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Investment Banking Road Shows: Marketing and Distribution

Tapping the Capital Markets

Clients of the investment bank, whether corporates, governments or organizations, look to the investment bank for executing their transactions in the capital markets. Whether this is to raise equity (through an intitial public offering or seasoned equity offering/follow-on offering) or debt (a maiden debt offering or experienced issuer), they will rely on the investment banks to reach out to investors and coordinate the transaction.

When people think of the top tier investment banks in Goldman Sachs, Morgan Stanley, JP Morgan, Merrill Lynch and Credit Suisse, on one hand they are being hired because of their experience in the process, idea generation, advisory services and ample demonstrated execution. However a key component of this execution is their connections on the buy side and how efficient their distribution channels are.

Investment Banking Distribution Capabilities

The question is what are you trying to market, who on the buy side would be interested in what you have to offer and how many of these buy side accounts are our sales team in regular contact with. If the investment bank can answer all of these questions but do not have strong buy side relationships, they lose. In order to syndicate a large bond offering, they should have Fidelity Investments, PIMCO or Prudential on the other line with a good sales pitch to make sure their part of the book that is being syndicated gets the right demand so that the total issue is oversubscribed.

An investment bank that does not have a strong distribution network will not be selected to lead (lead left bookrunner) on an IPO, follow-on or debt syndicate.

Obviously, different offerings will have differing natural holders or investors. An investment bank looking to clear a big equity issuance with a global multinational should find no shortage of buyers with large institutional investors such as Blackrock or Federated Investors. A smaller name may be better handled by a regional mid-market bank such as Suntrust (SRH) who have strong networks and can reach out to investors that will take smaller bite sizes (a smaller equity issue could be swallowed whole by a large investor, which they would not want).

For more niche instruments such as convertible debentures, high yield bonds – especially more structured bonds (usually the more distressed end of the spectrum) with payment-in-kind interest and equity warrants, preferred shares, mandatory convertible bonds and prefs, hybrid capital and all of the more exotic capital stack components, the respective distribution teams have to know the hedge fund and private equity universe well, as well as the alternative investing arms of major asset managers.

Investment banks need to solicit feedback and be in constant dialogue with their buy side accounts to see what they are underweight in and overweight in and what they do and do not want in their portfolios. They have to be familiar with their mandates and understand what is a good fit and what is not (including what size and what provisions they like to see).

When the meeting comes, if the investment bank constantly sets up meetings with potential issuers that do not fit the institutional investor’s agenda, they are going to start ignoring that investment bank (unless they are just taking meetings to scrub market intel from the issuer as opposed to actually investing).

Broadening the Investor Base

As with any other market, capital markets are more favorable to the supply when there is more demand. As such, a corporate that is based out of the Chicagoland area where there is more awareness for regional industrial firms may be well suited going to other asset manager hotspots such as Boston, New York, Houston, Miami, San Francisco, Los Angeles and Washington DC and sharing their story. Reaching out to more institutional investors means that the demand curve for the name shifts right, which means in theory higher price for equities and bonds (although in terms of bonds we would be thinking of this as a lower yield or coupon and lower cost of debt).

Regional bias is a problem for investors and issuers alike – even in domestic markets such as the USA, portfolio managers have been found to invest more heavily in companies that they recognize – which will usually be in the area that they work in (Pacific Northwest versus California versus Midwest versus South versus Northeast).

Domestic bias or home bias is even more prevalent – for instance most Canadians have a predominantly Canadian portfolio despite Canada making up less than 5% of total global equities. The Canadian stock market is not necessarily representative of the Canadian economy either, with the index heavily weighted towards financials and energy and with a disproportionate overrepresentation of materials stocks (mining).

When Do Investment Bankers Go On Deal Road Shows and Non Deal Road Shows

Road shows can be a great way to reach out to new investors if corporates are looking to find new buyers or equity or to find new debt issuers – possibly in a different currency, as long as they are able to swap back to their functional currency. It makes sense to build out a curve in USD debt as well as Euro debt so that future issuances will have a reference obligation to anchor the next issue on.

Obviously, the investable universe is huge, so portfolio managers at large asset management firms are happy to take meetings with management if they are interested at first glance to get a deeper dive and answer questions that retail investors would not easily have access to. It is also a way to see whether or not they find the management reliable and trustworthy.

It is not in the day to day responsibilities of most corporates and governments to set up meetings with the appropriate institutional investors. This is coordinated by the investment banking coverage team for the client and their relevant product bankers (DCM, LevFin, ECM, Equity-Linked) and the syndicate partners/sales guys (who sit on the trading floor and are generally behind the Chinese Wall – so they do not have access to insider information and will get the same information as the buy side investors, although they will refine how the story is told to resonate with investors).

So the road show may entail the investment bankers educating the sales team using only public information before they go reach out to their buy side accounts. The client and the investment bank then go on a road show using public information where they are whisked off from major city to major city to be put in front of investors with a schedule like this:

Day 1 Boston
9AM: Fidelity Investments
10:30AM Bain Capital
12PM State Street (Lunch)

and so on…

Day 2 and 3 in New York and Days 4 and 5 on the West Coast

Dinner is usually with the bankers to recap and to gather any feedback from the sales teams when they reach out to the buy side accounts for what they would expect and how much money they would be willing to commit.

Debt Capital MarketsAccessing Leveraged Capital Markets – Part II · Accessing Leveraged Capital Markets – Part I · Introduction to Green Bonds · Introduction to High Yield Bonds · Acquisition Finance: Bullet Debt · Working in Treasury · Debt Capital Markets Analyst and Associate Work · Interview with: Credit Rating Agency Analyst · Introduction to Convertible Securities · Investment Banking Credit Ratings Advisory · Differences Between Leveraged Finance and DCM · Early Bond Redemption Analysis · Hedging Interest Rate Risk · Hybrid Securities / Hybrid Debt / Subordinated Debt · Debt Refinancing Options for Issuers ·
Equity Capital MarketsPreferred Shares Primer · A Comparison Of Spin-Outs Versus Carve-Out IPOs: Part II · Subscription Receipts in Acquisition Finance · Investment Bankers Love Equity · Acquisition Finance: Equity Consideration · Block Trades/Block Sales · Dividend Reinvestment Plans (DRIP) · Introduction to Convertible Securities ·
ex investment banking associate

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