Pre-IPO Research Note Under Investment Banking Pressure
An analyst at a mid-sized brokerage is drafting the initiating note on a technology company whose IPO the firm co-led. The stock lists in nine trading days. The prospectus shows revenue growth of 18% in the last year; the analyst's draft model assumes 45% compound growth for five years, a WACC of 8.2% and terminal growth of 5.5% - above long-run nominal GDP growth. The IPO was priced at 22 times forward earnings against a peer median of 14 times. The draft concludes "Buy" with 30% upside. The head of investment banking emails: "The client needs support in the first week - make sure the note is out on listing day and constructive." The analyst's spouse holds units in a pre-IPO fund that owns 0.4% of the company. The head of research is on leave and has not reviewed the model.
1. Separate the analytical, process and pressure problems in this file. What is wrong with the note as drafted?
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Three distinct problems: the analysis, the process, and the pressure.
Analysis. A 45% CAGR for five years against 18% actual is not a forecast, it is an assumption doing the work of a conclusion. At that growth rate terminal value dominates the valuation, so the DCF will justify almost any price. Terminal growth of 5.5% forever, above nominal GDP, is not defensible. A WACC of 8.2% for a small-cap newly listed technology name almost certainly understates the cost of equity. And a "Buy" at 22 times against a 14 times peer median needs an explicit, evidenced reason for the premium - not an assumption set reverse-engineered to produce 30% upside.
Process. No research head review, no evidence of a rating committee, no sensitivity analysis. The note is being timed to listing day to support the aftermarket, which is a conflict, not a distribution plan.
Pressure. The investment banking email is an attempt to influence a recommendation and should go to compliance, not be answered informally.
Personal interest. The spouse's indirect 0.4% holding must be disclosed and handled under personal-account-dealing rules; the size does not matter, the undisclosed interest does. The analyst must not deal and should inform compliance immediately.
2. What must happen before the note is published, and who decides each point?
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Nothing is published until five conditions are met.
- Model rebuilt or evidenced. Each of the four contested assumptions - growth, WACC, terminal growth, target multiple - must be supported and stress-tested, with a sensitivity table showing what the rating would be at peer-median assumptions. The analyst owns this.
- Rating signed off by research. The head of research (or a designated deputy) approves the rating; the investment banking head has no role in it. If the research head is on leave, the deputy decides - the note does not skip review because of a diary problem.
- Conflicts disclosure drafted. It should cover the co-lead mandate, any lock-up or quiet-period obligation, and the analyst's spouse's indirect interest.
- Timing set by research policy. If the firm's rules restrict initiation around a mandate, the note waits. The decision on listing-day publication should be a standing rule applied to all IPOs, documented, so it cannot be varied deal by deal.
- Compliance reviews the email chain and decides whether the IB conduct needs escalating.
The principle: the recommendation must follow from the evidence, and the timing must follow from policy - not from the issuer's aftermarket needs. If the analysis genuinely supports "Buy" and the timing rule permits it, publishing is fine, but the reason must be removed from the decision.
3. The investment banking head escalates to the CEO, who tells the analyst to "be a team player". How should the analyst respond?
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The obligation does not change with the seniority of the person applying pressure.
Steps: (1) Put the objection in writing to the head of research, the CEO and compliance - the assumption issues, the timing instruction, the IB email, with dates and the exact words used. (2) Decline to sign a note whose assumptions he cannot support. If the firm publishes anyway, ensure his name is not on it and that his disagreement is recorded. (3) If pressure continues, use the firm's whistleblowing channel; research-independence rules typically require exactly this kind of interference to be escalated, and retaliation against a research analyst for refusing to be influenced is itself a serious matter. (4) Do not split the difference by softening to "Hold" while leaving the model intact - a rating that contradicts the model is as misleading as an unsupported "Buy".
What an examiner looks for: the recommendation follows from evidence; conflicts are managed and disclosed, not merely acknowledged; and the analyst can show that the issuer's interests did not determine the content, the rating or the timing. "Team player" is not a defence to publishing research the analyst believes is wrong.