Investment Banking Request for Proposal
In the eternal quest for the next sale, the request for proposal (“RFP”) is a very important part of boosting the probability of a transaction where the investment banker gets paid.
A request for proposal is not unique to investment banking. These are fairly standard solicitations across the business world, whether you would like someone to design a building for you or fix your sink. Someone who is looking to contract work to be done will ask potential plumbers to give them a quote, their intended method, other options they would consider and some background on their plumbing business. A government that would like to build a new bridge will ask engineering firms to give them timing, their intended structures and price ranges, qualifications and any other considerations.
The investment banking version is distinct depending on what the nature of the ask is – however, due to the certainty of the fee involved, the quantum of work that goes into a response to the RFP can be commensurately large.
Winning the Sell Side Mandate
For an M&A transaction, the investment bank that represents the seller is 90% sure that they will end up selling either an asset or the whole company, which means that they can be reasonably assured of worthwhile compensation. Should buyers not produce a value that is acceptable to the seller, the investment bank will generally have received a monthly work fee to compensate them for their attention to the project.
For investment banks representing the buyer, depending on how broad the process is (how many potential buyers are solicited), the probability of winning can be minute.
As such, investment banks are heavily incentivized to win before the process starts by having the best response to the RFP and getting engaged exclusively with the selling party.
Case Study: RFP for Asset Sale Considerations
Christina owns a portfolio of chain stores, including one that specializes in high-end jewellery from brands such as Van Cleefs and Cartier. As most of her chain stores specialize in consumer staples, Christina decides that the luxury chain is non-core to her portfolio and considers a sale so that she can streamline her portfolio and take advantage of what she has heard of lofty valuations for luxury good sellers due to a booming global economy and rising affluence in permanent resident demographics.
Christina sends an RFP letter to several investment banks, asking for:
- A market update for luxury goods – jewellery in particular – and resellers
- The investment bank’s prior experience brokering transactions in this market
- The potential strategic buyers that would be interested and what they would be willing to pay for these assets
- The potential financial buyers that would be interested (private equity firms) and what transaction values would clear hurdles for them
- Other alternatives to monetizing the portfolio
- The investment bank’s proposed compensation for representing the seller
- The nature of the process that the investment bank would recommend, whether broad (open to many) or targeted (handpicked buyers), how long it would take and what time commitment Christina would require for the sale process where she cannot focus on running her business
Once the RFPs are fired off, investment banks roll up their sleeves and put together comprehensive pitch books addressing all of the above topics via public information and precedent transactions that they have worked on or observed on the street.
Investment Banking Response to RFP
The banks pitch books will generally be structured along the same narrative, usually following an order than resembles the following:
- Market Update
- What has happened in the luxury goods space in terms of total market spend?
- Where is the market growth coming from?
- What are some catalysts going forward?
- What are some prevalent trends?
- Value Considerations
- What have previous luxury good chains sold for as a multiple of the cash flow that they generate? (Precedent Transactions)
- What are current luxury goods sellers trading at if they are trading on the open market? (Comparable Companies Analysis)
- What is the firm worth from an intrinsic value perspective? (Discounted Cash Flow)
- What would someone who wanted to conduct a leveraged buyout of these assets be able to get in terms of financing and what would that translate to in terms of a realized return
This may all be communicated through indicative value ranges expressed via a football field chart.
- Potential Buyers
- What strategic buyers are likely to be interested and at what price?
- Are they willing to pay in excess of their trading multiples?
- Are some of them good fits but have other activities going on?
- They are looking to sell instead of buy at the moment
- They are overleveraged and will not be able to attain acceptable financing terms
- The assets do not fit with their publicly communicated strategy
- They may have difficulties clearing anti-trust law as the government feels the industry will be too concentrated in the hands of a few
- What financial buyers are interested and at what price?
- What is their hurdle rate? 15% for safe, stable assets, 20-25% for riskier assets?
- What strategic buyers are likely to be interested and at what price?
- Strategic Alternatives
- Could Christina consider a sale/leaseback and retain operatorship for a fixed fee or percentage of proceeds if the financial buyer is not an expert?
- Could this be marketed with something else?
- Could only a portion of the portfolio be sold instead of in whole?
- Can Christina sell the business but retain the real estate and negotiate long-term rent?
- Process Overview – The time and steps required for the investment bank to market the assets, including anyone else that may need to be hired (lawyers, virtual data room)
- Fee Proposal – What the investment bank proposes their compensation will be as a % of the transaction value as well as for time worked and expense reimbursement – the smaller the transaction value, the larger the % fee will be
- Deal Team and Credentials – the investment bank’s representatives dedicated to the process and their prior relevant work experience as well as deals that they have transacted in the space, where the bank ranks overall in terms of transaction volume in a league table
With glossy new pitch books in tow, the relationship manager (usually the executive director or managing director) will then have a meeting scheduled with the seller, where this meeting will be lined up with all the other banks. This is the bake off or beauty contest.
Why is this called bake off or beauty pageant? It is because all participants line up and you get to try their chocolate pudding. Who has the best chocolate pudding? You are the winner! Same thing with the beauty contest, but slightly less creepy. Do you actually bake pudding? I would not know.
After the bake off, the Christina will engage with the lucky investment bank to sell the assets via the signing of an engagement letter.
Engaging with an Investment Bank and Next Steps
Sometimes the bank that wins the bake-off was chosen in advance. For example, Morgan Stanley may have already been pre-emptively chosen by the seller to market the assets, but they send out RFPs anyway for information gathering as these RFP responses can be robust. It can still be worthwhile to put together a comprehensive response to RFP even if the investment bank does not win because materials can be used for future materials and market commentary (including recycling content for representing the buyer in the same process) and because the seller may be impressed with the content and use the bank for future mandates.
If bankers lose the RFP, analysts and associates will let out a large collective sigh if the relationship manager is inclined to pair up with a prospective buyer to purchase the assets. This is a much longer process with a far lower probability of success. Nonetheless, the bankers are already acquainted with the assets and will look to engage with a likely buyer with access to financing so that the probability of winning is maximized.