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Podcast · inderesPodi 122 · 2022-05-06 · 1:32:20 · In Finnish

An Investment Banker's View — Sami Miettinen on inderesPodi 122

Published as “inderesPodi 122: Investointipankkiirin näkökulma, vieraana Sami Miettinen (6.5.2022)”

Hosted by: Sauli Vilén

▶ Watch on inderesPodi

Recorded on 6 May 2022, in the middle of a market that had just turned. Sauli Vilén frames the brief plainly: investors only ever see the outcome of an IPO, and the aim of the episode is to describe what happens in the wings. It is one of the more operationally specific accounts Miettinen has given, and much of the detail comes from a deal he had just completed.

Who he is, and how he invests

Twelve years in London — Credit Suisse, SEB — with a career that started at Nordea’s predecessor, where the work included the Nokian Tyres IPO. After the financial crisis he returned to Finland and, following a short spell in banking, moved to boutique investment banking: mid-sized M&A, IPOs, public tender offers and financing transactions. The Neuvottelija channel began during covid, when he could no longer charm anyone over lunch; by the time of recording it was running about 150,000 views a month.

His own portfolio he describes without much romance: cost-efficient index funds with a heavy US weighting as the bedrock — a position he says he learned the hard way after wandering off into all-manner-of-asset-market allocation — seasoned with some direct equity and, more exotically, LP stakes in private equity funds. He explicitly distinguishes himself from Buffett and Munger, whose central lever he reads as leveraged low-beta quality; his own risk is more growth-shaped, which, he notes wryly on the day, was taking a beating.

What an investment banker actually does

His working definition: an enabler of difficult financing transactions — the negotiator who makes a public tender offer, a company sale, an IPO or a refinancing happen as cheaply and cleanly as possible. He notes the title is neither official nor protected, and that a rival house once rebranded people like him as “M&A consultants”; he declines the demotion.

Choosing the lead manager

Two routes. Either a long-standing relationship carries it — his Norr Hydro mandate came out of IPO training he had run for Nasdaq Helsinki and the entrepreneurs’ association back in 2019, with Yrjö Trög and his board, and the listing followed on 1 December 2021 — or the company runs a competitive process and asks several banks to pitch.

What companies actually compare, in his account:

On valuation in the pitch, his answer is more nuanced than the question. The size of the offering matters more than the headline valuation — Norr Hydro needed eight million, Lapwall five — and the relationship of that number to company value is secondary. But a pitched price has to come with a chain of reasoning: comparables, a DCF, the upside case, the effect of the capital structure, an explicit IPO discount as a safety buffer, and then the reality check of whether an anchor investor would actually commit money at that level. Pitching an inflated number and apologising later is, he says, a first-order breach of trust — you win the mandate and then have to say that was bullshit, here are the real figures. Some banks avoid the problem entirely by refusing to participate in beauty parades, which he considers a reasonable strategy if you can only execute one IPO every six months.

Selling the offering — the part that is genuinely hard

He is emphatic that the sales work is the most important thing the bank does and the thing it should be held responsible for. Finland is a capital-poor country, its institutions are, in his phrase, cranky, and that is a difficult equation for a salesperson. Retail demand is unknowable until the book opens, so the real effort goes into anchor and institutional price formation and the bookbuilding.

He divides the profession into two: bankers who sell and bankers who execute. Good project managers are plentiful; the market is short of the selling, negotiating kind, with the occasional individual who does both superbly.

On scale, he had rung friends at Goldman, Citi and Nomura for an Arvopaperi interview in December 2021 and got a consistent answer: below a hundred million they will not turn up, because the machinery is built for firing thirty million at CalPERS, not for an eight-million float. That is the gap the boutiques operate in, on foot, knocking on institutional doors themselves.

The anchor negotiation

The most useful section of the episode. Asked whether the bank walks in with an indicative price and tests whether it resonates, he rejects both framings — you sell the business case. The anchor negotiation should be taken with complete seriousness; it is arguably the most important phase of the whole exercise, and the CEO, chair and principal owner should be brought into it, because institutions will only believe an investment banker’s version of someone else’s business up to a point. Send materials in advance for hygiene, then do the one-on-one properly: plan it, rehearse it, take notes, do many of them, prepare for the disappointment of most saying no, and have a plan B for who to ring next.

Do anchors set the valuation? Effectively yes, he concedes. They rarely volunteer that a price is too low; they simply decline unless it comes down. You can play hardball and limp into the retail tranche with a couple of weak anchors and fingers crossed — he does not recommend it.

His rule of thumb: about 50 % of the offering pre-committed by anchors, with the flexibility to cut that back if the case is strong. Norr Hydro had a 25 % cut-back option on anchor demand and used it; Lapwall had 50 % and used all of it. He notes some arrangers do not build in the option at all, and that institutions grumble about it — but he considers the whistle-blowing responsibility to be precisely the arranger’s, and refusing to run around finding a few more anchors, on the assumption that retail will fix it, is the thing you must never do.

