Australian super fund body ACSI turns spotlight on investment banks’ underwriting fees

New research finds firms paying more than twice as much as they should

The Australian Council of Superannuation Investors (ACSI), the 38-member group which focuses on the management of environmental, social and corporate governance (ESG) investment risk, has turned the spotlight on excessive underwriting fees for raising capital.
ACSI’s research has found that companies are paying more than twice as much in rights issue underwriting fees than it reckons they should. ACSI represents 33 domestic investors with combined assets under management of A$400bn (€275.9bn) and five international institutions: CalPERS, Universities Superannuation Scheme, Railpen Investments, PGGM and the New Zealand Superannuation Fund.
It has found that over three years, companies have, in aggregate, paid underwriters such as investment banks and brokers a premium of more than A$170m. ACSI also says that average underwriting fees are more than 60% higher than they were 20 years ago.
The new research – Underwriting of rights issues: cost versus value – examined 63 underwritten rights issues conducted between 2010 and 2012. The 36-page report was prepared by Mike Harut, ACSI’s Governance and Engagement Analyst, with the assistance of Dr John Handley, Associate Professor of Finance at the University of Melbourne and consulting firm Ownership Matters.“The results of this study drive home, once again, how important it is for boards of public companies to be vigilant and active in their oversight of the capital raising process to ensure the best outcomes for the shareholder, who foots the bill,” said ACSI’s Chief Executive Gordon Hagart.
Hagart became CEO last year after a stint as Head of Environmental, Social and Governance (ESG) Risk Management at the A$97.6bn Future Fund, Australia’s sovereign wealth fund.
He added the research was a reminder that there is currently no requirement for companies to reveal how much they have paid advisors to underwrite share placements – even when companies subsequently seek approval from shareholders to ratify equity issues, meaning it was difficult for investors to determine whether the fees paid delivered value for money.
ACSI suggests investors develop a policy on capital raisings and query boards’ oversight of the capital raising process, as well as underwriter selection and fee negotiation. If relevant the issue could be factored in to proxy voting decisions, it adds. ACSI is also calling for Australian listing rules to be modified to require disclosure of underwriting fees for share placements.