General Motors Co is considering selling a chunk of the carmaker's stock to institutions who would commit to buy and hold major stakes as the company prepares for its initial public offering, people familiar with the discussions said on Monday.
GM is mulling a plan under which sovereign wealth funds or pension funds would serve as cornerstone investors, a technique often used for large initial public offerings to show that key investors are supporting the deal, four people said.
It's on the table and would be part of the normal course of the IPO, one of the sources said, asking not to be named because the preparations for the IPO are private.
But getting cornerstone investors may attract political criticism if foreign investors or union-linked funds are seen as getting a sweetheart deal.
Direct discussions with potential investors would begin after GM files its initial prospectus with the U.S. Securities and Exchange Commission, expected on Tuesday, the sources said.
Investment bankers have turned to cornerstone investors for recent deals in Asia, most notably the record $22 billion IPO for the Agricultural Bank of China.
Like that deal, the GM IPO represents a major privatization of a government-owned company. The GM stock offering is expected to raise as much as $20 billion, making it one of the largest IPOs ever. The U.S. Treasury currently holds 61 percent of GM after its $50 billion taxpayer bailout.
Each cornerstone investor would likely be asked to commit to buying 2 percent to 10 percent of the IPO and cornerstone investors would likely account for 10 percent to 30 percent of the total IPO, one of the sources said.
Another person familiar with the situation said that the discussions are centering around earmarking about 15 percent of the IPO for cornerstone investors.
By comparison, GM is expected to sell about 20 percent to 25 percent of the IPO to retail investors, that source said.
Tapping a pool of wealthy backers as cornerstone investors could help sway smaller investors to buy into the offering at a time when the economic outlook is uncertain and markets are jittery.
But it could also interject a new element of controversy into the IPO process at a time when GM is scrambling to distance itself from its unpopular 2009 bailout.
Selling a chunk of GM to a sovereign wealth fund could invite criticism that U.S. taxpayers had subsidized gains for offshore investors.
Similarly, courting large pension funds could prompt examination of whether such funds -- often with ties to organized labor -- were participating in order to win favor with the Obama administration.
There is also the potential criticism that cornerstone investors might crowd out smaller investors and could reduce overall liquidity for the stock.
Because of the potential for the GM IPO to become a hot-button, politically, senior U.S. officials have been actively involved in the early-stage discussions around how the stock sale should proceed, people involved in the preparations have said.
Ron Bloom, the Obama appointee overseeing the U.S. government's investment in GM and Chrysler, and Herb Allison, the former Fannie Mae chief executive officer who now oversees the Troubled Asset Relief Program, have been consulted on the question of how to balance access to the offering by retail investors against the potentially competing goal of maximizing returns for U.S. taxpayers.
GM wants to build relationships with investors in emerging markets which are expected to represent the bulk of auto sales growth in coming years, one source said.
Emerging and foreign markets like China and Latin America are becoming increasingly more important to GM, whose sales in China surpassed its U.S. sales in the first half of this year for the first time.
Agricultural Bank of China had 11 cornerstone investors in the Hong Kong portion of its IPO, including Qatar Investment Authority and Kuwait Investment Authority, taking a combined $5.45 billion of stock.
(Reporting by Clare Baldwin and Soyoung Kim in New York and Kevin Krolicki in Detroit; Editing by Phil Berlowitz)