Allocation, and the retail complaint

He takes the retail grievance head-on, from both directions.

The worst case is a book that stays short, in which case everybody gets full allocation — the winner’s curse. His view is unambiguous: not on my watch. Blow the whistle, even publicly, and raise your hand for the error: I could not price it, or sell it, or the market moved.

The other end is allocating a derisory two per cent, which he agrees is unpleasant. The rules constrain the shape of it: retail cannot be discriminated between — everyone gets cut by the same proportion — whereas within institutional demand you may treat homogeneous groups differently. Norr Hydro’s institutional threshold was around €94,000; below that you were retail, with a minimum of about €945. They cut anchors to a 75 % guaranteed allocation, wrote the post-anchor institutions a very thin book, and pushed everything available to retail — and it was still a disappointment, because a seven-times oversubscribed eight-million offering is simply arithmetic.

The two anecdotes worth keeping. First: when day-one demand came in, everyone’s reaction was what? — followed by a cold sweat and the wish that no more advertising had been booked that week, since they could not close the book until the weekend. Vilén draws the practical inference for investors: whether the company is suddenly promoting itself hard is a leading indicator of a book that is not full. Miettinen doesn’t dispute the logic, while noting they did not cut marketing.

Second: who can actually see the book building? The bank and the board — often not even management. Nobody else. It is inside information, there are strict information barriers, an insider register from the intention-to-float onwards, and telling an anchor how the book looks would be plainly illegal. He invokes Michael Milken and Drexel Burnham as the reason these rules exist.

On the guaranteed-allocation-plus-cut-back mechanism, Vilén asks why everyone doesn’t use it. Miettinen’s answer is the anchors’ view: having just made a 31 % first-day gain, they would happily have taken another million or two. It’s a negotiation.

Norr Hydro ended with 12,000 shareholders and over 30 % free float, which he contrasts with offerings done to a bare 300-holder minimum and a 10 % free float — and he can’t resist noting Inderes’ own float in passing.

On anchor discounts he is blunt: staff discounts are fine, anchor discounts are sly. Anchors should come for love of the game and fight for the same discount for everybody.

Primary versus secondary — why selling is demonised

In small Finnish offerings, secondary selling is rare: below €10 million, only about 5 % of offerings include a single share sold by an existing owner. In large ones it is routine, typically a private equity holder exiting tens of millions.

The theory says it shouldn’t matter — if the prospectus discloses everything material, you hold the same information as the seller and are in the same boat, so primary and secondary should be equivalent, with the caveat that a company shouldn’t raise cash it can’t deploy. In practice the market reads a selling principal as an insider signal — he knows where the bomb is — and a pure secondary offering as a bad smell outright. Miettinen thinks it is over-demonised, but notes the practical consequence: Finland’s small institutions will decline for that reason alone. In a small offering there is also a real objection — an eight-million company can easily waste the powder.

The workarounds all come after the lock-up: block trades rung around to institutions under NDA at a couple of per cent discount, drip feeds with disclosure as you go, or borrowing against the shares instead of selling. He notes all of them require selling the case again, and all carry the same signalling problem.

What counts as a successful IPO

Criterion one: the offering is fully subscribed with healthy oversubscription. Beyond that, the literature suggests a 10–15 % IPO discount and there should be a first-day gain — not 30 %, which is a pricing miss for other reasons. But the measure he actually cares about is aftermarket performance relative to the index some months later. Norr Hydro priced at 3.15 and was trading around four while the market fell — that, he says, matters more than the pop.

The second half of it is the company’s own responsibility: delivering what it promised, with the bank helping to set expectations at a sane level. As certified adviser he and Jari Lauriala sit in the board meetings and hear the guidance discussion — Norr Hydro had issued two upgrades by then, which he treats as evidence the original guidance was not tactically sandbagged.

He is unsparing about the failure mode: dragging a death-rattling zombie to market because you mis-sold it is extremely irresponsible, and it should be attributed to a person, not a house — that fellow hauled this wreck to the exchange, let’s watch his track record. Retail may not know who led an offering, but Finland’s handful of institutions certainly remember, and the door stops opening.

The IPO boom, and the pipeline

The numbers he gives: 7 offerings in 2019, 7 in 2020, 31 in 2021, including main-list transfers. By December 2021 the market expected around 15 by this point in 2022; there had been four. He reads the spring as a savage disappointment relative to the pipeline — but also as evidence that Finnish arrangers have integrity and pulled the handbrake rather than shipping junk. The material has not disappeared; some of it will end up in trade sales instead. His guess for the year, with the caveat that it depends on rates being pushed through the market and Finland joining NATO removing the country risk: about fifteen. Anchor investors, he adds, are extremely cynical at the moment, and without the foundation stone there is no point going.

M&A

The mandate split is roughly 90 % sell-side, 10 % buy-side, for a mercenary reason: there is one seller and many losing bidders, so sell-side work actually closes.

