MY OPENING SALVO a few days back about the growing row between independent IPO advisers and equity underwriters caused quite a reaction. (See “Independent advisers vs investment bankers: Take One” on www.ifre.com). Which was exactly what I had intended.
In essence, it was a fairly righteous call-to-order to two bodies of closely-related professionals who were engaging in an increasingly bad-tempered war of words in the media as recriminations started to fly over the under-performance of some European IPOs.
I’ve got to say, as hard-bitten a sceptic-cum-cynic as I am, I was frankly shocked at how some of the actors in this debate tried to game and influence my views through innuendo, double-talk and tittle-tattle. I had initially concluded that the differences – broad and varied but centred in this case on protecting the independence of research during IPO pitching – were irreconcilable. But on reflection they’re not. Most of the issues that came up during conversations I had on the subject ultimately came down to how they were nuanced and articulated.
If I were to summarise my conclusion to the market professionals involved, it would be: “Grow up, play nicely and get over it”. I reckon I’ve been around long enough to make so bold a call. If investment bankers had been honest during the tech boom of the early 2000s, independent advisers wouldn’t exist in this way. So to the bankers who moan so vocally about advisers, I say this: if you don’t like where this has got to, you as an industry have only yourselves to blame.
The righteousness of my initial comments had the desired effect: the echoes of my indignation were somewhat drowned out by the sound of some of the most vocal interlocutors in my sorry tale rapidly backsliding. “It’s summer. Better things to worry about,” said one senior ECM banker. Said another: “… [this is] embarrassing; so much self-interest in an area where we’re all on the same side.” Indeed.
The baseline issue is this: if issuing clients feel the need to use advisers, that’s their prerogative – even private equity clients, who arguably least need the assistance of advisers but who are among their biggest employers. I’m sure financial sponsors are more than happy to have advisers put the squeeze on banks to come up with the “right” answers. After all, they’re single-mindedly focused on maximising value and hitting IRR targets.
I DID REACH out to the Financial Conduct Authority, as there had been strong inferences that advisers were in effect blackmailing the banks with the carrot of IPO mandates to flout the rules on research and banking separation. This was dismissed as utter nonsense by advisers – or at least by those who didn’t refuse to speak to me! The FCA confirmed that at the present time it was not preparing to launch any investigation into this.
During my due diligence, I dusted off the Spitzer settlement docs to remind myself of the outcome. The Spitzer settlement essentially required:
• Separation of research and investment banking (including communication firewalls)
• Analyst comp based on quality and accuracy of research not IB revenues
• Bankers can’t evaluate analysts
• Bankers have no role in determining companies covered by analysts
• Bankers can’t seek to influence the content of research reports to win or retain IB business
• Independent monitors to ensure compliance
• Enhanced disclosures, including analyst performance
• Provision of third-party independent research
• Furthering of investor education
• Analysts prohibited from participating in IB pitches and roadshows
That final one is the hot potato. While the regulatory steer is clear, the language around this area needs to be tightened up. Can a meeting between adviser and analyst realistically be considered part of a pitch? Absolutely. But by the same token, advisers have a duty to vet the research element, given how central it is to the ultimate outcome.
“Nothing in the Spitzer rules says you can’t have a conversation with an analyst,” one senior adviser told me. “It all depends on how you have that conversation. So you meet them for half an hour to discuss their coverage, general competence, experience, track record, views and knowledge about the sector and the companies they cover. That forms part of the assessment as to which bank to choose. But the research analyst is completely independent; if they’re convinced about something, we can’t stop them from including it in their report.”
It’s completely reasonable for advisers to seek well-regarded, competent and clued-up analysts who are going to have a positive story on a company. That’s doesn’t constitute a breach of the rules. An adviser wants to end up with a body of research that broadly gets the story right based on analysts being armed with correct and relevant information. As long as they don’t force a valuation or a given story down their throats, that’s fine.
SO WHAT ARE my conclusions and suggestions?
1. Advisers are here to stay and have to work with underwriters. Having advisers say that the research rules apply to banks not to them may be correct but is ridiculous. Accountability and responsibility work both ways.
2. Suggesting that adviser IPOs underperform non-adviser IPOs is also ridiculous. Evidence for this is flawed.
3. On the basis that meetings between bankers and research analysts are chaperoned by compliance, I say make independent advisers – which after all are regulated investment banking advisory boutiques – subject to the same rules as broker-dealers around things like analyst meetings and wall-crossing. Chaperoned meetings between advisers and analysts may be gold-plating the process, but it would keep everyone happy.
Banning pre-IPO research as some have suggested is not a solution
4. Banning pre-IPO research as some have suggested is not a solution.
5. Regulators should, however, ban the slightly shady practice some advisers employ of half appointing underwriters until pre-deal research has been written.
6. Advisers have a duty to weigh-in on final allocations. Bankers should acknowledge this and those meetings need to be de-stressed. Conflicts of interest work both ways.
And here’s a final suggestion from Konstantin Dombrowski, who works in issuer relations at SIX Swiss Exchange.
“I may have a solution,” he said. “Why not bring exchanges into the process instead of independent advisers? We are closest to regulators and we operate the secondary markets, hence [we are] perfectly placed to weigh up investor and issuer interests; we are ex-investment bankers and are certainly qualified to provide the required advice; we are not going to argue as strongly on allocations but will add an additional view; we will add independence to the process. And we are not going to charge anything. Boom! Problem solved.”
Comments on a postcard.