What Is The Purpose of Having Several Co-Managers With Negligible Economics on a Deal?
Post-MBA guy here with a post-MBA guy question - why exactly is it that some deals have ~90% economics to two or three main heavy hitters and then an additional several co-managers or passive book-runners each taking a 5% allocation? Obviously in these cases the larger banks taking the majority of the allocation could just close out the deal themselves - so why bring along a consortium of others who don’t actually work on the admin side of the deal and don’t provide meaningful/necessary support with distribution?
- research coverage #1
- throwing some bones
- some of the firms are MWBE qualified
Yes, research coverage is big. I think it’s actually illegal to promise research coverage to be on a deal but it’s kind of a wink wink silent understanding that it will happen (I say this because I remember client asking our ECM partner this and he had to give an answer like this)
Diversify the book. MM and regional banks will have relationships with smaller and more regional investors that will diversify the book.
Also the company needs to pay the bank group for relationship purposes. Gotta keep the lenders happy. The banks in the bank group that are far down with only a small amount lent compared to the tier 1 lenders will be your co-mngrs getting the small fee. But the banks rely on these fees to improve the relationship ROE of the loan and to be able to lend to them. If you just pay the big boys up top you’ll piss off the rest of the banks who will all leave the bank group the next refinancing if you’re not going to pay them their share (I was in CB before IB and we had conversations like this all the time; like hey these guys never treat us right in DCM/ECM deals, we never get our fair share, the ROE isn’t good, we’re exiting next refi)
On the topic of diversifying the book - is it seen as an advantage to have smaller allocations to smaller investors versus larger chunks sold to larger investors? Just curious why? Does this ultimately prevent any one shareholder from having too much power or potentially causing a price drop if they sour on their holdings in your company and decide to sell? I would think having as much money possible tied up with strong hands would be more beneficial?
Basically yes to the point above. If you’re selling to only a few of the largest investors then you’re giving the shareholders a lot of control of your company. Power to affect board seats, management selection, direction of the company, etc. Better to have a wide variety of accounts and shareholders where overall ownership %s will be lower
This is all correct except the research promise part. At my BB we guarantee if we are a bookrunner we will pick up research coverage - I think the way this works is because we screen it with our analyst first, and if they are positive on the company and it fits into their coverage, they will agree to be supportive of initiating coverage. This way, it isn’t us telling the analyst to be positive, but rather the analyst telling us if he likes the company on it’s own merit, and from there we would then pursue the deal. If he shoots it down and isn’t supportive, we wouldn’t take the deal, for reputation reasons
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