His worked example is Metso and Tamfelt in 2010, where he advised Metso. It was executed as a share exchange, negotiated substantially at chair-to-chair level with Mikko von Frenckell as Tamfelt’s large owner, and Metso’s rising share price during the process helped convince the other side to take paper. His point is structural: share consideration shares the synergies and aligns the risk, whereas most criticised failures are cash deals with too much premium paid out of the buyer’s hard cash — a distinction he says people routinely miss.

The second example is Nordic ID, which he describes as rescuing: a directed issue in the middle of covid, then a sale of the whole company to Brady Corporation by cash tender offer that cleared above 90 %. The nuance he highlights is the non-public phase, where they collected irrevocable support from over half the existing shareholders under confidentiality before announcement — and the professional skill involved in asking someone whether they are willing to receive inside information without blurting out the case if they say no.

On why most acquisitions fail from the buyer’s side, his first answer is self-serving and he says so — no investment bank in the room. The real ones: organisations doing their first acquisition and learning on the expensive one; falling in love with secondary value creation; and failing to respect the market price as the best available view. Synergies in a spreadsheet are far too easy: one plus one turns out not to exceed two.

He is caustic about quantified synergy claims — Stora Enso selling its North American operations to NewPage with something like 8 % of target revenue in synergies, a number he says was obviously pulled out of thin air. A listed company must give sufficient and accurate information, so it can’t be a PowerPoint slide resting on nothing; but over-optimism about sales synergies in particular is endemic. His preferred combination is high synergies with a low multiple, which leaves room to be wrong; a high multiple resting on large synergies is a red flag.

What he looks at as an investor when a portfolio company announces a deal: does management have acquisition experience and does this belong to their strategy, or is this a first-timer improvising; does it complete, and is there shareholder support and a board recommendation; are there conditions that dump competition-authority risk onto shareholders — his examples being the Konecranes–Terex saga and Outokumpu buying Thyssen assets without a withdrawal clause; the price relative to where the buyer itself trades; and the consideration, with a preference for share deals.

He also mentions, with visible pleasure, a study he built at a previous bank showing that every sell-side mandate they executed had a positive market-adjusted share price reaction — which irritated his colleagues as showing off, and which he thinks ought to be part of an adviser’s references.

Fiscal dominance and the euro

The closing third, and the theme he was pushing that year.

Fiscal dominance he defines as the stranglehold inflation — and governments — have taken on central banks. The Fed had raised that week while the ECB sat at zero, and the ECB cannot follow, because the euro area is nineteen heterogeneous countries and Italy’s capacity to service its debt at another one or two per cent is poor. A political central bank will not risk pushing significant member states into restructuring, so it is not independent.

But he thinks the escape isn’t available either. If the ECB won’t raise, nobody will lend at a minus six per cent real rate, so the market rate on actual transactions still respects inflation — what drops instead is the volume of transactions that clear. It leaks: Italian yields rise regardless. His forecast is the short end nailed down and raised far too slowly, inflation overshooting, and refinancing happening at negative real rates in a lender’s market. He notes the Fed was about to start shrinking its balance sheet while the ECB had not even begun, leaving a double problem in Europe, and that with euro-area debt at an average duration of 8.2 years, ending QE today would still take years to work off the balance sheet.

The end states he lays out are three: honour the market price; restructure, as Greece did to the tune of a hundred billion in 2012, which requires major political architecture change; or keep mutualising — recovery-fund-style joint debt that reliably delivers negative real returns and moves money from north to south, which is federalisation in the financing sense. If nobody volunteers, the black spot stays with the ECB, which then has to invent stories about why guaranteed losses aren’t losses. He also notes the hokum option: convert what the central bank holds into hundred-year zero-coupon paper and make it someone’s problem in 2122.

His own proposal, from the 2015 Libera book Euron tulevaisuus, is a step back towards the ECU: with a digital central bank currency arriving anyway, give each country its own digital wallet, build the infrastructure so those wallets can find a local market price, and compute the general euro as a capital-key-weighted sum across the nineteen. That preserves the euro as the unit in which decades of existing contracts and derivatives settle, while adding pressure valves for country-specific conditions — Italy could be allowed to inflate away its refinancing risk; Netherlands could strengthen.

Asked the odds the euro area is intact in ten years, both he and Vilén give a low probability of breakup — there will certainly be a unit called the euro, since some liabilities are effectively perpetual; the open question is the infrastructure that clears whether a euro is worth one euro everywhere. He adds that the new cold war has probably sealed it, because the politics of transfers look different when everyone is being pushed to pull the same rope.

How he was positioned

Never bet against America, still. No cash on deposit, and no bonds — deliberately omitted, because a rising yield curve makes fixed income a guaranteed loss, which he notes is also exactly why nobody wants to be Italy’s lender. Cost-efficient ETFs weighted to the Nordics and the US and away from the DAX and euro-area exposure, his own property, a UK pension pot from the London years with a global equity allocation, private equity LP stakes, some real estate funds of a more sophisticated kind, the €50,000 equity savings account used in full and kept in growth rather than dividend names — and, through gritted teeth after his London friends had called the value rotation a year earlier, a little value.

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