More corporates are expanding the parts played by diversity firms beyond sharing deal economics with bigger banks.
Corporates committed to the long-term success of brokerage firms that are owned and run by Black and Hispanic people as well as women and veterans are going to greater lengths to give these so-called diversity firms not only fees, but more meaningful roles in capital markets transactions.
- That key takeaway emerged at a late January meeting of the NeuGroup for Diversity and Inclusion working group. A panel of treasury professionals discussed how their relationships with diversity firms have evolved in the last few years and how they’re ensuring that big banks support their efforts.
- The panelists also shared how they select diversity firms, which several members noted are growing in number as more corporates push to meet both D&I and ESG goals. We’ll explore the selection process in a future post.
Progression from passive to active. In addition to increasing the number of diversity firms participating in their most recent transactions, each panelist said the role played by the firms has become more meaningful than in past deals where a relatively small number of diversity firms played passive or small parts, largely consisting of receiving fees.
- “Early on, we were solely utilizing the diversity space as book managers in a passive role,” one panelist said. “Over the last year or so, we’ve transitioned in a rather big way and started to utilize diversity firms as joint leads on our US dollar transactions.
- “Not only does the diversity firm get to enjoy the same access and economics, but it really enables them to develop their story, create contacts with the other lead book runners, get exposed to the process and enhance their relationship with larger, tier-one investors.”
- One NeuGroup member who had been using two or three diversity firms in debt deals and giving them economics but no more, expanded to eight in a recent debt offering.
- The other, more significant change: “I asked [the diversity firms] to give me their orders because I wanted to really demonstrate that this was meaningful to us,” they said. “So I personally got their orders summarized. I sent them to the diversity coordinator so that individual knew that I was paying attention.”
- Before the final pricing of the deal, this member took extra time to review the allocation of bonds by tenor and diversity firm with the D&I coordinator. “As a result, the eight firms got equal allocation to all the other banks.”
Managing big banks. Indeed, corporates leading the push for a more level playing field for diversity firms to compete with bulge bracket banks have to be prepared to take a hands-on approach to the allocation of their deals. In cases like the one above, it may involve close coordination with a D&I coordinator, usually one of the lead managers whose role is to support the diversity firms.
- One treasurer said he lost sleep over the allocation process in the past because some banks would say one thing and do another. “It does get hard, but we don’t leave it to the banks anymore,” he said. “We actually mandate to the banks what the diversity firms are going to get.
- “It’s not going to be, ‘we’ll just give them the economics but we won’t give them the paper.’ And that’s usually what happened in the old days. But it’s not happening today because a lot more of us have a lot more experience with it and know exactly what’s happening.”
- Another panelist sees progress in how big banks work with diversity firms. “It’s been an evolution. The bulge bracket firms have taken more of an interest in enhancing and mentoring the diversity firms,” he said. “It’s become more supportive, more of a mentor relationship.
- “And we take a lot of time thinking about who we are going to pair a diversity firm with. We try to pair them with firms with a rather large presence in the market, firms we’re comfortable with, firms that have proven to be good partners in the diversity space.”
Miles to go. None of the panelists expressed satisfaction with where their companies stand on the road to enhancing the role and stature of brokers owned by minorities, women and vets. They all want their organizations to make more progress, while acknowledging that some corporates are farther along than others on this path.
- “We all do things a little differently,” one member said about the group of panelists. “And it’s really a matter of where you are in your evolution and where you want to do more. But we’re all about how do we continue to evolve this, make it more meaningful and more inclusive.”
- “I’m going to do something completely different in the future,” one treasurer said. “I want to change the way we do things, where we don’t have much reliance on the banks anymore. The diversity firms are getting so much better, with the talent that they’re bringing in and the bandwidth that they have now. So we’re going to narrow it down to fewer banks, more diversity firms. And you’re starting to see more and more corporates doing this.”