THE NOTION OF disruptive forces in investment banking is hardly a new one and it’ll continue to drive debate across the industry. But can disruption, as we understand the term as it’s applied in fintech, entertainment, mass-media, communications – or even in retail and consumer banking circles – really be a feature of the new IB landscape?
If you take disruption in its new meaning to refer to a process of creating new, innovative, sustainable and truly differentiated paradigms for how given businesses are conducted, I’m not buying and see little evidence of it in the industry even though the grounds for disruption are out there as we enter uncharted territory in IB. But how would it emerge, what would it look like and what would it do differently?
I had a long chat this week with a super-senior investment banker who walked from his bulge-bracket shop last year. He told me he wants to be a capital markets disruptor. But he has not come up yet with a version of the disaggregated business or service model he is envisaging in his head that is sufficiently compelling for him to mobilise his network or reputation (or his cash).
When all is said and done, the environment is perfect: we’re living in a disruptive period as political and regulatory efforts to render the financial system immune to future attacks or crises force banks to engage in strategic re-organisation efforts to drive safer, leaner, more efficient, more transparent, better-run – and yes, more ethical – outcomes. The fact that this effort has collided with unorthodox monetary policy experiments to reverse the long-run period of economic torpor in most of what used to be called the developed world renders the backdrop a mightily complex one, hence even more ripe for exploitation by innovators.
The only example people point to in terms of disruption is M&A
YET THE ONLY example people point to in terms of disruption is M&A. And I confess I am getting a little tired of people using it to illustrate the theme: classifying advisory boutiques and independent shops as disruptors and integrated financial services firms as disrupted, with all of the clichéd “eating their lunch” headlines.
For a start, monoline advisory practices are as old as the hills; they are not intrinsically or conceptually a function of the New World. The debate about the utility of independent advice versus the integrated multi-product approach is also as old as the hills and it is a debate that comes and goes in cycles with one or the other sides in the ascendancy depending on the underlying context.
The proliferation of M&A shops fronted by former rainmakers at bulge-bracket firms was not driven by dark disruptive forces; the reality is much more prosaic. It’s a direct result of the institutional and cultural transformation being played out in the industry. The new realities of Big Banking have been crimping the lifestyles of the IB rich and famous since the financial crisis.
Heavily reduced compensation and compensation caps, heavily scrutinised governance, mass redundancies on Wall Street and throughout the world, not to mention public hostility towards evil big banks, have seen thousands of people scampering or pushed out of the industry. Many have entered shadow banking, which is beyond the tendrils of stifling regulation and a place where they can do pretty much the same thing – and that is the point here – for a lot more money and with a lot more autonomy.
I NEED TO be a little careful here so I say the following with some hesitancy: M&A league tables (published by IFR parent Thomson Reuters and others) paint a misleading picture in that they are calculated on the basis of giving everyone on the deal full credit for the entire deal, leading to a heavily distorted picture with multiple counting.
If you include Jefferies and Macquarie in the independents camp, there are 13 such firms in the top 25 of US announced M&A year-to-date. Centerview Partners, currently the top-ranked independent, has US$199.44bn in deal credit. But what is that telling us? That they were advisers in some capacity in ‘x’ number of deals worth in aggregate ‘y’ dollars. So what?
To say, as people do, that boutiques have stolen market share from the banks and we are undergoing a process of ‘boutique-isation’ is to all intents and purposes meaningless, in my view. Without banks providing balance sheet financing, refinancing, distribution, trading, hedging and risk management, FX, cash management, wealth management, or depositary and ancillary services, there would be little M&A activity.
The essential services that banks provide are expensive to maintain and expensive to mobilise. Whether that is reflected in the economics of deal-making is a key point here. I’ve love to have the data to be able to compare the sunk cost bases – i.e. the cost of switching the lights on in the morning – of firms run by the likes of Blair Effron, Paul Taubman, Yoel Zaoui, Aryeh Bourkoff, Mark Walter and their cohorts at other independents versus the likes of the relevant bits of Goldman Sachs, JP Morgan, BofA Merrill, Citigroup and the like and overlay that with their respective M&A fee take.
OK, I am digressing somewhat but while I am on this subject, I would like to see league tables that reflect ‘skin in the game’ away from pure advisory. No one has called for IPO advisers to be included in ECM or IPO underwriting league tables. They simply provide a different service. Advisers clearly have a role in the industry. But disruptors they ain’t.
Are institutional capital markets beyond being disrupted? Answers on a postcard.
