1. The Index Monitor March 2017
SNAP INC. POPPED, but will not crackle for major indices
INVESTMENT PERSPECTIVE
Snap’s inclusion in major indices is revised after clarity around wrongly accounted for shares.
Index Treatment & View
It now appears that MSCI and all the other major global indices overlooked the 50mn shares of the 200mn shares sold subject to the lock-up, of which speculation suggests this was NBC Universal, as they invested circa $500mn in the company. It seems the ‘trigger’ for this review from the major indices was a news article circulated by the news agency Bloomberg on the 03 March, that indicated the company expected the 50mn shares to be subject to a 12 month lock-up. There could be a potential opportunity for Snap Inc. to be added to major indices in the future, but most scenarios rely on the share price exceeding $30 to trigger the minimum index methodology requirements, and at this moment it looks unlikely.
Portfolio Management Desk Perspective
It was a surprise the stock was added, based on two aspects; the lock-up not being accounted for by the index providers, and most importantly the share price on the first day of trading closing at $24.48, up 44% from its IPO price of $17. Based on the IPO price alone and with no consideration for lock-up (all 200mn shares included), the stock was well below the minimum criteria for inclusion, circa 45% below! It was very close to call in the end with the stock meeting the minimum threshold on a free floated adjusted inclusion of circa 6% above, with the free float cap level for MSCI set at $5.6bn. The expected weight based on the fact the stock would be included was relatively small for a global benchmarks at circa +0.01%. The index investment view is that the IPO was only attractive, if you held a short term technical perspective on the share price, your mandate allowed non index constituent stocks, and this was acceptable portfolio risk. All of this played well into it being a positive short term index arbitrage trade, with greater upside to the portfolio return than downside. If the view held was that this stock was not going to be included in the major indices, then the justification for participating in the IPO would seem unjustified.
Trading Desk Perspective
The run up period to this IPO was much anticipated with both Passive & Active strategy bookrunners covering the offer, which was unusual, as there is typically only one bookrunner covering all strategy types. There were 7 bookrunners, with an indicative price range of $ On the IPO day the books were well covered at 15X oversubscribed, the interested parties were very diverse; including Pension Funds, Wealth, and Hedge Funds & Asset Managers. The biggest 25 trading accounts of the bookrunners accounted for 75% of the take-up of the IPO. The HSBC Trading desk were aware that ~25% of the shares were locked up for 12+ months. There were no surprises on how it traded in the forthcoming coming days, it was expected, with retail investors driving the price the first few days ($27.09 high), and the stock returning to more sensible levels of ~$20 more recently. An interesting observation was that the days following on from the IPO the market share of borrowing and associated fees increased, indicating a strong possibility for short selling of the stock.
Benchmark Methodology
March 2nd 2017: MSCI announced the inclusion of Snap Inc. to the MSCI Global Investable Market Indexes
MSCI methodology rule book for IPOs states that a company:
with a full market capitalisation of at least 1.8 times the interim market size-segment cut-off &
free float adjusted market capitalisation of at least 1.8 times one-half of the interim market-size-segment
The cut-off as of close of its first or second day of trading
Can be considered for early inclusion outside of the index review
Implementation announcement - added
March 2nd 2017: MSCI confirms that Snap Inc. would be added as an early inclusion
the close price on the 02 March
share issuance of 661,865,469 shares outstanding
Free Float of 0.65 as the close price was $24.48, giving Snap Inc. giving a Free Float Adjusted market capitalisation of circa $5.7bn.
As a requirement to match the index, investors would need to purchase at or before close of business on 15th March
Snap Inc. was due to be added to the large cap segment of the market, post it’s successful placement of 200mn class - A common shares in the IPO
Implementation change - not added
March 3rd : A correction is announced by MSCI contrary to their previous statement
Additional analysis on lock-up periods found that 50mn shares issued as part of the 200mn were locked up, and therefore does not meet the free float criteria set by MSCI themselves.
The stock will not be added by MSCI as initially intended on 15 March

2. SNAP Inc. – IPO ($17) – March 2017
“Expected” Index Impact
A clear technical index demand/supply anomaly was not created by the ‘expected’ weight change
INDEX
STOCK
TYPE
ANN
DATE
EFF
CUR
WGT
EST
WGT CHG
USD VALUE
SHARES OF TRADE
DAYS
TO TRADE
MSCI WORLD
Snap Inc.
Addition
02/03/2017
15/03/2017
0.00%
0.013%
35MN
1.4MN
< Less 1
Stock Price
SNAP Inc. – IPO ($17) – March 2017
+63% from IPO Price
Stock borrowing activity and costs
Source: Bloomberg, HSBC Global Asset Management as of March For illustrative purposes only. Past performance is not indicative of future returns
IPO Price Range: $14.00-$16.00
Estimated small weight in the index if included: circa +0.01% for MSCI World
High demand for stock in the IPO resulted in the stock price
Volume peaking on the second trading day at $27.09
High borrowing activity and costs for the stock following the IPO
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