banks are conflicted, according to Jenny Anderson today.
They get large fees from advising private-equity shops, while at the same time
they’re raising their own private-equity funds to compete with them. The consequences
can be unpleasant:
The bank has an obligation to the investors in its fund to get the best deal,
and that can often be different from the obligation they have to shareholders,
which is to make sure that [it] maintains its franchise of offering chief
executives the best possible advice — that is, advice free of motives
from a bank on the prowl for deals.
There was a time when banks were advisers. Then they advised and financed.
Now they advise, finance, invest. Logic would suggest that if the banks truly
had their clients’ interests at heart, the banks would stick to advising
and financing, hardly low-fee businesses.
Well, it depends on what you mean by "low". The fees that banks charge
are high if you look at them on an absolute level: millions of dollars per deal,
hourly rates in the quadruple figures. On the other hand, if you compare fee
income to all the other income that a bank such as Goldman Sachs brings in,
it’s tiny. No one can make billions of dollars a quarter on fee income alone.
Banks have shareholders, is the problem, and shareholders want earnings growth,
and pure fee-based investment banking is simply not a business where banks can
increase their earnings quarter after quarter. It’s possible for small advisory
boutiques to sit on the financing and investing sidelines – and some very
old and venerable names such as NM Rothschild do just that.
But they tend not to be publicly-listed companies. If you submit to the tyranny
of the shareholder, then your clients will necessarily always come second.