My immediate response to the news that Lazard, the boutique investment bank, is to cut 10% of its staff amid a “dealmaking chill,” is that they should cut 10% off the fees they charge to their clients instead. Actually, they should cut a lot more off than that.
I have never been a great fan of investment banks advisory fees having been party to the payment of several eye-watering sums over the years. The City has always been accused of getting its pound of flesh whatever the economic circumstances, and those of us mere mortals probably agree. It’s a club that few of us can join, and it should be called out as such.
For example, the Takeover Panel – through its oversight and governance of the “code” by which parties to a controlled transaction in listed shares must abide – effectively mandates the use of an investment bank in that transaction. Of course, others can advise, but the big transactions always use members of the “club” — is it just a coincidence that many of its secondees come from investment banks, and many will return there, as will some to the magic circle of law firms?
This hardly seems fair or right in our democratic age. If the purpose of the Code is to protect the widows and orphans who own shares in the transacting companies, someone might spare a thought for the cost being borne by those poor souls having to appoint investment banks to follow those rules.
Lazard itself is, arguably, one half of a duopoly if one seeks an independent adviser. Just four or five major banks vie for the crown in the “biggest,” “best,” “most” deal maker tables each year. Such a limited set of providers of services to thousands of listed companies around the world is not knowingly going to lower costs, and the big five know how to charge.
Turning to property, the standard introductory fee for a property transaction was 1% for many years, save perhaps on the larger lot sizes. Competition and limited barriers to entry kept a lid on the ability to charge such high fees, and today clients robustly negotiate the services, so the industry has pretty much adjusted to a lower standard level. This is a good thing for the consumer.
Not so in investment banking, where “benchmark” tables of fees allegedly paid in comparable transactions are regularly trotted out to support the egregious proposals. Some of these benchmarks can show fees of over 4% of the transaction value! I am not aware of equivalent records being kept in the world of real estate. I might suggest that there should be, but my own experience gives me reason to doubt the veracity of those deal-making benchmarks, and I fear that such a record could be counter-productive for the industry. Investment Banks have been getting away with it for years, but there is change afoot.
I was recently considering a corporate property transaction where the level of fees sought by the advisers, was so high that in my view, the whole transaction was no longer economic. It only just worked at the asset price, but when the full friction costs were considered – remember, the bidder typically pays the sellers investment banking costs too – it didn’t wash for the bidder’s shareholders. Which likely means no transaction. The classic question “would you rather have a large slice of no cake or a smaller slice of some cake?” comes to mind.
If I am right, the consequences are quite interesting. In a low growth environment, today’s bidders cannot afford to pay net asset value plus transaction fees to get a deal done, so the level of corporate transactions will likely remain low. If you happen to be a director of a listed company, with your eyes firmly on the best outcome for your shareholders, you might initially conclude that you should take the sell side of any deal, for someone else then pays those egregious fees. But “corporate bids,” where there are any, are now likely going to be at much lower levels than we have hitherto witnessed, making some of the discount to NAV today logical. Whether shareholders will sell at these levels is quite another thing. Why property companies list at all might be another question you should ask, but let’s not go there; just don’t expect any property company IPO’s any time soon.
This could, however, all prove rather good news for property investment agents because there may now be a few more property transactions around as company directors seek the other way of closing the NAV discount, that is by “proving” the valuation of their assets in the market. That makes sense if you judge that the property market valuer is more “right” today than a nervous equity market analyst. For what it is worth, I do.
It follows then that Investment banks will probably cut more staff before this cycle is out. They will have to if they keep to their historic fee levels, for it’s those fees that contribute to those corporate deals not getting done. Not an analysis they will want to hear. Nor that I suggest that they make their services more economic. They might work it out though; it’s one thing when you are an affordable tax on society; quite another when you are taxing yourself out of business.
The Investment Banks have always considered themselves a cut above the property broker – it might be amusing to the latter that some of these corporate advisers could be in rather a lot of trouble. There may even be a few more property transactions to go around.
