UK institutional trade bodies, supported by a raft of leading asset management firms, have started a consultation over whether they are paid enough to sub-underwrite rights issues.
Standard Life, Schroders, Fidelity and Investec Asset Management are among the managers supporting the probe, led by Douglas Ferrans, chairman of the Investment Management Association trade body. Ferrans said: “There is a belief out there that the banks are ripping off shareholders.”
The Office of Fair Trading is currently conducting a preliminary investigation into overall investment banking fees. Ferrans said: “We shall take care to ensure that the Office of Fair Trading is kept in the loop.”
Investors are unhappy because they believe the proportion of commission they receive as sub-underwriters has fallen dramatically in recent years. They say the risks being taken by bank underwriters are minimal.
Ten years ago, sub-underwriters were paid 1.25% out of 2%, according to the Association of British Insurers. They are now collecting 1.75% out of 3.5%, forced up during the credit crisis, it added.
Bankers argue that sub-underwriting fees reflect the willingness of the market to take the going rate. One banking industry source familiar with the consultation said: “Each rights issue is a separate negotiation.” He added fees reflected the work done on each transaction. He disputed the 3.5% figure, saying: “I would say it is actually between 2% and 3%.”
Ferrans said: “We shall be taking apart every single source of data, including rights issue documents.”
The average discount at which new shares are issued to the ex-rights price has risen from 20% to 25% to 40%, according to the ABI. This keeps risks down, even in volatile markets.
Prudential is paying 3.5%, with sub-underwriters rather better favoured with 2%. National Grid is paying 3% with sub-underwriting fees reverting to 1.5%, according to a banker working on the deal.
Ferrans said his consultation was likely to investigate alternative ways of raising equity finance. This would include the direct syndication of issues to investors, with Lazard among the banks willing to help. The banking source said: “You can’t do this without a bank in control. The deal would leak.”
The Ferrans consultation will be overseen by the Institutional Investor Council, an executive arm to the Institutional Shareholders Committee. It speaks for the ABI, IMA, National Association of Pension Funds and Association of Investment Companies.
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