Sour grapes haunt Sygnia listing

The company’s name is on the tongues of many pensioners, retail and institutional investors in the country and one of the objectives of the listing – to grow brand awareness – has been firmly achieved.

Except that the fairy tale has turned into a nightmare for Sygnia CEO Magda Wierzycka and her team who have spent the past two days fending off calls from furious and abusive would-be investors who have not received the share allocations they requested.

You see, 31.2 million shares worth some R262 million were available for allocation, ahead of Sygnia’s listing on Wednesday October 14, but almost 624 million shares worth R5.2 billion were applied for. As a result many hopeful investors received nothing and those that did receive something, were allocated between 2% and 10% of what they applied for.

One can understand that investors are disappointed. The listing is a juicy one in a low-growth environment and many investors were hoping to make a quick return.

But it’s not as simple as that. While excess demand versus limited supply is a simple concept to grasp, many investors are questioning the way Sygnia handled the placement and are suggesting that while it may have followed the law, it didn’t follow the spirit of the law, and thus crossed a line into an ethically grey area.

First some background. The Sygnia listing is by way of a private placement of shares, which means the company is selling a portion of the equity shares in its business (in this case 22.3%) to a select group of investors and it has the discretion to allocate these as it sees fit.

This is in contrast to an initial public offering where shares in the company are heavily marketed to the public and sold, usually to institutional investors, who then allocate the shares on a pro rata basis.

Where Sygnia has aroused the ire of investors is that it has gone about a private placement in a very public manner, actively engaged with investors, and benefited from the publicity. But when push came to shove, it gave preference to staff, certain BEE companies, selected institutions, wealth managers and online stock brokers. The rest of the investment community was largely ignored.

This approach is in stark contrast to Sygnia’s smaller competitor Anchor Capital, which listed a year ago at 200c/share. The Anchor listing was also by way of private placement, but Anchor sought specific buyers for its shares. It did not engage with the public and did not engage with many of the stock brokers and other interested parties that approached them, instead advising that they were unlikely to receive an allocation.

Sygnia encouraged its clients to sign up to Sygnia Securities for preferential access; it went to see all of the big institutions; and it engaged with the Investment Analysts Society whose members include fund managers, brokers, and smaller investment houses. It may not have used the media, but its road-show was highly public.

The intention was never to over hype the listing or create massive demand for the shares, says Wierzycka. “When we engaged with the institutions in August their reaction was tepid. We were advised to organise Investment Analyst Society group presentations as a quick way to communicate with largely institutional investors. We also organised a couple of group functions for our own clients and supporters.

“I think most institutional investors attended the IAS sessions because we are a competitor and they wanted to know what we do – pure curiosity. They left the sessions having bought into our story and vision. This is where the frenzy seems to have originated from.

“We did not ever think in our wildest dreams – or actually nightmares – that the placement would be 20x over-subscribed,” she says. “We thought it might be twice over-subscribed, with the wildest person in our office suggesting 5x.”

So how does one allocate shares in these circumstances?

Sygnia Securities was allocated the first 34%. Shares were allocated to clients, some BEE companies and supporters. While Sygnia clients were encouraged to open a Sygnia trading account, day-traders who took advantage of the opportunity did not receive an allocation she says. “We think they will turn the shares quickly to realise a quick profit.

“The balance was allocated to BEE parties who came directly, as well as a small number of institutions which engaged with us and expressed an interest in being long-term holders of the shares. BEE parties who expressed an interest in being long-term holders of the shares received 18% of the allocation,” she says.

“We also allocated some shares to private wealth managers and stockbrokers. We aimed for a balance between the two. We have no way of knowing how many individuals they represented or how they would manage the allocation process internally. Hence the percentages received by individuals coming through other stockbrokers were beyond our control.

We clearly could not accommodate all the interested parties and hence opted not to allocate proportionately. The allocations would have been ridiculously small.”

The largest allocation to any one institution was R25 million, the smallest R1 million.

Another problem, she says, was that the vast majority of the R5.2 billion reached Sygnia on the last day of the application process, leaving them with one afternoon to finalise the allocations.

It was not a perfect science.