Corporate finance fee structures: still working?

Recent conversations reveal private equity practitioners increasingly conscious of the burgeoning boards and rising number of partners at large corporate finance houses. There is a growing awareness that this set of high-level personnel demands big pay cheques, meaning the pressure to bring in fees might cloud an adviser's judgement as to whether a deal should go ahead.

As the M&A landscape has shifted, the service provided by corporate finance has been forced to adapt. Uncertainty, a lack of confidence and aversion to risk have all been key themes in deal-doing over the last five years. This has caused transaction times to stretch out for months instead of weeks, in some cases spanning over years. Rather than simply facilitating the deal, acting as the middle man between buyer and seller, corporate financiers must be more solution-focused.

This monumental shift is neatly highlighted by EY's restructure. "We've had to become more focused on corporate finance in a broader sense; it's not just a transaction anymore," explains Alex Gaunt, partner in the recently created operational transaction services (OTS) team at EY.

Can corpfin advice truly be trusted anymore if it is laden with so much risk?

Gaunt says the conversation now centres on a capital agenda (rather than a capital event), the key difference being that an agenda encompasses all forms of capital management, including recapitalisation and refinancings as well as acquisitions and disposals. "We have to think in the same way as the client," says Gaunt. "That's the real challenge. Everyone is more focused on delivering cash and optimising stakeholder returns, and this has driven a leaner market. It has really changed us."

As well as fewer deals and a heightened sense of apprehension towards transactions, the clients have also changed. While numerous buyout houses cease to invest and zombie funds abound, bigger fish such as Omers have entered the larger end of the market. "We're continuing to see globalisation; UK funds are looking further afield and Asia is increasingly looking into Europe," says Gaunt. This means that, even for deals over the £50m mark, an international angle is crucial. Arguably, this should play into the hands of the larger accountancy firms, all of which have the global reach and resources to cater for these sorts of transactions.

But, the smaller players have not been blind to this international progression either. Says Phil Adams, CEO of Altium: "It is increasingly important for us to demonstrate reach across international markets, particularly for buyers. We have recently strengthened our reach considerably, entering into strong new partnerships in India and the US." Altium's core activity is in the £50-500m range.

Two-track mind
Much like the bifurcation witnessed in the private equity market, corporate finance houses are moving in the same direction, with larger players focusing on sheer scale, resources and a global presence, while a swathe of smaller players are narrowing their focus on particular sectors, geographies and in some cases service offerings.

Indeed, Rothschild, known for being a European powerhouse, sees a large proportion of dealflow coming through its Manchester office. Houses such as Clearwater Corporate Finance and GP Bullhound, on the other hand, have made a name for themselves as the go-to houses in their respective sectors.

While the larger accountancy firms have many strings to their bows, able to offer clients access to various forms of finance, others are taking a more specialised route. Canaccord Genuity has been a dominant force in private equity-backed IPOs this year. "We have been through an education process over the public markets, and we see it as a good exit route for certain portfolio companies," says Jacques Callaghan, deputy head of European investment at Canaccord Genuity. "When GPs are seeking advice we can offer an M&A and equity capital markets service." 

And according to Callaghan, this offering is crucial for the future of the market: "There are a number of privately owned and private equity-owned companies that are considering their optimal exit routes; our ability to assist them with both a sale process and an IPO or a dual-track process is an important differentiator."

From looking at just this handful of firms, it is clear the corporate finance community is adapting to the tougher M&A environment. However, as pressure to put money to work increases for GPs, corporate finance houses are understandably facing deeper scrutiny. In today's market, both investments and exits are facing mounting pressure – creating growth, profit and delivering decent returns are paramount. Therefore, as belts continue to be tightened across the industry, perhaps now is the time to question the traditional fee structure.

According to Stuart Marcy, director at Menzies Corporate Finance: "Corporate finance is expected to take the risk, even though there are countless reasons as to why a deal could fall over that don't involve the advisers."

Chairman of BGF, BBA Aviation and Invensys Sir Nigel Rudd even conceded that it is all too easy to be tempted by chunky fees over providing the best advice. Speaking at the recent ICAEW Corporate Finance Faculty event in London, keynote speaker Rudd made sure to remind the industry it must uphold its honesty and integrity if it is to survive.

Surely an industry as wide-spread and dominant as corporate finance should not need reminding that it must act in an honest manner.

Unfortunately, however, the traditional fee structure has not been adapted as the industry has evolved, and understandably so – for this to happen it would require the agreement and coming together of all corporate finance houses, potentially on a global scale. 

Until the industry acts on this in a unified manner, the survival and success of corporate finance has to be rooted in trust and integrity. As Jonathan Boyers, corporate finance partner of KPMG asserts: "The asset must go to the right buyer, whoever advises on the deal."

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• Advisory
• Ernst & Young
• Rothschild
• KPMG
• Top story