Buttonhole a corporate broker over an OBE (one bottle each) lunch about what exactly he does for a living, and his patter will go something like this.
In the stockbroking game, he’s the relationship manager between the plcs that his shop calls clients and the market. The corporate broker, 18st of braces and bonhomie, quaffing the old red infuriator like tap water and telling gags about how his wife’s so fat that when she fell down the stairs he thought EastEnders was starting, is a chief executive’s eyes and ears in the market.
He’s the one telling the boss that the firm has a fan club out there. Fund managers are panting for them. Or not. That fan club, perhaps, may need a little work.
Or whether the company could raise money. Or not. There could be a situation in a particular division of the business that needs sorting before fund managers are comfortable chucking your money behind it.
Fund managers back lots of companies and individual chief executives can’t always get in front of them whenever they’d like. Besides, the custodians of our pensions and savings often prefer to talk to the company one step removed, through the corporate broker. Safer that way. Less likely that the flatfoots at the Financial Conduct Authority will take umbrage about the fund manager possibly knowing something that he or she shouldn’t.
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Trouble is, like so much else about the way the City has always gone about its business, the regulator has decided it’s iffy. “Sounding out” pension or hedge fund managers ahead of time, so the FCA warns, could allow insider dealing to take place. Or market manipulation.
Sounding out happens for any number of reasons, but usually when a company’s after some dough. Say you’re the boss of a thumping great Footsie beast and you fancy buying a little growth with a spot of mega-M&A. However many times you check that the numbers stack up, you need to have your shareholders on board. Otherwise, the deal’s stillborn and you look like a div in a sharp suit. Again.
Step forward your corporate broker. He’ll tap up a select few investors. The top five, say, who might own a fifth of the company. If he’s smart, and some are, he’ll never stray too far down the register to test the temperature. If spivvy little private client brokers gets wind of a possible fundraising, pound to a penny their even spivvier clients will presciently short the shares ragged, smacking down their price, safe in the knowledge they’ll be able to buy them back cheaper later, during the (usually discounted) cash-call.
Stick, then, to senior fund managers. A corporate broker should know them anyway. He’ll pick up the blower. Or maybe have a quiet word during a scheduled meeting between company and shareholder. Ask some hypothetical questions, shy of detail. Obviously. No one, strictly speaking, is brought “over the wall”, made privvy to price-sensitive info before the great unwashed get told, too. But your corporate broker can come back to you with a pretty informed idea about whether your masterplan’s going to fly.
If it’s a smaller company looking to do something, often there are only a couple of investors who control thick slabs of the business. Without them on board, forget it.
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Is sounding out open to abuse? Of course it is. No matter how abstract the questions, a fund manager would have to be thick as a bucket of pig manure (and not all of them are) not to come away with a fairly clear idea that something was up. And, yes, he could trade on the back of it.
Most, so the FCA says, aren’t doing enough to make sure abuses can’t happen. And it’s probably right.
But if sounding out could be tightened up, it should not be stamped out. Significant owners of a business rightly should have a say in how it’s run. And, big company or small, a chief executive needs to have a good feel for whether his big shareholders will back his ambitions — and he needs it before the meter starts ticking in the banks and law firms that will hold him to ransom to get his deal done.
Back at the lunch table, the wine waiter uncorks the second bottle, pours a half-inch into a fresh glass. The corporate broker shoves his nose in, gargles claret like Listerine. Only after he nods his approval are both glasses filled.
No one likes surprises. Not him, not fund managers, not companies.