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How IPOs convey the "phantasm of range" to underwriters and the way minority corporations pay much less

A view of the New York Stock Exchange (NYSE) can be seen on June 29, 2020 on Wall Street in New York City.

Angela Weiss | AFP | Getty Images

Warner Music Group Corp., the label for artists like Ed Sheeran and Cardi B, went public with 28 underwriters last month. More than a third of these companies were MWVBEs, a special name that stands for companies owned by minorities / women / veterans.

The $ 2 billion IPO paid fees of $ 79 million, more than half of which went to the banks that served as the primary insurers for the deal. Medium-sized companies took home between $ 694,309 and $ 1.4 million (excluding Raine Securities, which earned $ 173,578). The lowest fee class for Warner Music's IPO – and almost every business – was reserved for the 10 MWVBEs, each of which generated $ 104,147 each.

It is common for IPOs – especially those that are conducted by customer-facing companies – to include MWVBEs to diversify the underwriting group. Despite an increasing number of minority-owned companies that cover prospectuses, their fees have been low on average over the past five years – about 12 cents against the dollar – compared to other smaller companies that tend to have similar "passive" roles. found a CNBC analysis.

"For customer-facing companies, there is an illusion of diversity and inclusion, but without meaningful inclusion in the fee pool," said Jim Reynolds, chairman and CEO of Loop Capital, a minority stake company that shares offers.

On average, between 2016 and the first half of 2020, MWVBEs took home around $ 167,620 per IPO and secondary offering, according to S&P Global Market Intelligence, which was compiled by CNBC. Medium-sized companies earned an average of $ 1.4 million per store over the same period – more than eight times the MWVBEs, as the data showed.

A stock insurer earns fees by buying a certain number of stocks from the offer and selling them to investors while capturing a spread. The more shares an underwriter receives, the more fees are incurred.

There are several roles an underwriter can have. In the simplest form, however, they are divided between active and passive. Larger banks are usually hired as active bookrunners because they have more expansive investor relationships and can sell more stocks. The bulge bracket companies also advise the issuers and can add value after the offer with more workers in the areas of trading, lending and research.

Passive bookrunners have less interaction with the issuer in the daily process. Their main job is to get stocks and sell them to investors. MWVBEs and boutique banks are usually hired as passive bookrunners.

However, MWVBEs are usually smaller than some of the medium-sized boutique companies that act as passive bookrunners alongside them. Although their roles are often similar, MWVBEs are almost always assigned the fewest shares and therefore take fewer fees home with them.

In recent years, however, issuers have included more MWVBEs in their banking programs due to the increasing demand for equality between women and minorities. So far, according to Refinitiv, various brokers were involved in 41% of the IPOs listed in the United States in 2020. That's twice as much as 2019, as the refinitive data showed, and the trend has increased in the past three years.

Less than 1% of the fee pool

However, greater visibility has not resulted in more fees for every MWVBE. In fact, the CNBC analysis found that the proportion of fees allocated to every minority, women, and veteran-owned company has changed little over the past two decades.

Only in rare cases do MWVBEs receive more than 1% of the fee pool. On average between 2016 and the first half of 2020, it was 0.69 percent, according to CNBC analysis using S&P Global Market Intelligence data. In contrast, medium-sized companies each received around 22 percent on average.

Issuers often view this practice of adding MWVBEs to the syndicate as a "feel good check the box" idea, Citigroup vice chairman Raymond McGuire said in a comment last month in the New York Economic Club. "But is it something material? No," said McGuire.

McGuire's speech highlighted the Special Purpose Acquisition Company (SPAC) that billionaire hedge fund manager Bill Ackman is currently marketing – which could be the largest of its kind at $ 6.5 billion.

Bill Ackman, founder and CEO of Pershing Square Capital Management.

Adam Jeffery | CNBC

McGuire said the SPAC was "exceptional" because Ackman "had the courage and conviction to include minority companies as a co-manager with 365 basis point fees – 20% fee for this group." (365 basis points correspond to 3.65 percent per company). Citigroup is the main insurer of the SPAC, Pershing Square Tontine Holdings.

The SPAC is the first high-profile test for MWVBEs that gives them a more important role. CastleOak Securities, Loop Capital Markets, Ramirez & Co. and Siebert Williams Shank, each of which is owned by a minority, will act as "Co-Lead Managers" directly under Citigroup, Jefferies and UBS. Veteran-owned Academy Securities and Roberts and Ryan, and C.L. King & Associates are co-managers.

Pershing Square Tontine's SPAC is expected to start trading this week, said a timekeeper. If things go smoothly, MWVBEs could play a more important role in future business.

"We are strong advocates of adding value-added MWBE companies to all aspects of financial services," said Dana Telsey, executive director of Telsey Advisory Group, a women-owned company that writes stock offers. "We hope that the momentum continues and that the management teams of the largest banks are pushing their organizations to include diversity in all types of transactions."

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