Investing in businesses can be highly fulfilling, but dealing with professional advisers is not my favourite part. Most specifically, forking out large sums for what can sometimes be mediocre work is never pleasant.
However, the City is organised around bankers, lawyers and accountants. So if you want to raise capital, they set the rules — and the prices. Inevitably, in many corporate sales there are cost overruns — and, all too often, disputes about professional fees. For the advisers,when large sums are changing hands, it somehow feels appropriate to bill hundreds of thousands of pounds — or even millions — for a few months’ work. Yet for an entrepreneur, this disposal might be the reward for their lifetime’s labour — decades spent building up a successful enterprise. And why should professional fees be a percentage of the overall value of a deal?
Haggling or complaining about fees can be damaging to your reputation if you back companies for a living. Bankers, lawyers and accountants inevitably prefer to work with clients who are generous about fees and never quibble. Those who fight over fees to get good value for investors can be seen as “difficult”. Curiously, such clients do not get to see the same deal flow.
Professional firms charge what the market will bear, and since almost their only real expense is people, the larger the fees they receive, the more all their staff get paid. So there are very simple incentives at work. Of course, some City professionals are expert and wise, and possess rare skills and knowledge — but many are not so brilliant.
Meanwhile, legal fees have climbed from £150 an hour in 1985 to £1,000 an hour in 2018 at the grandest firms. Their working practices have not changed much since the time of Charles Dickens — but then why would they if the craft is so very lucrative?
Of course, in a capitalist system, people should be allowed to get rich, but M&A lawyers take minimal risks and yet enjoy a scale of rewards more in keeping with those who put everything on the line. Once a deal is done, the advisers all walk away with fat cheques; the buyer of the business must make the investment pay. Quite often the total costs — for bankers, lawyers, accountants, PR and all the rest — can add more than 5% to the purchase price of a business.
Most business owners sell a company once — so they are inexperienced in choosing advisers and agreeing fees. This can lead to them getting ripped off by City slickers, who use plenty of jargon and dress up their activities to make them look more technical and complicated than they really are. Just because professionals talk with posh accents and work from smart addresses does not mean they can’t be sharp when it comes to naive clients.
Unfortunately, financial illiteracy permeates society from top to bottom. Too many ordinary people do not understand mortgages, pensions, insurance, loans or investing. So the financial services industry preys on their ignorance and laziness to gouge them when they buy savings products, borrow money or buy a home.
The same mechanism is at work in America and is the subject of a new book by Devin Fergus called Land of the Fee: Hidden Costs and the Decline of the American Middle Class. It describes how surreptitious fees accompany so many transactions.
A more sophisticated process goes on at the top end. Many entrepreneurs have never floated a company, sold a business or bought another business. When they present themselves in the Square Mile, they look like fresh meat for the assembled advisers to gorge themselves upon.
An investment banker once explained to me how he viewed British industry: as a collection of assets run by useful idiots who were seduced and manipulated by the financial wizards in the City. In his eyes, quoted companies were just there to be endlessly bought and sold to generate fees for the armies of prosperous professionals in Canary Wharf, the City and Mayfair. Mind you, captains of industry don’t complain too much, because the fees are being settled with other people’s money — normally the shareholders’. Why rock the boat?
Ultimately, I would always prefer to act as principal and vigorous custodian, even if the risks are higher than life as an adviser. As Flaubert wrote in the novel Sentimental Education: “There are some men whose only mission among others is to act as intermediaries; one crosses them like bridges and keeps going.”