An economic minister, a banker, and a hedge fund manager walk into a meeting
The first sentence of this Bloomberg story about Russia’s latest investor charm offensive could be real conspiracy fodder, if it weren’t in fact so mundane: “Goldman Sachs has been hired by the Russian government to burnish the nation’s image overseas and attract more institutional investors”. Goldman Sachs makes millions convincing community banks to buy mortgage securities backed by Black Sea housing projects! Or something else that a Matt Taibbi column auto-generator would spit out.
What’s actually going on is pretty simple, and not that unusual, even if it is buried almost halfway through the story. Goldman Sachs has an agreement with Russia “similar to a corporate broking arrangement”, which are very common. The services provided here are pretty nondescript — setting up meetings with investors, handling the logistics of getting executives or government ministers from city to city, providing a modicum of input on what should and shouldn’t be said.
For a company or country, the value is pretty clear. They get to meet with investors, which they were probably going to do anyway. With a bank involved, the head of investor relations has an easier job: he gets someone else to blame when a meeting with a mildly unsavory hedge-fund that is probably short the company’s stock gets onto the day’s schedule.
For banks, the rationale is equally obvious. They might not directly make much or any direct revenues from carrying luggage for a CFO or finance minister, but indirectly, it’s valuable: their investing clients will pay them for meetings with trading and prime brokerage business. It’s the same reason they sponsor conferences that are stocked in equal measure with tech execs, investors, and bankers. And even if it doesn’t directly win any M&A or underwriting mandates, relationship bankers are happy to provide a bit of incremental, cheap client service that helps improve their relationship. Banking teams also get access to the finance ministry or COO. In this respect, sovereigns are more valuable than corporates. There are more publicly traded companies than countries, and demand for the scarce information government ministers can provide is that much more valuable. And banks track how much they’re getting paid by investors to arrange these meetings. That gives banks the ability to know who the Russian economic minister should meet with, not just from the economic minister’s perspective, but based on the bank’s economic interest.
Much like the expert network firms, arranging meetings between investors, and companies or countries is theoretically defensible, if practically concerning, behavior. Sure, the meetings begin with a reminder that material, non-public information won’t be divulged and shouldn’t be sought. But that leaves so much to be discussed! As Matt Levine points out, there are other types of information that investors want to get, and executives want to give.
When I was at Goldman, I once had the job of taking the top 100 securities division clients at Goldman and scatter-plotting their overall revenue against the number of 1×1 meetings they received in the last year. I’d then calculate the mean for revenue and meetings, and divide the chart into four quardrants. The point was to find the outliers:
- who among the top 100 clients was paying more than average but getting fewer than average meetings (this was the desired outcome, until the client complained, then ignorance was feigned and more meetings were given, or not);
- who was paying less than average but receiving more than average meetings (negative);
- and who was paying less than average for fewer than average meetings or paying more than average for more than average meetings (a fairish outcome, but in a wasted effort sort of way).
All of this means that somewhere in the future, in a relationship management review, a hedge fund manager somewhere in the world will complain that they are paying Goldman Sachs millions of dollars a year in trading fees, but only received nine 1×1 meetings. A befuddled salesperson will promise to rectify the situation and two weeks later, the deputy economic minister of Russia sees that hedge fund on his itinerary.