IPOs fail to bypass middlemen

But after a year of trying,UK investors and their advisors in London — Europe’s capital markets hub — have yet to secure a single deal.

It’s difficult to organise,that’s the key. You’ve got the price sensitivity of the information,you have got the size of the issue,the number of potential sub-underwriters that you could talk to,one fund manager said.

We would have been quite keen to participate if there had been a suitable candidate to participate at half the fee. But nothing’s cropped up yet,he said.

Big European and Wall Street banks increased underwriting fees at the beginning of 2009,when a spate of crisis-hit companies sought to rebuild capital cushions. And they haven’t come down since,the fund managers say.

Average fees rose to 2.45 percent of the deal size in the period after 2009 from 1.62 percent in the 2006-2008 period,estimates by U.S. consulting firm Freeman & Co show.

Fees are higher on smaller deals,and can go up to 4 percent. Fees are typically shared with sub-underwriters,fund managers who commit to buy the stock.

The level of underwriting fees has increased very significantly over the past few years … (and) has remained remarkably sticky,said Michael McKersie of Britain’s Association of British Insurers (ABI),whose members account for almost 15 percent of investments in the London stock market.

During the worst days of 2009 some deals had been fully sub-underwritten even before they were announced,some of the fund managers said. That means the sub-underwriters carried all the risk in return for only half of the fees and other big investors never got a look-in on the underwriting.

Angered fund managers found a willing ear among politicians and regulators in the run-up to the UK elections,nourished by public outrage over the role that well-paid bankers played in causing the credit crisis.

LOWER FEES

Investment bank Lazard has tapped into the discontent,working on a plan in which fund managers would be the primary underwriters,guaranteeing to buy all the stock and taking on the full risk if the sale went awry.

We’re confident that the structure works,said Charlie Foreman,a capital markets banker at Lazard.

We believe that both long-only institutions of different stripes,be they pension fund managers or fund managers generally are there to do it and we’re waiting for an opportune time to put it in place,he said.

Lazard would get advisory fees for its role,while the fund managers would receive all underwriting fees.

The funds perceive Lazard and similar groups such as Rothschild and Greenhill as more independent than large Wall Street or European investment banks because they are not also acting as underwriters.

But while Lazard and the fund managers it has grouped around it may well do a deal they have yet to threaten the big investment banking houses — despite all the rumblings in the media and the political upheaval.

The ABI is now backing a probe into fees that could end up supporting the Lazard initiative,by looking for ways to make advice more independent from the large equity underwriting houses.

But even McKersie has his doubts about whether finance directors at companies — who may only do an equity sale once or twice in their life time — will sign up for an innovative new way of selling shares that hasn’t been tried before.

(They) are in a position of substantial personal risk. They and their boards are particularly concerned and it’s always safer to a pay a bit more,he said.

Or,as one banker who did a number of emergency rights issues during the height of the crisis,puts it: So what if it is 4 percent? If you were looking to guarantee your survival,that isn’t too much is it?