If you are a healthcare company executive who is contemplating, in the process of, or has completed an IPO, chances are you have met with a number of investment banks. In these meetings, each bank shows a varying number of league tables that position the bank in a positive light relative to its peers. The data presented is useful for finding banks active in your space, but the parameters defining the table can be adjusted to portray any institution in a position of relative strength. The bottom line is that investment banks are good at what they do, and all of their bankers are bright, diligent, capable, client-focused, and extremely hard-working professionals. Without these attributes, they would not be in such a role.
However, they are not all the same.
In conducting your due diligence on investment banks, look beyond the league table and take a multifactor approach. Following are five areas to explore in your process:
- How is the banking franchise perceived by the investment community? In the capital markets setting, an investment banking franchise is comprised of multiple parts that act in unison to complete an IPO, and each part has a distinctive and important role in the process. To put it simply, while the bankers structure the offering and prepare the materials, the analyst, sales force, and traders are out aggressively marketing the offering to institutional investors. This investor-facing segment of the franchise is critical to the offering’s success and also an area where you, as an executive of a healthcare company, should focus some of your attention in the due diligence process.
An investment bank perception study is an effective way to do this, as it gauges the strength of the franchise from the investor’s standpoint. Following are some of the points you should touch upon:
- Does the investor have a regular dialogue with the analyst?
- Does the investor monitor and consider the analyst’s opinions in its investment process?
- Does the analyst’s published research and commentary have an impact on the sector or specific companies covered?
- What are the analyst’s strengths? Stock picking? Industry/sector expertise? Written research? Relationships with management teams?
- Are the offerings priced, traded, and stabilized effectively?
- Does the bank typically sponsor offerings that are well-received by investors?
- Spend time familiarizing yourself with the analysts of banks you are considering. Read their research and interview them on their style, interaction with investors, and collaboration with their sales force. The bankers will offer the best advice on corporate actions where necessary, but the analyst will always be visible — quarter in and quarter out. The analyst will be the resource that gets your story to the far reaches of the investment community (and quite possibly the first resource used by investors considering a new position).
- Take a good look at the sales force structure. The salespeople are the relationship managers between their bank and the investors that will ultimately buy your offering. Key questions to ask your bankers include: How big is the sales force? How are they broken down by geography and business segments? How tenured or experienced is the average salesperson at their respective bank? Are they regularly exposed to your particular vertical within the healthcare sector? Do they have a good dialogue with investors that care in said vertical? Is there a specialized sales force that focuses solely on healthcare?
- Do not overlook the trading function. Trading is an extremely important aspect of the IPO and can reveal a lot about the bank’s ability to conduct an offering and support it in the aftermarket. Look at the bank’s trading volume for companies comparable to yours. Is it making aggressive markets and committing capital to capture market share in those issues? The more market share it captures, the more market intelligence it has and the better it can support your company’s shares and offer specific, tangible market insight.
- Build a syndicate that is complementary. As you assemble your syndicate of investment banks, choose members who will complement one another. Maybe you pick a firm whose analyst is the so-called “ax” in your particular arena — be it a therapeutic space, a specialized medical technology or diagnostic, a service that enhances patient care, or a technology that reduces costs for healthcare systems. Supplement that choice with a niche player whose analysts’ written work is highly regarded on the buy side and maybe a regional player that can influence investors in an important market. Include banks with strong wealth and retail franchises and larger global banks that can touch offshore investors and expand the reach of your offering.
Investment banks are capable institutions with hard-working professionals, and all of them strive to put clients first and work in the best interests of those clients. They’re not all the same, however, and it is important to find the best banking group for your specific company that will support you over the long haul.
As your partner, plenty of banks can help you complete an IPO, but only those with highly regarded investor-facing franchises can help you succeed as a public company.