Now that blogs are rather out of fashion, I feel compelled to launch one. In part this is because sorting through my in box at year end, I found so much mis-information on a topic near and dear to my heart, that I won't sleep well without throwing some experienced-based observations into the conversation. For instance, I recently saw a blog post about picking bankers for an IPO, that made several assertions with which I beg to differ.
This blog argued that by the time a pre-IPO company is ready to actually hire investment bankers, it's too late to meet new candidates; according to this blog, the competitors should have been fully vetted already. This is really bad advice. It may have been true 30 years ago when banking was "a relationship business" but it is a poor strategy today. Here's why: One of the best ways to realize a salary or title gain on Wall Street is to move firms. In fact every year after bonuses are paid, there is a street wide game of musical chairs. While some firms (Morgan Stanley among others) have seen less turnover than others in recent years, to settle on a bank before it really is time to begin the process is to pack for a vacation by looking at last month's weather forecast. I have yet to attend a bakeoff, even those that were conducted as mere formalities to sanctify pre-existing decisions, where some bank didn't surprise on the upside while another meaningfully underperformed expectations.
Secondly, bankers that have the most time to visit early and often in the period before a deal are sometimes bankers who may have excess time on their hands - never a good sign. Certainly, it helps to have met with banks at least once before a transaction is in sight, just to understand the differences in style, but to have come to any sort of conclusion ahead of the game is almost always a mistake.
If they wanted to, the CEO and CFO of a hot IPO prospect could spend endless time meeting with bankers happy to drop in, but what a massive time sink. Meet the contenders once if you like but spend the bulk of your time building the business. Allocate the time to banks and bankers when there is a decision at hand. That way, you'll know you are evaluating the actual team that will be there in the trenches with you.
A second suggestion this blog made for those picking a team "is be sure to understand the reach of the banks under consideration" and then, it listed a favorite. Well, yes, reach is important, but understand that ALL of the major bulge bracket firms talk everyday to the very same clients. Some of the smaller boutique firms focus their efforts more specifically, by region or by fund description, but there isn't a successful fund manager anywhere who doesn't keep a dialog going with the whole lot of investment banks out there as after all, when investing, more information is always better.
A third point made in this piece was "pick the banker who had a hot hand last year". That is as clever as the old "pick the investment manager who had the hot hand last year". For those who haven't followed the industry, rarely is there a fund that repeats at the top of it's sector. On those rare occasions when a fund did put two back to back winners together, year 3 was generally a clunker. Success rarely translates from year to year. Serious investors evaluate the issue coming to market, not the logo of the bank on the cover, beyond the "tier one", "tier two", and "tier who?” designation. It's the quality of the work, not the color of the logo that matter. The key is not figuring out who had the hot hand last year, it's figuring out who will field the very best team for you this year, on an individual-by-individual basis.
I've passed my self-imposed 600 word limit, so enough. The point is, beware of generalizations, as there is nothing static about investors or investment banks. Nothing beats solid homework on the various banking teams at the time you are ready to hire them to work for you.