Craig Coben is a former global head of equity capital markets at Bank of America and now a managing director at Seda Experts.
Last week, the African-focused fintech firm CAB Payments issued a profit warning just three months after its IPO on the London Stock Exchange, sending shares into a free fall. The shares on Friday closed 85 per cent below the IPO price of 335p.
There’s no way to sugarcoat this debacle. Over the last two decades, London has witnessed some duds, from Debenhams to Deliveroo, but you’d be hard-pressed to find any new issue that has fallen so far so fast. The taste is even more bitter because the private equity firm Helios Investment Partners cashed out 40 per cent of its holding, netting almost £300mn, while “hopping mad” investors were left holding the bag.
Writing in FTAV last Wednesday I questioned whether CAB Payments was a suitable company to be listed and whether the prospectus had adequately disclosed the risks that sent its shares hurtling downward.
In an interview published yesterday in the Sunday Times, the chair of CAB Payments Ann Cairns, says I’m wrong (Alphaville’s emphasis below):
[CAB Payments] laid the blame for its revenue downgrade on unforeseen volatility in African markets, which make up a large portion of its business. Nigeria’s currency, the naira, crashed in June after its central bank governor was suspended. The company said this led to smaller fees on trades in the currency. Additionally, it warned that other central banks in the region have since issued restrictions on the trade of Central African and West African francs. In some areas, businesses have apparently been told to use local financial firms at the expense of international rivals such as CAB.
Writing in the Financial Times, Craig Coben, the former global head of equity capital markets at Bank of America, said, diplomatically, that this kind of scenario might not have been “conspicuously disclosed” in CAB’s prospectus document ahead of its float. Cairns disagrees: the prospectus did highlight that a large proportion of the group’s revenues came from the region, and that future results could be “negatively impacted” by changing conditions in these markets.
I will say it less diplomatically: this IPO, London’s largest in 2023, demands investigation from the UK Financial Conduct Authority. It is not enough to say that the company gets most of its revenue in Africa and that changing conditions could adversely affect results (Alphaville reached out to CAB but the company declined to comment).
Every share prospectus contains a section called “Risk Factors.” The purpose is — you guessed it! — to inform investors of relevant risks and to enable them to make an informed investment decision.
Unfortunately, over the years the “Risk Factors” section has degenerated into what I’ve elsewhere called “a mixture of alarmist legal jargon and boilerplate gobbledegook more suited to shielding issuers and underwriters from liability than to informing investors.” Too often, the “Risk Factors” section drones on and on — 23 pages of dense prose in the case of CAB Payments’ prospectus.
Regulators have cottoned on to the practical uselessness of these disclosures. That’s why the European Securities & Market Authority issued guidelines in 2019 saying that the risk factors “should be limited to those risks which are material and specific to the issuer and/or its securities and which are corroborated by the content of the prospectus.” ESMA also says they should be “concise.”
So let’s take a look at the two reasons for the profits warning.
First, the Nigerian central bank governor was fired in June — one month before the IPO — and the naira was allowed to float freely. The prospectus mentions this as a risk on page 10 and says it’s too early to assess the magnitude, followed by standard language that it could have a material adverse effect. So far, so . . . meh.
However, on page 2 it discusses the same development using much the same language but reassures investors that it shouldn’t affect the company’s outlook (AV’s emphasis):
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 midterm.
Moreover, the prospectus says later (page 56) that the company expects income to grow by 45 per cent in 2023 and mostly shrugs off the risk of a free-floating naira:
This targeted growth in total income assumes a return to normalcy in Naira trading in the second half of 2023. With respect to Naira’s performance, the Group’s total income target assumes that a realistic worst-case scenario for its financial performance would be in the event of a return to unrestricted trading in Naira in the second half of 2023, which the Directors believe would shrink the Group’s take rate for Naira but improve the volume of Naira flows. 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 target. While . . . it is . . . difficult to know the impact it will have on the Group’s Naira take rates, if the Naira take rates were at post-mid-2021 levels into the second half of 2023, the Directors expect the Group could exceed the Group’s total income growth target for 2023.
The natural inference is that yes, “this is a possible risk but we who know the business best are not too worried about it ourselves and we have baked it into our numbers.” In any case, it raises the question whether the risk factor was “corroborated” or downplayed by the disclosure elsewhere.
Second, CAB Payments will miss its numbers also because central banks in other West African countries have forced firms to use onshore banks for their foreign exchange rather than intermediaries such as CAB Payments.
There’s some high-level prospectus disclosure of the risk that central banks “could introduce measures to protect their currency and economy,” but nothing more specific about what those measures could be. In fact, the prospectus talks about how CAB Payments partners with local banks. In any case, the risk factors say that the Central African and West African franc transactions each represent only about 7 per cent of total revenues — making each currency barely material in the grand scheme of things.
More generally, the summary of the risk factors (page 4) — presumably the most material, the ones that keep management and the Board up at night — reads like a laundry list of utterly obvious or generic risks applicable to almost any financial institution:
-
The Group’s growth may not be sustainable at its current levels in the future, which could have an adverse impact on its business and future prospects;
-
The Group’s business is dependent on the macroeconomic and political environment in the countries where it provides products and services;
-
The Group’s earnings could be negatively impacted by fluctuations in FX rates;
-
Employee misconduct or errors may be unable to be prevented or deterred by the Group and may cause financial loss or damage to the Group’s reputation;
-
The Group’s business is reliant on its ability to attract, retain, and develop highly skilled employees;
-
The Group may not be able to retain its existing customer base, which could affect its business and results of operations;
-
As the Group expands its products and services globally, it may face challenges that could adversely affect its business or future growth;
-
As a result of containing a UK-regulated bank, the Group is subject to extensive legislation and regulation, and any failure by the Group to comply with applicable laws and regulations could expose it to significant costs and reputational damage;
-
The Group allows customers to send cross-border payments to and from numerous jurisdictions outside the United Kingdom, which exposes it to a variety of laws and regulations. Any failure by the Group to comply with these local laws could have an adverse effect on its business;
-
The Group is subject to laws and regulations relating to anti-money laundering, counterterrorism, anti-bribery, and sanctions, and any failure by the Group to prevent or detect violations to these could expose the Group to liability; and
-
The Group is dependent on its technology, and any service delays, system failures, cyberattacks, or other interruptions could disrupt the Group’s ability to continue to provide its products or services, harm the Group’s reputation and/or subject it to other liabilities.
It’s not an open-and-shut case, but I don’t think the risk disclosure is detailed, specific or conspicuous enough to have put investors on notice that CAB Payments was so exposed to a drop in revenue like this, and so soon.
That said, this debate raises a larger question about suitability. Why would you be listing a company whose disclosed risks include central bank action “to protect their currency and economy”?
CAB Payments operates in grey or parallel markets, commanding extraordinarily high margins and generating massive increases in transaction volumes in something as plain-vanilla as foreign exchange trading. Extrapolating high growth — the forward guidance of 45 per cent income growth in the prospectus is unusually specific for any IPO — seems reckless or at least ungrounded given the extreme susceptibility to policy changes by African governments.
“We just have to let the stock market do what the stock market does,” the Sunday Times quotes Cairns as saying. Maybe investors should have known better, but the roster of blue-chip advisers, Magic Circle lawyers and credentialed independent non-executive directors helped portray an abnormal business with supranormal margins as normal.
If the IPO market is largely governed by caveat emptor — with overbroad risk factors protecting the parties and sellers from accountability — then it shouldn’t come as a surprise when future IPOs are empty of new emptores.
