Looking for an Investment Bank? Don’t Overlook Institutional Sales
When shopping for a major purchase, say for a new home or car, many people wisely draft lists of must-have features and optional nice-to-have features.
Compiling a list of needs and wants is also valuable to companies searching for an investment bank, especially given how frequently they fail to evaluate a key feature: the banks’ institutional sales forces. During my 18 years on Wall Street, I can’t tell you how often I saw companies make the mistake of considering the right sales force a want-to-have feature, when they should have considered it a must-have.
Don’t make that error. Let’s discuss why you need to conduct a quality assessment of the banks’ sales teams, how to do it, and how to make the most of your relationship with the team you ultimately select.
Your investment bank’s sales team will be responsible for sharing your company’s story with the largest institutional buyers in the world — mutual funds, hedge funds, insurance firms, pension funds, and the like. I estimate that there are roughly 400 to 500 of these buyers globally.
At the most basic level, the salesperson’s job is to turn these institutional investors into your shareholders. But as you might expect, this is much more nuanced when we drill down a bit.
Finding the right buyers
Institutional buyers have investment criteria and preferences. Not every stock — not even every good stock — is a fit for all of them. It’s up to deeply informed salespeople with strong relationships to recognize good matches between stocks and buyers, and then to execute deals. Unless your company is the rarest of breeds, it is going to take considerable work to sell your stock.
Salespeople obviously have a critical role to play. Yet company executives often overlook them when searching for the right investment bank to handle their business. Management teams are generally focused on two other vitally important bank functions: origination and proprietary research. CEOs and CFOs are correct to place so much emphasis on these functions, but not at the expense of sales.
To ensure that your bank is as good at sales as it is at investment banking and research, you need to start by asking questions:
- How many years of experience do your salespeople have on average?
- Is their experience relevant to your company? Remember, these people will be telling your story. Will they understand that story in depth?
- Do they have strong relationships with and understand the needs of the major buyers we’re after?
- Do they have deep ties among buyers in geographic areas where we might prove to be more appealing?
- May we meet directly with a salesperson to ask questions? This gives you the opportunity to get a sense of their intellectual curiosity, among other traits.
- How are the salespeople paid? Are they on commission or is their compensation made up of salary and bonus? This is a particularly important question. The answer may have implications regarding motivation.
- How many accounts does each salesperson call on? Are they handling 20 names or 70? A heavier load could result in less attention paid to the stock you care about most — yours.
Your evaluation shouldn’t end with questions, though. It should continue even after you’ve selected a bank.
The value of relationships
When out on the road visiting the offices of institutional buyers with your salesperson, pay close attention to how familiar he or she is with the environment and people who work there — even the administrative staff. If the employees at a buy-side account know your salesperson, he or she is probably spending a lot of time there. That’s a good sign.
Keep this in mind: the finest salespeople are highly enough regarded by institutional buyers that those buyers will come to rely on them. They’ll ask for their advice and trust them enough to act on that input. That kind of relationship takes time to build, which likely will be detectable when you visit.
There are also sources of information that enable you to conduct a quantitative evaluation of your sales folks. For example, you could request data from the bank itself. Alternatively, many big institutional buyers rank investment banks. Inquire how they are rated by, say, Fidelity or T. Rowe Price.
I’m going to conclude with a few quick points:
First, the selection of an investment bank does not mark the end of your work with salespeople. This is an ongoing relationship. Invest the time to get to know each other. When I was an institutional salesman, some of the best and most valuable time I spent was on the road with the CEOs and CFOs of the companies my firm had banking relationships with. Based in part on those relationships and the greater understanding we developed, I came to derive great joy from watching their companies grow and their stock prices appreciate. What’s more, I was better prepared to share their stories with buyers.
Second, even after your company goes public, it is essential that you continue to build and maintain relationships with institutional buyers — and your salespeople represent a key link in this ongoing initiative.
Finally, you need not go it alone. We have gone through this process hundreds of times before. Our advice is based upon decades of Wall Street experience, as well as a unique and deep understanding of the healthcare industry. Please feel free to contact us.
ICR Westwicke is the largest healthcare focused investor relations firm in the country. We provide customized investor relations programs and independent capital markets advice to small and mid-cap healthcare companies.
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