet. But even the biggest institutional investors can’t perform the kind of due diligence of a private buyer or even IPO global co-ordinator. They have to be able to trust something about the process or it breaks down.
The CAB Payments IPO should be a “teachable moment” for the regulator to require accountability from advisers to incentivise clear disclosure and careful screening. The gatekeepers must have skin in the game.