How do investment banks calculate their fees?
Been working on an idea, and I need to understand how i-banks charge their clients, especially when it comes to one-time (more expensive) vs recurring (cheaper) fees structuring.
Any relevant ideas on pricing would really help.
Thanks
A really vague question.
For M&A specifically, the fees are reasonably correlated to the size of a deal - more or less banks tend to charge a percentage of the deal size. With that said, a lot of other important factors come to mind, how complex the deal is, the timeline the deal is on, lead adviser or not, etc.
If you want to get an idea of this correlation you can probably just pull a list of last year M&A deals and the respective fees each bank took away.
what the hell are you talking about?
Is the question for equity raises ?
Here's how success fees may look:
Transaction value / Fees as % of transaction value
$10 million or less / 8% to 12%
$10 MM to $25 MM / 4% to 6%
$25 MM to $100 MM / 2% to 3%
$100 MM to $1 Bn / 0.5% to 2%
$1 Bn or more / 0.5%
Fees are often made up of different parts, i.e. a base fee and a success fee of X% of total transaction value, a monthly retainer of several thousands for the time of the process, a discretionary fee (which as the name implies will be paid by the client depending on its satisfaction with the whole process) and a ratchet. A ratchet in this context means that the bank agrees with the client on a specific and realistic transaction value of f.e. €100m and when the bank manages to sell the firm for €120m it will receive X% on the €20m in excess of €100m. Additionally, expenses will be reimbursed. This is for a typical sell-side process with the elite boutique I'm working at.
Let's say a deal happens but is subject to regulatory approval (e.g. CK Hutchinson and O2 currently). What happens to advisory/financing fees should the regulator not approve the transaction -- would bankers not get paid in this case? Thanks all
Generally, the bankers don't get paid if a regulator kill the deal. And great wailing, beating of breasts and gnashing of teeth ensues.
Makes sense. Do investment banks have specific people to maintain relationships with regulatory bodies in order to prevent this from happening? Or is this illegal?
The bidder makes formal applications to the regulator for approval. The relationships which come into play will vary. A lot can turn on who sits on the approval panel and how political those appointments are. I haven't seen banks be the repository for the relationships, but perhaps it does happen elsewhere. Sometimes it's law firms. Sometimes its lobbying firms.
Often the approval process is public and public submissions are made. There's often interest groups who regularly provide submissions, often opposing the deal, hoping to get the bidder to offer guarantees on max price increases etc which will favour customers. Other factors can come into play in the decision eg if the bidder is foreign owned/managed (see, for example, this recent rejection by a regulator http://bloom.bg/1TOqDFXr).
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