Capital MarketsTreasury Management

How Corporates Tapping Capital Markets Use Minority and Diversity Firms

By May 28, 2020 No Comments

NeuGroup members discuss benefits, challenges and process as treasury promotes diversity and inclusion.  

Many treasury teams at multinational corporations strive to include firms owned by women, people of color and disabled veterans when selling debt, buying back stock or issuing commercial paper. At a recent NeuGroup meeting focusing on capital markets, members shared their insights on the process of including minority and diversity firms in various transactions.

Formalize the process. The member who kicked off the discussion described her company’s path toward formalizing the process of using minority and diversity firms to underwrite bond deals. Using diversity firms as junior managers initially encountered resistance from some lead managers who declined to fill their orders, she said. But in 2013 the company mandated the inclusion of five to six of the firms in each debt issue, allocating 1% to 2% of the bonds to them.

  • “There are about 20 firms we use,” the member explained. “We sat down with each one of them three years ago and we rotate among 12-15 of them for bond deals.”
  • Every year, the company also sets up a relatively small, 364-day revolving credit facility employing local diversity firms from the metropolitan area where it’s based.

Adding value. Some members have found diversity and minority firms add particular value in stock buybacks. “We have found a select group that do well in share repurchase,” said one participant. Others said they had more success in using diversity and minority firms in their CP programs, including the session leader. “They have come through for us when bulge bracket firms have not come through,” she said.

  • At a separate NeuGroup meeting of assistant treasurers, one member said, “Philosophically we want to further diversity, but we also want to find ways to add value when we work with diversity and minority firms.” Transaction execution quality is the top criteria to measure value, he added.
  • On bond deals, “we find these firms bring real and incremental orders,” the AT said, noting the investors they serve tend to be price-insensitive. And while those orders don’t make or break a deal, they help on the margin, diversifying the company’s large debt stack.

Meetings matter. Participants in both NeuGroup discussions agreed that meeting with diversity and minority firms is worthwhile, in part to determine which business owners are truly “walking the talk.” For instance, one member said, it’s a red flag if a woman who owns a firm shows up with six men. Also, he wants to know what a firm owned by a disabled veteran is doing beyond hiring veterans. He was particularly impressed by one firm that is offering training classes to disabled vets. 

  • Another member said it’s important to find minority and diversity firms that truly align with the values of his company, adding that hiring these firms is an extension of the corporation’s commitment to environmental, social and governance (ESG) principles—an increasingly important topic for issuers. 

Challenges. The relatively small size of a diversity or minority firm and the capital it has may limit its ability to execute on a bond underwriting, members said. “How much they could take was a problem,” one said of her experience with minority firms on debt deals. 

  • The assistant treasurer’s company has a sizable investment portfolio, but trades requiring significant balance sheets can be problematic for small minority firms, he said. Their size can also inhibit them from providing asset-management services to large corporates seeking efficiency by doling out multi-billion-dollar mandates.

Backing by big banks. Members agreed that a few large investment banks step up to help manage the inclusion of a minority or diversity firm in a bond offering and, in some cases, provide a capital backstop for the smaller firm. Other banks, one member said, still ask, “Why do we have to do this?” In other words, as another member observed, “Some lead underwriters are better or more willing than others.”

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Ted Howard

Author Ted Howard

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