Boutiques and banks clash

When did your banker last recommend against an execution or transaction for which they are being remunerated?” This leading question awaits prospective clients browsing the website of Ondra Partners, one of a new breed of independent boutique offering “unbiased” advice to companies raising equity, debt or making acquisitions.
Senior bankers at established underwriting banks get angry at any implication they do not always work in a client's interest and in turn question whether firms offering advisory services have the experience and knowledge to be of help to companies.

One senior banker at a London-based firm said: “These firms have very little to offer as they don't have the day-to-day experience of the primary equity markets that you need to make the type of judgments they say they can offer. Frankly, they simply add another level of complexity and expense that is certainly not in the best interests of the client.”

In spite of complaints, there are signs companies in need of raising equity to strengthen their balance sheets and wary of getting it wrong, are frequently seeking independent advice.

Investment advisers Lazard and Rothschild have so far been the main beneficiaries of this, working on some of the largest European equity issues of the year, such as Italian utility Enel's €8 billion deal as well as some of the more complex capital restructurings such as the £1bn equity offering by UK building supplier Wolseley.

These banks say there has also been a resurgence of demand from private equity sponsors wanting to float portfolio companies and from companies and investors considering ways to monetise their equity holdings.

Advisers must tread delicately so their involvement adds to the smooth running of their clients' , rather than creating tensions with corporate brokers and equity capital markets bankers.

David Landman, a partner and chief operating officer for Europe at advisory boutique Perella Weinberg Partners, said: “An adviser should be an advocate for a company and its shareholders during an equity offering, not an adversary of the underwriting banks.”

One of the main jobs of independent advisers on the recent spate of rights issues has been to offer guidance on the structure of equity syndicates and the level of underwriting fees, in part because companies have been keen to make underwriters and bookrunners more accountable.

Underwriter input
Advisers have been asked to draw up underwriting contracts that restrict the banks' ability to hedge their positions and to push for greater transparency about banks' intentions to involve sub-underwriters. Some companies have wanted to take the opportunity to reward supportive shareholders via sub-underwriting fees and have also been keen to include creditors on equity syndicates.

Paul Gismondi, head of capital markets advisory in London at Lazard, said: “Equity offers are relationship building opportunities that don't come about every week. Some companies have needed or wanted to include lending banks in an equity syndicate given that debt is a scarce commodity.”

The risks associated with higher equity market volatility and the weakened balance sheets of many investment banks have made fees a hot topic.

Advisers say there has been a lot of brinkmanship by banks attempting to drive up fees, while some have not been willing or able to commit to hard underwrite deals themselves.

Adam Young, joint global head of equity advisors at Rothschild, said: “The risk appetite of underwriters has varied considerably during the first half of this year and companies have wanted advice on the right line-up of banks to cover the naked risk in case a deal was not fully sub-underwritten.”

There has also been a trend for more unbundling of fees into a base fee plus incentive and discretionary elements and this has led to advisers being asked for their view on how the banks have performed when fees are allocated.

This quality control is important given that the banks with the greatest underwriting capacity might be over-stretched. One head of European equity underwriting said some of the strongest banks are having to leave relatively junior bankers in charge of smaller rights issues because their top bankers are in such demand.

Equity advisers also claim to have been playing a more strategic role at an earlier stage, advising on timing, alternative structures such as a rights issue versus equity placing and the right message about how the proceeds will be used on complex deals involving balance sheet restructuring.

They say preparation, particularly on deals that were not “plain vanilla” equity raisings, have helped get deals done faster with the best chance of success and less chance of leaks.

Gismondi said: “It is a market of windows so it is important that a company is not exposed to the market until it is absolutely certain that it wants to launch a deal. Independent advisers can begin the documentation process before brokers and other banks are brought on board.”

However, bankers at large underwriting firms say preparatory work done by advisers can sometimes be substandard and create more work for bookrunners.

One head of corporate finance based in London said: “We often find this when advisers have been given responsibility for preparing the equity story ahead of a deal. We'll be brought in two weeks before launch and find ourselves with a plan that hasn't been properly market tested and will have to spend a lot of time rewriting the proposal.”

The increased profile of independent boutiques clearly rankles with many equity bankers, who object to the implication that their views might be tainted by self interest, claiming many “independent” advisers are just investment bankers trying to make from the recapitalisation process while there are no mergers and acquisition fees.

Nick Reid, co-head of UK investment banking at UBS, said: “Companies with strong and trusted relationships with their corporate brokers and investment banking advisers tend not to need support from anyone else.”
He said UBS' corporate broking team offers a market view based on experience and relationships with shareholders, the advisory team comprises bankers who complement the broking relationship, undertake financial analysis and help brokers build the equity story, while the ECM team provides institutional relationships and execution expertise.

ECM bankers are also adamant their advice on equity offerings is the best because they are in the “flows” of the market day in, day out, speaking to institutional investors, gleaning information on trading activity and doing deals.
One head of ECM at a US bank said: “Equity advisory firms are only valuable as job creation schemes at a time of dislocation in the market. If you want culinary advice, you ask the chef who's been tasting the food in the kitchen, not the person sitting in the dining room waiting for the meal to be served up.”

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