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Capital Markets

Early releases devalue lock-ups

Investment bankers predict a healthy flow of equity capital markets business this year as stock markets continue the run-up that began last spring. If the secondary markets' tone remains strong, investors may be tempted to buy new issues. But they should remain suspicious over whose interests the investment banks are serving: theirs as investors, or those of issuers' of stock who grant mandates and fees to the banks.

Lock-up agreements didn't appear to mean much this January as Goldman Sachs and Merrill Lynch, and then JPMorgan waived constraints preventing large shareholders in Yell and Telekom Austria from selling more stock before an agreed period had elapsed following initial disposals.

Lock-ups are typically agreed with the original vendor of a stock – perhaps a government in the midst of a series of privatizations, a private equity group which may regularly wish to exit positions to return cash to its investors, or a corporation pursuing a restructuring programme – when it first floats a portion of its holding in a company on the public market but still retains a large chunk of shares.

Sometimes vendors hold these blocks because they want to retain the chance to participate in the share's anticipated upside.

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