Staging the acts for the IPO circus

, , China, Execution, Hong Kong

As I explained last autumn (read “How fat cats get the cream”), investment banks are complex entities, with many divisions and departments often competing among each other (but sometimes working together) to harvest fees from corporates and institutional investors.

This is no different when it comes to initial public offerings, where two major areas are involved to plough those millions of dollars in takings that so enrage politicians seeking public sympathy to secure their re-elections.

On the one hand, and within what is called the “Chinese wall”, are the “bankers” proper – those executives that are privy to confidential information not generally known to the market. After hard won battles to secure mandates, they are the ones who work over a number of months on structuring deals, and helping to shape businesses so they are fit to become public companies.

These include country bankers, who in Asia generally have the main relationship with the issuer and whose remit is to act as a gatekeeper and as the primary port of call when it comes to bringing new ideas. This includes delivering the various products that a specialist or universal bank has to offer. These can range from mergers and acquisitions to loans or debt capital markets products, to IPOs and the whole suite of equity instruments.

Working in tandem with them are product specialists. They are in charge not only of pitching for new business, but also of helping to execute deals. Some are more active throughout the “corporate finance” execution phase of a transaction (including documentation and discussion with stock exchanges and regulators) while others – like the equity syndicate desk – primarily get involved as investors are contacted and a deal enters its marketing stage.

Also within the Chinese wall are industry or sector specialists, whose role in an IPO is generally to correctly position the company versus its listed peers, and assess its appropriate valuation, using arguments that will help convince investors. Also involved on this side of the firm are in-house lawyers and corporate communications professionals who keep tabs on the media, and ensure that news about the issuer or deal stay coherent and coordinated.

On the other side of the Chinese wall – and therefore not privy to confidential matters – are research analysts, who compile research reports, travel around the world to conduct pre-deal investor education and prepare the ground for the sales effort during bookbuilding. And obviously the brokers, who effectively sell a deal to investors – salespeople, sales-traders and traders, whose day-to-day work consists in talking to institutions, be they sovereign wealth funds, “long-only” funds, tycoons, hedge funds, private banks or even corporations.

Those working at commercial banks and appointed for the public offer portion of a deal do the same with retail investors. And a variety of back-office executives also come into play to ensure all these trades are settled seamlessly – not a simple feat when they involve a company that has never been publicly quoted before.

Some banking or broking groups (for example, Credit Suisse, Goldman Sachs, Nomura or UBS) also own substantial in-house asset managers and wealth management firms, which in this case are treated – in theory at least – like all other investors.

And then there’s the small matter of how fees and commissions are apportioned among these departments. More often than not these days it’s a 50-50 split between those within and outside the Chinese wall, although some houses (generally not those at the top of the league tables) continue the – rather pointless if you ask me – practice of negotiating this on every deal – before some of that money feeds into year-end bonuses. A never-ending cycle of riches.

Philippe Espinasse worked as an investment banker in the US, Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. He is the author of IPO: A Global Guide, published by HKU Press.

[This article was originally published in The South China Morning Post on 9 January 2012 and is reproduced with permission.]

(c) 2012 South China Morning Post Publishers Limited, Hong Kong. All rights reserved.