How You Can Choose the Right Investment Bank

Mururi Wanjuki

Once again, the heavens are open and it is raining IPOs in Kenya. Little is understood about IPOs in Kenya except that they "make money" and that share allocations are handed out in measly doses by mean investment banks. Even much less understood is the concept of investment banks which most of us cannot differentiate from stock brokerage houses.

How do they operate? We are told it will cost five shillings a share. Do they toss a coin to determine this? If you are seated in the boardroom sifting through various investment banks' proposals, both local and foreign, how would you go about choosing which one to use?

Investment banks function as intermediaries in a wide range of financial transactions. They are not simply IPO banks. They are experienced in carrying out projects that, for most companies, take place very rarely, but are critically important.

There are many types of investment banks that range from global full-service firms (such as JP Morgan) to boutique firms that specialise in a particular industry or product (such as First Africa Capital specialising in Mergers & Acquisitions). In Kenya, the market is not deep enough to support such a specialisation and investment banks do not therefore focus on what may be described as niche markets.

Investment banks provide four primary types of services: raising capital, advising in mergers and acquisitions, executing securities sales and trading, and performing general advisory services. Most of the major investment banks are active in each of these categories. Smaller investment banks may specialise in two or three of these categories.

An investment bank can assist a firm in raising funds to achieve a variety of objectives, such as to acquire another company, reduce its debt load, expand existing operations, or for specific project financing. Capital can include some combination of debt, common equity, preferred equity, and hybrid securities such as convertible debt or debt with warrants.

Although many people associate raising capital with public stock offerings, a great deal of capital is actually raised through private placements with institutions, specialised investment funds, and private individuals. The investment bank will work with the client to structure the transaction to meet specific objectives while being attractive to investors.

Investment banks often represent clients in mergers, acquisitions, and divestitures. For example, projects include the acquisition of a specific firm, the sale of a company or a subsidiary of the company, and assistance in identifying, structuring, and executing a merger or joint venture. In each case, the investment bank will provide a thorough analysis of the entity bought or sold, as well as a valuation range and recommended structure.

Investment banks' sales and trading services are primarily relevant only to publicly traded firms, or firms which plan to go public in the near future. Specific functions include making a market in a stock, placing new offerings, and publishing research reports.

In performing this role, the investment bank simply buys and sells securities for people, whether they are equity (stocks), fixed income (bonds), currencies or commodities (oil and gold ).

They will have brokers whom you can call to buy 100 KQ shares, but in most developed markets their clients will typically be money managers, pension fund managers, foreign governments, commercial banks, insurance companies, etc. moving colossal amounts of money.

Their general advisory services will include assignments such as strategic planning, business valuations, assisting in financial restructurings, and providing an opinion as to the fairness of a proposed transaction.

So, who needs an investment bank? Any firm contemplating a significant transaction can benefit from the advice of an investment bank. Although large corporations often have sophisticated finance and corporate development departments, an investment bank provides objectivity, a valuable contact network, allows for efficient use of client personnel, and is vitally interested in seeing the transaction close.

A quality investment banking firm can provide the services required to initiate and execute a major transaction, thereby empowering small to medium sized companies with financial and transaction experience without the addition of permanent overhead. What do you look for when appointing an Investment Bank? Investment banking is a service business, and the client should expect top-notch service from the investment banking firm.

For all functions except sales and trading, the services should go well beyond simply making introductions, or "brokering" a transaction. For example, most projects will include detailed industry and financial analysis, preparation of relevant documentation such as an offering memorandum or presentation to the Board of Directors, assistance with due diligence, negotiating the terms of the transaction, coordinating legal, accounting, and other advisors, and generally assisting in all phases of the project to ensure successful completion.

t is extremely important to make sure that experienced, senior members of the investment banking firm will be active in the project on a day-to-day basis. Depending on the type of transaction, it may be preferable to work with an investment bank that has some background in your specific industry segment. .

Although no reputable investment bank will guarantee success, the firm must have a demonstrated record of closing transactions.

Ability to work quickly. Often, investment banking projects have very specific deadlines, for example when bidding on a company that is for sale. Generally, an investment bank will charge an initial retainer fee, which may be one-time or monthly, with the majority of the fee contingent upon successful completion of the transaction. Having worked on a transaction for your company, the investment bank will be intimately familiar with your business.

After the transaction, a good investment bank should become a trusted business advisor that can be called upon informally for advice and support on an ongoing basis.The prestige and cachet of a top-tier investment bank lends credibility to a transaction, especially an IPO, when the issuer is not well known to the public or to potential investors.

The investment banker has a vested interest in making sure the transaction closes, that the project is completed in an efficient time frame, and with terms that provide maximum value to the client.

At the same time, the client is able to focus on running the business, rather than on the day-to-day details of the transaction, knowing that the transaction is being handled by individuals with experience in executing similar projects.