What can I say? Sometimes you call it wrong.
This happens to everyone in investment banking and especially in the capital markets. And they really don’t teach you how to handle it when you’re going through analyst training. You tell a client what to expect and you even make a recommendation on that basis, and for good or ill, things don’t work out as planned.
I’ve told clients to expect their IPO to succeed at a certain valuation, only for the deal to fall short in the order-book and have to be repriced. And there have been times when I told clients I didn’t think the deal could get done on the terms they were asking for, only for the offering to go much better than expected. I’m sure every capital markets professional has had similar experiences. What do you say then?
Journalists have a term they often use: the reverse ferret. As far as I understand, it represents the art of changing your opinion without appearing to change your opinion. Politicians have a black belt in this skill. If we’re being honest, some of the most successful investment bankers are quite adept at it as well. That said, I think the concept is misunderstood in our industry and it’s usually unnecessary.
One of the category errors people make is to conflate capital markets advice for a forecast. When you’re giving out recommendations to a client, you know — and clients ought to be reminded — that events may conspire against you. Market conditions can change, politicians may say something, peer companies may experience a positive or negative surprise, or any number of things can happen unexpectedly.
So when you’re advising a client on how much they can raise or what the pricing will be on an issue, you’re basing it on the facts as you know them at the time. You are grounding your opinion on an analysis of precedent and market signals. In other words, your advice reflects a probability assessment performed against a backdrop that is inherently uncertain. If subsequent developments don’t vindicate your initial view, that doesn’t mean you were wrong, and that distinction has to be made clear from the very outset.
It’s natural that a client seeks reassurance and to some degree, your job is to provide it. You’re there to convey confidence and belief! But don’t ever get yourself into a position where you have to apologise for what you thought would happen or for a recommendation that you made in good faith. If you’ve done the work, then there’s nothing more that could’ve been asked of you.
One of the category errors people make is to conflate capital markets advice for a forecast
Have I changed my mind over the course of a deal? Of course. We should never be dogmatic and think that we have to stick by our original position or else we would lose face. Sometimes the facts will force you to change your mind, or sometimes you will shade the probabilities differently based on feedback from the client on what their risk tolerance is. Advice is always something that has to be looked at in the context of prevailing developments as well as client requirements. You don’t offer it in isolation.
You sometimes hear the joke that equity capital markets bankers are “often wrong, never in doubt”. Let’s break it down:
Wrong? For sure because any forward looking statement is going to be wrong in some manner, even when delivered on the basis of detailed study and in good faith. If things turn out differently from what you planned, there’s no point either in brazening it out or in pretending it didn’t happen. You assessed the probabilities and they turned out a certain way.
Never in doubt? Yes, to a degree. You need to state your point confidently and show leadership and not vacillation. But that doesn’t mean you should convey absolute certainty. Clients should know what they’re getting.
In short, you’ll gain a lot more trust if you speak and don’t spin, if you’re transparent about your views and explain why, and if you address what happened and why and not try to be evasive.
Of course there is a larger and arguably more uncomfortable question: do clients even care about your advice? As one of my early mentors once said to me: “Clients don’t want counsel; they want corroboration”.
In most cases, clients are looking to you to execute what they’ve already decided they want to do. They want your balance sheet or your access to investors or your product knowhow. It does depend on the situation, naturally, and during periods of extreme volatility or dislocation, you can imagine that clients will be looking for guidance as well as material support. But don’t imagine you’re some Robert Duvall-like consigliere with the chairman’s ear. The reality is that you’re mostly hired for execution and access.
None of this means bankers should stop trying to give best-in-class advice. It just means you should be humble about what you’re actually doing when you give it. And don’t worry too much if clients don’t take it all that seriously.