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Keeping the underwriters honest

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HONG KONG (Dow Jones Investment Banker) – Frustrated with what they increasingly perceive as a conflict of interest, a number of companies and their stakeholders are now engaging independent advisers to assess the work done by their investment banks.

Their concern is that they may not always be getting a fair deal, echoing the views of some major institutions in an inquiry on rights issue fees just published by the Institutional Investor Council in the U.K.

Such advisers do not replace investment banks. They assess the bankers’ work on structuring, marketing, timing, valuation, pricing and allocations – right through to aftermarket management. But because their principals are ECM veterans, they are familiar with the tricks of the trade.

From the investment bankers’ standpoint, these firms can facilitate the flow of information with issuers. Conversely, they may not always be welcome when involved in negotiating the underwriters’ fees. They also make it more difficult for the banks to apply “bait and switch” tactics, where a sharp drop in valuation in the late stage of a transaction is blamed on a reversal of market conditions.

The concept is not new. Advisers have in the past been appointed by governments in privatization offerings, separately from the underwriters. In fact Lilja & Co., an independent firm based in Zurich, was established by an ex-CSFB banker back in 2004.

But there appears to be a growing number of such ventures making their mark in the ECM advisory arena today.

Ondra Partners and STJ Advisors LLP, both London-based, were founded in 2008 and 2009, respectively. Ondra worked on the $1.1 billion IPO of U.K. fund manager Gartmore Group in December 2009, while, last week, STJ advised Danish telecommunications group TDC A/S and its selling shareholders Apax Partners, Blackstone Group LP, KKR & Co., Permira and Providence Equity Partner s on a $1.9 billion placement.

Although few statistics are published in this area, industry sources indicate that 16 out of the 42 European IPOs over $200 million since 2009 (and possibly a higher proportion in the U.S.) were advised by independent firms.

A noted player in this segment is N.M. Rothschild & Sons Ltd. The firm lost the equity underwriting capabilities offered by its joint venture with ABN AMRO when the Dutch bank was acquired by The Royal Bank of Scotland in 2007. Since then, it has focused on ECM advisory work rather than underwriting. Rothschild has worked on several high-profile equity transactions around the world over the last three months, including the $70 billion secondary offering by Brazil’s Petrobras and Vodafone’s $6.6 billion sale of shares in China Mobile Ltd.

“Our value-add is perhaps most evident when it comes to the dynamics of valuation, so that no vacuum of information is created. We want the issue process to remain fully transparent, from the pitching stage right through to investor education and book building — so that issuers are not backed into a corner,” says Claire Suddens-Spiers, Rothschild’s Head of Asian Equity Capital Markets.

In Asia, the practice is also gaining momentum, thanks in particular to a growing flow of cross-border equity deals. A newcomer there is Asia Pacific Advisers Ltd., established in Hong Kong in 2009 by ex- ABN AMRO and Barings banker Richard Orders.

These firms are paid through a combination of retainer fees and discretionary or incentive payouts. Among other things, their role can be to identify the right banks to lead a transaction. Once the book runners are appointed, an adviser will keep tabs on execution and monitor investor education and book building so that securities are marketed widely rather than through confidential or narrow club deals.

It seems like the independents may become an increasingly familiar face at the liar’s poker table.

(Philippe Espinasse worked as an investment banker in the U.S., Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. Visit his website at http://www.ipo-book.com. Readers should be aware that Philippe may own securities related to companies he writes about, may act as a consultant to companies he mentions and may know individuals cited in his articles. To comment on this column, please email djinvesmentbankereditors@dowjones.com)

[This article was originally published on Dow Jones Investment Banker on 16 December 2010 and is reproduced with permission]

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