It is a common practice in recent initial public offerings (IPO) to include minority/women/veteran-owned business enterprises (MWVBEs) to diversify the underwriting syndicate. However, a CBC analysis found that MWVBEs earn only 12 cents to a dollar earned by other small firms with similar passive roles in the IPO.
An example is the $2 billion IPO of Warner Music Group Corp. which includes 10 MWVBE underwriters. The IPO paid out $79 million fees but more than half of it went to bulge-bracket banks that served as lead underwriters. Middle-market firms made between $694,309 and $1.4 million. The MWVBEs only made $173,578 each.
The CNBC study also found MWVBEs took home an average of $167,620 per IPO between 2016 and the first half of 2020, while middle-market firms earned an average of $1.4 million per deal during the same period. MWVBEs accounted for only 0.69 of fees during this period while middle-market firms earned 22% on average. They are certainly smaller than middle-market firms but they almost always have the same roles in the IPO. Despite this, they are allocated with the fewest shares and earn less as a result.
According to Citigroup Vice Chairman Raymond McGuire, issuers often see the practice of adding MWVBEs to the syndicate as a feel-good, check-the-box idea but does not amount to anything for minority businesses.