Why all sides need to stop and relax
IT is time for the City to get its act together: it is in danger of ceasing to function as a proper, efficient platform for raising money for firms seeking to go public, an untenable situation. As our special investigation on pages 1-4 of today’s newspaper demonstrates, the market for corporate floats has almost ground to a halt, with the City breaking out into feuding factions. Everybody is blaming everybody else and trust has evaporated. Financiers we have spoken to say that the bad blood between the warring groups is worse than anything seen in living memory, perhaps because tensions that could have been papered over during the boom years have now become unbearable in tougher economic conditions.
Buy-side firms (the fund managers) are angry, claiming that investment banks are giving false hopes to firms seeking to float and pricing their shares too high; some advisers to private equity firms are briefing against investment banks, claiming that new floats are actually being priced too cheaply (yes, really); those seeking funds or to float their firms are upset at the cost of bankers and at the failure to find buyers for many floats; and the investment banks deny that they are operating excessively large, cartel-like syndicates, that the market is insufficiently competitive, that they are too powerful or that they are imposing fees that are too high on firms that are floating while taking on insufficient risk.
There have always been tensions between these four groups of City folk – but they have exploded as a result of the tougher economic and market conditions and the failure of a number of high-profile floats. As the documents we reproduce show, the language used by some has become excessively heated. I don’t believe the claims made in those documents. I’m more sympathetic to the argument made by fund managers complaining that banking fees are too high – but I feel that the market is less closed to new entrants than they seem to think and is therefore not fundamentally uncompetitive. But insults are flying and there is much bad blood. All of this needs to stop.
The extent of the initial public offering (IPO) market’s woes has been camouflaged by the spectacular success of Glencore’s huge float, which propelled the energy trader straight into the FTSE 100 and showered everybody involved on the sell-side with huge riches. It is the exception that confirms the rule. London isn’t New York any longer: there is no long list of sexy companies such as Groupon preparing to float and set to deliver immediate and massive windfalls to investors.
The “City” is a complex ecosystem which many outsiders simply don’t understand. It includes all varieties of bankers, wealth managers, traders and financiers, as well as lawyers, accountants, marketers, business services professionals, corporate executives, technology experts, other advisers and the like. So it was always a nonsense to talk of the City as if it were monolithic.
But as our story today also shows, the City’s financiers themselves are more deeply divided than they have been for years. In many ways, of course, this is a good thing: buy-side firms need to be at odds with sell-side firms, investors need to hold executives to account and so on. But what we are getting now is not the right kind of creative, competitive tension that is required for progress; but instead a debilitating eruption into useless conflict.
Unless investors trust that shares are being offered to them at a sensible price, and that various advisers agree than they can work with each other, the only outcome will be stalemate and a rush by investors to float on easier, more manageable markets such as New York or Hong Kong. This chaos is especially unhelpful to London given that its overall competitiveness is already in decline as a result of higher tax, increased regulation, necessary deleveraging, excessively high inflation and an overall weak economy.
This is not an issue that governments can fix. Not all problems have political solutions. What is needed instead is a cultural shift, for expectations to be readjusted to reality and for trust to reappear.
Somebody should sit the biggest fund managers, private equity firms, investment banks and other advisers in one room and try and knock heads together. Perhaps this could be a task that Xavier Rolet, the London Stock Exchange’s boss, may want to take on – or if not him, another City grandee. But something needs to be done, and this nonsense halted, for the sake of London’s long-term prosperity.
allister.heath@cityam.com
Follow me on Twitter: @allisterheath