The sponsor landscape has changed significantly in the past year, due in no small part to the sad demise of Cazenove in SA - it was absorbed into the maw of JP Morgan. Last year, JP Morgan held the princely sum of seven sponsorships. Today, with its absorption of Cazenove, it has 26.
And HSBC Investment Services has shed many sponsorships during the year, including Woolies, Gold Fields, Tongaat, Astral, Truworths and Trencor.
Of the large local banking institutions, Absa has the smallest representation in the sponsor arena, mainly because of its recent entry into the industry.
Often the role of sponsor is seen as being a loss leader, to get a foot in the door regarding the more lucrative corporate finance work. And this in turn becomes more healthy the larger the company.
Large corporates often feel they need to use global investment banks such as Deutsche Bank, HSBC, UBS, Citigroup, JP Morgan and Merrill Lynch. This is because these companies often have foreign shareholders and are sometimes also listed offshore. In these instances, investment banks with global footprints are often deemed necessary to execute deals swiftly and efficiently.
In recent years, there has been a proliferation of smaller sponsors, partly in response to the fact that the large investment banks are reluctant to deal with smaller companies because it is not worth their while. This is similar to the approach that these investment banks take when deciding which companies to research from an investment perspective.
Smaller companies have thus naturally turned to the smaller, specialist sponsors.
Typical of these are Arcay, Bridge, Java, Exchange, LPC Manhattan Moela (LPC) and River. Sometimes, the smaller firms act as co-sponsors with larger firms, especially if they have niche expertise that's lacking in the bigger sponsor.
LPC is one of the more active players in the smaller sponsor arena. It is one of only two managerially active black sponsors on the JSE and decided early where it could add value. "We've learnt a lot in the past few years," says LPC director Andrew Tyndale-Biscoe, "and we want to take that knowledge and move further upscale, though obviously not to the same level as the global investment banks."
In the past, when sponsors were still known as sponsoring brokers, they were often merely a conduit between the JSE and listed companies. Now, with much stricter listings requirements, sponsors have to be much more proactive.
The designated adviser (DA) role, as it pertains to AltX, the JSE's small-cap market, is an onerous obligation. "A DA is a nonexecutive director of the listed company," says LPC director Doug Greenshields. "It is therefore essential to maintain strong relationships with our clients - we're not fair- weather friends."
Smaller companies tend not to have internal corporate finance departments and thus rely on sponsors and DAs to a large extent.
The DAs' responsibility isn't just onerous: it can be expensive if mistakes are made, hence the need to know the clients intimately. For noncompliance with JSE regulations, the JSE can impose a fine of up to R1m on the company concerned and up to R250 000 on the DA.
And for all of their hard work and responsibility, the DAs don't charge much. In some instances, they'll work for free to get a bite of the cherry of future corporate finance work. Typically, a DA will charge a fee of about R10 000-R15 000/month for its services, which is a lot less than media relations companies typically charge. To break even, a DA should ideally be charging at least R15 000-R20 000/month and have at least three clients.
There are plenty of prospective new JSE/AltX listings, but the rejection rate by DAs is high. Typically, only one in 10 new applicants for a listing will be taken to the JSE/AltX. "You have to list for the right reasons," says LPC MD Miller Moela. "We won't list companies until they're ready."
