Should Investment Bankers and Investor Relations Firms Share A Bed?

Posted by on February 14th, 2012

Yesterday morning I awoke to a headline that blew me away. Rodman & Renshaw, an investment bank that has been ranked as the #1 placement agent of PiPe and Registered Direct financing transactions every year since 2005 (according to their website), announced that they had purchased the assets of The Investor Relations Group, a NY-based investor relations firm focused on micro-cap companies (and from time-to-time a peripheral competitor of my firm, KCSA Strategic Communications).

My first reaction was to immediately share the news with my partners and colleagues. Within a few minutes, the responses came flying in. I can sum up all the replies, for the most part, with one word…. “Wow.”  Having lead a successful investor relations agency for more than a decade, I have worked with Rodman & Renshaw and many, many other investment bankers over the years. I have always had a good relationship with the firm, as do some of my senior executives, and we have made introductions to their bankers when we felt it appropriate for our clients. As a matter of fact, several of my clients, past and present, have completed PiPe or Registered Direct transactions as a result of our introduction to Rodman & Renshaw. Some have turned out well, others less so…. but that’s the market. As an old friend of mine used to say, “it tends to have its ups and downs.”

So, having had a number of interactions with the firm and a good understanding of their role in the micro-cap/small-cap ecosystem, the first question that popped into my head was why would they do that?  The second question that came to mind was a bit more selfish – why in the world would I recommend Rodman & Renshaw to a client now that they are elbowing their way into investor relations and will be competing with us?

Well, the answer to the first question is laid out in the press release announcing the news. According to the release, Rodman & Renshaw can now offer The Investor Relations Group’s clients direct access to capital and all the benefits of their new capital markets platform. This new platform, which claims to eliminate the middle man and reduce the cost of capital for private capital raises, is a solution that will connect issuers directly with investors. Why a leading placement agent (i.e. a middle man) would want to launch a platform that eliminates the middle man is beyond me, but far be it for me to question Rodman & Renshaw’s strategy when it comes to the capital markets. You don’t make it to #1 for the better part of a decade by accident or by making bad strategic decisions.

Now the answer to my second question is actually pretty simple.  We are paid to be objective.  So, if Rodman & Renshaw offer my clients something that can’t be found elsewhere or I believe they are the best suited firm to meet my client’s needs, well, then it’s my responsibility to make an introduction (even if I know that at some point they will likely be pitching my client to leave us and use their newly-acquired firm).  While I think it stinks that I may have to subject some clients to a sales pitch from a competing firm (The Investor Relations Group will retain their name and operate as if it were still independent), I’m supremely confident that our clients recognize what sets us apart from the competition and after all, its about doing the right thing for the client. All the time.

And that’s why I just don’t see the logic for the banker or the IR firm in this deal. On dozens of different occassions in 2011 and two or three times in 2012, our clients or prospects have asked us to assist them in identifying a banker that can help with specific capital needs. Our team dives into the financials, speaks with management, talks with investors and learns the company’s story from “soup to nuts.” Then we research the sell-side community and identify the bankers that are most active in the industry. We look at their tombstones and we evaluate the performance of their company’s stock before and after their financings were completed. We make a short list and then we call the bankers to find the right person in the organization. We interview them for our clients. When all is said and done, we give our clients everything they need to make an educated decision about who to consider as a banking partner. Finally, we arrange the meetings, attend them and help our clients prepare the information that the bankers need to perform their due diligence. At the end of the day, we are a crucial part of the decision, our clients appreciate it and it really does make a difference.

IR firms like ours are hired to provide our clients with objective advice based on experience and expertise. If we were to only recommend our clients to banks that were affiliated with us or that had some recipricol relationship with us, then we wouldn’t have much value at all.  If you agree that objectivity is what makes investor relations counselors like myself and my colleagues at KCSA a valuable partner to our clients, then why would a public company want to hire an investor relations firm that is married to just one banker?

I don’t think they would.

On the other side of the coin, if I were running a public company, what are the odds that my banker will recommend the right IR firm to me if they own an IR firm of their own? Frankly, I think this is going to be very good for business. Sure, I may not get any referral business from Rodman & Renshaw ever again (they have recommended us in the past) but I have to believe that if there were any bankers referring clients to The Investor Relations Group, they will think twice about it now. As they say, “when one door closes, another one opens.”