Win-win: Prioritizing D&I Firms for Share Repurchase Programs

# Capital Markets

# DEI

Many NeuGroup members say diverse-owned firms excel at open market share repurchases.

A long-simmering debate over share repurchases is heating up, generating headlines featuring President Biden and Warren Buffett . But there is no debating that stock buybacks remain a hugely significant tool for corporate capital allocation: they’re projected to exceed $1 trillion in 2023.

Bigger insight: Comments about buybacks by NeuGroup members at recent meetings also reveal growing agreement that diverse-owned banks and brokerage firms are distinguishing themselves on share repurchases, providing treasury teams with top-rate service and achieving pricing on open market repurchase (OMR) programs that equals or surpasses other banks.

Focused eyeballs. Size is one factor explaining the high marks corporates give diverse-owned firms. “They’re smaller, they’re really focused, they’re really driven, they’re not as overextended across the large numbers of programs,” one member said. “And at the same time, I noticed many bulge brackets shrinking their support of share repurchases.”

Sobani Warner, co-head of corporate finance at Siebert Williams Shank (SWS), one of the nation’s top diverse-owned firms, told NeuGroup Insights, “We probably have more eyeballs watching buybacks; we have the head of our desk watching, making sure that we are able to deliver within the parameters clients set forth, following their instructions, communicating with them.”

Participation in bond deals may be more lucrative for banks, but lower fees for OMRs are not a disincentive for many diverse-owned firms. “There’s no question that the business is lower margin, but it’s a solid margin relative to trading for institutional equities—it’s all about what your perspective is,” Ms. Warner said.

“The more touchpoints you have, the stickier you are,” she added. “Then clients understand the importance that we place on them by seeing us handle different types of their business with white glove service.”

High performance, high service. “Our experience has been excellent, the performance vs. volume-weighted average price (VWAP) was just as good as all the bigger banks from our revolver and better than average,” said one member who uses a D&I firm for OMRs. He added that he’s had no back-office or administrative issues, and “it was certainly a positive experience, and we have no reservations about continuing to use them.”

The member first vetted the broker’s repurchase desk, checking the number of traders and their experiences, and seeking references from other corporates. The member has since been used as a reference by the diverse-owned firm numerous times.

“If you use them all the time, your bank group might get upset because they’re losing fees, but we don’t have any problems sharing that business around,” he said.

Limitations and ways around them. Despite high performance on open market repurchases, just 40% of members who work with diverse-owned investment firms who responded to a recent NeuGroup research survey said they use the firms for buybacks. One reason, suggested by the member quoted above: many corporates would have to go outside their existing bank group to find, vet and choose another firm.

Also, as Ms. Warner explained, diverse-owned firms like SWS have balance sheet limitations, an obstacle for accelerated share repurchases (ASRs), which require principal trading and forward transactions.

However, SWS recently formed an alliance with a bulge-bracket bank that allows clients who may not be interested in OMRs to engage with SWS on ASRs, despite the size of its balance sheet.

The larger bank manages the risk on the deal, as well as doing the derivatives trading, which Ms. Warner said leaves SWS to “contribute by doing the baseline open market trading.”

“The larger firms realize that many companies want to be able to engage with the D&I brokers for their repurchase activities,” she said. “This arrangement allows a company to incorporate a D&I firm in their share buyback process and do an ASR.”