Investment Dealers Digest – January 7, 2011
Aequitas: Negotiating A Funding Minefield
Two Jefferies veterans want to help corporate officers understand what they should expect when they pick an investment bank
Investment Dealers Digest – Paul Burton, 2011-01-07
Aequitas Advisors, which the former Jefferies & Co. bankers Jonathan Cunningham and David Pritchard started late last year, plans to review, question and analyze proposals from investment banks. The duo said they will advise on and aid in the negotiation of deal fees and deal structures, including whether to issue securities, debt, convertibles or a combination of the three.
“We realized that management needed help,” said Cunningham, who managed the convertible securities division of Jefferies for 18 years. “Wall Street, over the past two years, has made it clear that their interests come before everyone else’s. The system is inherently conflicted when a bank represents both buyer and seller.” However, “we’re not saying Wall Street is broken, but it needs to be tweaked.”
He and Pritchard said they hope to reach out to a potential client as consultants soon after it decides to raise money through a debt or stock sale. At this point, they say, the competitive dynamics among banks are strongest, and companies planning a transaction are in the best position to question bankers and understand what an underwriter will do for the issuer.
“We have familiarity across the capital markets spectrum – equity, equity-linked high-yield and bank debt – and will consider the pros, cons and dynamics of each,” Cunningham said. The two executives say the fact that many banking firms have inherent conflicts makes the process of hiring one risky for inexperienced clients.
“The bottom line is that the customer is always right, but banks serve many customers. Our role will be to sit squarely on the side of management without allegiance to anybody,” said Pritchard.
Pritchard and Cunningham are their firm’s sole backers, though they would not reveal how much startup money they spent. The two rent office space at the headquarters of the private-equity firm Basso Capital Management. “Right now, we’re not a capital-intensive business,” Pritchard said. Aequitas aims to consult public companies with enterprise values of up to $2 billion, though Cunningham said: “We are agnostic about the size of the company, the industry, and the securities they want to issue. We don’t like to draw lines.”
Aequitas expects two-thirds to three-quarters of its advisory work to come from firms that want to raise capital through the sale of equity and debt. It also will help issuers plan convertible debt offerings.
“We are not about pushing back and saying ‘No.’ But we want to help companies avoid pitfalls,” Pritchard said.
Cunningham said many of his firm’s assignments could be related to corporate debt issuance. “Over the next two years, there will be much refinancing of debt,” and many businesses could sell stock for that purpose, he said.
Craig Stevenson, a 35-year shipping industry banker and the chairman and chief executive of Diamond S Shipping of Greenwich, Conn., was chairman and CEO of the oil-tanker owner OMI Corp. when he worked with Pritchard. In 2004, OMI hired Jefferies to price convertible senior notes at 2.875% in a private placement.
“When you start talking converts, Dave is one of the most knowledgeable guys I’ve come across,” Stevenson said. The note placement “gave us the opportunity to repurchase a substantial number of shares of our common stock at an attractive fixed price,” he said.
Aequitas has one client, which it would not identify. “If we have five or six engagements in our first year – and by engagements, we mean executed transactions – we’ll be successful in starting out,” Cunningham said.
Nicholas Kirk, a managing director at the New York advisory firm Hickory Group LLC, said Aequitas would be an ideal adviser for middle-market firms.
“There’s a need for thoughtful, intellectual advice that’s free of conflict. … A company that’s middle market, in the growth segment, needs the same advice [as a large corporation] and more. They’re fighting for market share, and they have a tougher challenge by the bent of their size,” said Kirk. “These folks need a much higher level of representation.”
Cunningham acknowledged the difficulties of hanging out a shingle in an industry rife with marquee names. “We’ll be up against internal dynamics, among other things,” he said. “We’ll have, for example, a CFO who has done business with certain bankers for years, saying, ‘Why do I have to hire this other firm?’ We could get derailed early by just that.”
He said Aequitas does not expect to expand its ranks beyond its two founders in the short term. “We could put 10 to 15 staffers in place immediately, but our fees would have to be higher, and our ability to tread water and grow the business right would get compromised.”
However, in the long term, it does intend to add staff as it builds clients and reinvests money into the business. “The type of people we would hire is someone comfortable with our client-centric focus,”said Cunningham, 48, who retired in 2008 from Jefferies, where was involved with the structuring, placement and trading of equity, equity-linked and debt transactions.
Before Jefferies, he was the head of equity and derivatives trading at Commonwealth Edison in Chicago. He is an elected trustee for the village of Pleasantville, N.Y., and once served as its deputy mayor.
In 1997, Cunningham hired Pritchard, now 45, as an institutional salesman at Jefferies. Pritchard was there for 10 years and rose to managing director and head of its convertible securities operation. He has also worked at Bear Stearns, the research and sales boutique Parallax Group and CIBC Capital Markets.
Cunningham expects “the vast majority” of clients to be publicly traded. Private companies or those owned by private-equity firms are “not our sweet spot,” he said. “It’s a harder sphere to break into.”
For Aequitas, named after the Roman goddess of fair trade, the biggest challenge is “how to get the story out that we have a pretty specialized set of skills,” Cunningham said. “We won’t succeed if we don’t add value. We need to have clients and prospective clients saying, ‘We’ve got to use this guy.’”