Teaching an Old Market New Tricks

Financial News

While there is a lot of money to be made in investment banking, there is not a lot of love lost between those who work in the glass towers of the City and Canary Wharf and those who move into small, boutique offices in the greener, grander surroundings of the West End of London and start telling clients about the tricks of the trade.

That is what happened when John St John, ex-chairman of European equity capital markets at Nomura, founded STJ Advisors at the peak of the 2008 financial crisis with a collection of bankers from bulge-bracket investment banks. These included Marcus LeGrice, former head of ECM at Nomura; David Jennison, ex-head of ECM for central Europe, the Middle East & Africa at JP Morgan; and Simon North, former head of European corporate broking at Lehman Brothers.

They started doing the unthinkable - trying to bring transparency into the pricing of initial public offerings. Much of the ill feeling they faced was caused by a presentation that found its way to the hands of the media in the summer of 2011. In it, STJ claimed to be able to boost company valuations in an IPO by up to 30%, and alleged that the bulge-bracket banks were trying to drive down valuations to get deals done.

A senior equity capital markets banker, who declined to be named, said: "I can't believe they wrote that presentation."

One senior European investment banker said: "We've lost a few deals because of them. They only see banks on parameters that are acceptable to them."

But, in their first media interview since being formed, STJ is keen to stress they are not the enemy of the investment banks. Instead, their aim is to help clients deal with the opaqueness within capital markets, and offer advice on how to manage equity and debt placings across the range of capital markets functions: IPOs, blocks trades, rights issues and bonds.

St John, credited with inventing the practice of competitive flotations, still stands by that presentation, but said: "The way the leaked presentation was portrayed was without context. Our aim is to work with the banks to establish a process where key decisions can be made by the issuer with the benefit of entirely transparent market data. It isn’t just about price, it is about optimising the whole process and reaching a situation where issuer, investor and investment banks are happy.

“You have to check that market information is correctly represented to issuers. We try to provide an independent and objective view.”

Data driven

STJ’s selling point is data. Lots of it. During a typical IPO process, it will end up with feedback from all parties involved. For large IPOs, this could be up to 1,000 investors offering two or three pieces of feedback on factors such as pricing and their thoughts on the banks on the deal.

With the collated data from investors, STJ can construct a picture of where investment banks have good relationships and skills, which has the most respected research analysts in each sector and discover whether investment banks are being transparent when they pitch for a place on future deals.

Jennison said: “The question we want to answer is: which research analysts do the portfolio managers who might buy the issuer’s shares most respect… We seek to orient the marketing of an offering to maximise investor coverage and minimise overlap.”

St John said: “There is quite a lot of data we are processing. We aim to clarify potentially contradictory information from different sources.” 

During the deal process, STJ also uses this data to give direction on which banks should ring which fund manager.

One head of equity capital markets spread his arms in disbelief regarding this tactic. He said: “We are a large-scale investment bank. We’ve known these [fund managers] for years. You can’t tell us who to ring or not.”

But STJ is making it work. Fund managers have long complained about the size of a syndicate and being needlessly rung by numerous bankers pitching the same stock. In a Financial News’ survey in mid-2011, 65% of investor respondents said the optimal number of bookrunners on an IPO was one or two. From the beginning of 2010 to the end of 2012, the average syndicate size for the 41 IPOs listed on the London Stock Exchange above £50m was 4.2 banks per deal, according to data from Dealogic.

While Goldman Sachs and JP Morgan can pick up the phone directly to the likes of Fidelity and BlackRock, STJ also likes to hire smaller investment banks when convenient, who may bring regional knowledge to an IPO, thereby broadening the potential investor base, and achieve a better price for the client. 

All this involves a vast amount of interaction with both investment banks and investors. Throughout a deal, data is sent to STJ’s offices in Regent Street, London. At the end of each day, it is all sent to a processing centre in Bangalore, India, and, by the morning, STJ and its client have a new update on how the deal is progressing.

Clients seem to like this approach. Jacobo González-Robatto, the former group chief financial officer of Spanish bank Banco Popular, employed STJ to advise on its €2.5bn rights issue in December 2012, a key test on whether the eurozone banking sector could access capital markets.

He said: “They were extremely knowledgeable about investors. We were very pleased with the outcome and we were glad to use them.”

Right numbers

Several chief executives who employed STJ to help on capital raisings declined to comment. St John even admitted: “Success is a bit of a relative concept… however we certainly have pride that our deals have delivered a lot of success for our clients.”

He added: “We put the interest of the offering ahead of everything else. A win for all participants is what we aim for in a successful offering.”

STJ is especially proud of Dutch cable firm Ziggo’s $1.1bn IPO in March 2012. The shares are currently up 49%, as of last week. Other recent deals include advising private equity firm Advent International on its successful Sfr442m ($478m) placing of ordinary shares in retail firm Dufry in January, and as adviser to Russian firm Brunswick Rail on its $600m Eurobond offering.

Less successful was STJ’s role as an adviser, alongside Lazard, on the €3.3bn IPO of Spanish lender Bankia. Arguably, it was a miracle the IPO took place at all, given the turmoil in the eurozone. But by mid-2012, Bankia was taken over by the Spanish government, becoming the biggest failed bank in the country’s history.

Despite this, one equity markets banker said: “Clients are increasingly feeling the need to have an adviser on board.”

However, one C-suite executive that employed STJ said that a balance was needed when dealing with them. He said: “Sometimes they try and achieve very thin margins on deals, but you have to be careful on the pressure you put on the banks. I wouldn’t advise you to give them a full mandate on a deal, but they give excellent advice on how to manage a deal.”

He added that “they are certainly value for money” and “cheaper” than rivals Rothschild and Lazard.
A head of European capital markets at one of the largest investment banks summed it up: “This is the way many deals work now. I tell my bankers to get over it.”

Expansion plans

It is also not the first time St John has set up an advisory boutique. Before re-joining Nomura as chairman of European equity capital markets in 2007, he launched a dotcom advisory venture called EO.com in 2001 that helped investors apply for new issues of shares online during an IPO, but it collapsed after backers pulled their capital.

His latest venture has grown from eight registered employees at the beginning of January 2010, to just under 40, according to the Financial Conduct Authority register. Many of these are what STJ calls “special advisers”, essentially 22 bankers on retainer. If they bring in a deal, they receive the lion’s share of the income, with the rest going to STJ.

Areas earmarked for expansion include greater traction in Asia and Africa, and investor relations. 
Today, with minimal overheads – small offices in London, Paris, Hong Kong and New York – STJ posted £3m in profits for the year to March 31, 2012, although down from £5m in 2011. In the previous 18 months, from when the firm launched, profits totalled £441,300.

The head of European capital markets said: “They are professionals. They are good at their job. There is no point complaining about it.”

13 May 2013

Expert advice to the most sophisticated issuers.