Five Reasons why a CFO should partner with an Investment Bank
Managing Director Alexei Ratnikov, Director Melissa Hopper, and Senior Advisor Joe DiLorenzo discuss the benefits of CFOs working with investment banks.
Most companies will at some point find themselves needing to raise capital or complete an M&A transaction, and the responsibility for carrying out these tasks will typically fall largely on the company’s Chief Financial Officer (CFO). However, even the most experienced CFO can struggle to excel in these tasks in addition all of their other responsibilities. Consequently, a relationship with an investment bank can be especially beneficial for CFOs, as it expands the workforce, accelerates the process, and ultimately reflects positively on the CFO when the project runs smoothly and effectively.
The investment bank supports the CFO’s objectives
After engaging an investment bank, the beginning of the partnership will require a significant portion of the CFO’s time, as the investment bank gathers information and asks for the insights on the company. Once past this stage, the investment bank takes on the day-to-day work of preparing to raise capital and managing the process, with regular touchpoints to keep the CFO informed. At this point, the CFO is likely focused on communicating between the investment bank and the executive suite or board, setting expectations, and providing guidance — all well within a CFO’s usual areas of responsibility.
For the duration of the relationship, the investment bank exists to support the CFO, often with limited contacts with other officers of the client company. This allows the CFO to remain the face of the work and subsequently claim responsibility for a well-executed project under the guidance and supervision of the CFO.
Investment banks are a source of extensive market intelligence
CFOs can benefit from the deep market intelligence, transaction experience, reduced risks, and greater credibility which an investment bank can bring to the table. Even if a CFO has a strong understanding of the capital and M&A markets, they generally cannot match an investment bank’s understanding and market intelligence. Because investment banks’ primary business function is to monitor the market, raise capital or complete transactions, they have much deeper insights into the ever-changing market conditions, which enables them to better posture and present the opportunity and to target the full range of likely counterparties. They can pinpoint opportunities to improve on capital structure or uncover instances in which a company could complete an acquisition or sell assets.
Investment banks perform capital raising and transactions much more frequently
Most companies don’t complete capital raising or M&A transactions every day. Middle market companies typically do not have dedicated capital market teams that can handle such work. Consequently, CFOs are extremely busy managing the finances of a company amongst other things, so they can’t focus on building an investor network, managing endless bandwidth, and finding specific personnel to manage these types of tedious projects on their own. Conversely, an investment bank performs capital raises, M&A deals, or different transactions on a daily basis, so they have contacts, the ability to find funds, and a firm grasp of what banks or investors are looking for. In addition, some investment banks like Chiron Financial are also able to work directly with a company’s bank or other lender to help get a relationship back on track or provide other worthwhile solutions. Also in some cases, a third party review and presentation of the financial picture, which Chiron can also perform, can make the difference between achieving the goal and falling short.
“Knowing how to present information in a way that attracts banks and investors is incredibly helpful for CFOs,” explains Alexei Ratnikov, Managing Director at Chiron. “It ensures the transaction proceeds smoothly and efficiently, which in turn shines a light on the CFO’s job performance.”
As an independent third party, investment banks reduce the CFO’s risk
For a CFO, any big transaction — failure or success — is a risk in terms of career and position in the company, and in worst cases a risk of litigation with company’s equity holders and creditors. In some stressed situations, a CFO may be reluctant to take on this risk, knowing that their decisions will be scrutinized by investors, shareholders, and executives. However, no matter the financial position of the company, partnering with an investment bank reduces that risk. First, an investment bank takes an objective look at the company’s current situation, whereas an in-house employee may find their judgment clouded by their personal history or interests within the company. And second, the investment bank bears the responsibility of answering those shareholder questions and justifying their actions. Even in the most troubled situations, hiring a third party expert demonstrates a choice to make every effort to reach the best possible result.
Investment banks lend additional credibility to a transaction
Finally, having a partnership with an investment bank generates more credibility. Optically, it shows investors and other banks that the company is serious about finding a way forward. It also sends a message to interested parties that the opportunity is being broadly and professionally offered to numerous potential investors, lenders, or buyers and implicitly that they will need to present the best possible terms in order to win the competition for the proposed transaction.
“When banks see a company has brought in an investment bank, they understand that you want to rectify the situation if you’re in distress or undercollateralized,” explains Melissa Hopper, Director at Chiron. “For example, because of COVID and general market trouble, a client of ours was overextended on their line of credit. We were able to bridge the communication gap between the lender and our client, and ultimately work to put together a sophisticated budget that we could take to lenders to recapitalize them.” The client has now been using that lender for the past 18 months with no major issues.
For many companies, the main criterion for CFO success is their ability to raise capital, which makes partnering with the right investment bank beneficial for a CFO’s career. In this type of relationship, the CFO acts as the expert concerning the company and as the transaction leader within the company, while the investment bank is the expert on the mechanics of a transaction or capital raise. The end result is a partnership in which the client company — and the CFO in particular — reaps the benefits of an investment bank’s expertise.
Investment banks as a critical resource in stressed situations
Some CFOs may not be aware of how quickly their bank lender may turn cold to extending credit when things go sour. It is quite common that CFOs start seeing troubling signs in the business way before it is being communicated to the lender. Trying to get the company back on the right track and hoping for better market situation, some CFOs eventually find their company to be in breach of covenants and the forbearance letter from a lender is quick to come. At that point, it is usually too late to start investigating alternative financing options and most time is being spent on managing relationships with existing lenders and creditors.
Investment banks can benefit a company and help CFOs in two ways. Firstly, it is always better to find alternative sources of financing and improve funds availability before the company is in default on existing loans. Investment banks can run an efficient marketing process behind the scenes and identify alternative capital providers willing to step in and replace existing lenders. This exercise does not cost much to a company prior to completion, as investment banks are usually compensated based on a closed refinancing transaction. Also, if an investment bank is engaged early in the process, it might be possible to renegotiate some terms of existing loans and avoid a looming default altogether. Secondly, when a company operates under forbearance it is always critical and in most cases is mandated by a lender that a company hires an independent advisor to help navigate through the situation. At that point, quite often an incumbent lender wants to terminate the relationships and get refinanced. Hiring an investment bank like Chiron Financial that can both provide required accounting intensive reporting and forecasting work and also handle the restructuring and/or capital raising can save cost and hassle of dealing with two or more advisors. Being pro-active and engaging a third-party consultant before receiving a call from the bank puts a CFO in a good light and helps manage creditors’ expectations more efficiently.
Meet Our Authors
Mr. Ratnikov has over 20 years of international experience in corporate finance and supports Chiron’s European and special situations business.
Joe DiLorenzo is a trusted advisor for Chiron with vast expertise in the financial industry as well as significant leadership roles for many organizations.