Low fees? No problem, say investment banks

Investment banks have been so keen to get work in a tepid deal environment that they are accepting extremely low fees on deals that may make it hard for them to make a profit.

But the work nevertheless helps their league table ranking, trading desks and reputation, especially if it is government work.

The estimated total fees on the initial public offering of New Zealand’s Meridian Energy Ltd are between 0.7 per cent and 0.9 per cent of the IPO’s total value.

Meridian IPO’s joint lead managers, Craigs Investment Partners, Deutsche Bank AG, Goldman Sachs Group Inc and Macquarie Group Ltd, are expected to get the lion’s share of those fees, which may be up to NZ$3 million for each investment bank.

The NZ government’s sale of its 49 per cent stake in Meridian may be as large as NZ$2 billion.

“There is intense scrutiny in every aspect” of the Meridian IPO, NZ’s Finance Minister Bill English told DataRoom. “There is a strong focus on good process in excess of securities law.”

English and his colleagues at NZ Treasury are especially happy about the fees for Meridian’s IPO when they compare them to the IPO of Queensland rail transport company QR National, now called Aurizon Ltd.

The IPO fee for Aurizon was 1.3 per cent. Credit Suisse Group, Goldman, Bank of America Merrill Lynch, RBS Group and UBS AG were the lead managers of the Aurizon share sale.

“Fees for government work are woefully low,” says a senior equity capital markets banker who pitched to work on the Meridian IPO. “Expenses, excluding labor costs, eat up all the fees you get. That doesn’t mean you wouldn’t gnaw off your right arm for the work.”

The lead managers of the Meridian IPO are not going to be reimbursed for their travel expenses across the Tasman, including the IPO road show, when the company meets investors with its investment bankers.