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Friday, 20 October 2017

Defying convention, and expectations

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  • Defying convention, and expectations

Berenberg is a staid 400-year old private bank, yet it is also the bright young thing in equity capital markets.

To view the digital version of this report, please click here.

They are out there if you look hard enough – humble celebrities, honest politicians, reflective football players, diamonds-in-the-rough all. Then there’s the most surprising abnormality of the lot, and an institutional one to boot: the investment bank packed to the gills with affable individuals still boyishly eager and filled with intellectual rigour, all acting like the last five years was just a very, very bad dream.

To be fair, for Berenberg Bank, a private German lender that traces its origins back to the 16th Century, the past half-decade has been rather good. The financial crisis ripped the heart out of a legion of leveraged banks, but it also stopped Europe’s equity capital markets dead in their tracks. Even when the markets picked up again they were not the same; nor were many of the universal lenders and merchant banks that once lived off and preyed on them.

Without the fanfare of Barclays’ ECM buildout, the German bank slips into an apparent void. From early 2010, it starts boosting headcount, adding analysts in London and sales staff, mostly in Europe but with a sprinkling in North America.

A defining feature of the bank – and the USP when it comes to ECM – is that it remains a private partnership and holds over €28bn in assets under management. The firepower of a private bank is something established ECM rivals fear, and rightly so.

After steadily building a presence, particularly in German issuance, the bank broke through to the top table when it rescued the IPO of Talanx in September. Germany’s third-biggest insurer launched its float into the wake left by the failure of Evonik’s IPO in June, and the turbulence led to the €700m deal’s cancellation on September 12 after failing to reach consensus on pricing with an army of bookrunners, including Citigroup, Deutsche Bank and JP Morgan.

Talanx scrapped the deal, then vented ire, blaming its bankers for overestimating the fair listing value. Investors clearly liked the company, it fumed, but their valuation “deviated significantly” from the estimated minimum fair value banks had provided.

Private power

Then Berenberg, one of the insurer’s oldest banking clients, holding only a co-bookrunner slot on the deal, intervened.

Initially it spoke to around 120 investors (the final number was far higher, the bank said) across Europe, the UK and the US. It carefully gauged interest on structure and pricing from institutions of all sizes, from smaller institutions and mid-caps right up to blue chips.

It reported back to its client. The pricing, Berenberg reckoned, was wrong: way too high given market conditions. Investors were also fretful of any biggish European flotation: minds were too easily diverted to the €3.5bn IPO of chemical firm Evonik scrapped only three months previously.

Vetting a genuine cross-section of the market, said Andy McNally, head of Berenberg Bank UK, “gave us a much better and much more precise idea of how a deeper pool of investors would value the company”.

Hendrick Riehmer, a managing partner at the bank, adds to the picture. “If you talk to three accountants in Britain, Benelux, and Scandinavia, they might have different ideas,” he said. “And that creates the opportunity to say, OK, maybe a different price – maybe higher, maybe lower – would be better here.”

Rival members of the syndicate perceive the situation somewhat differently. They argue Berenberg used its private bank wealth to present the client with a substantial initial order that would relaunch the deal and secure its promotion by two levels to joint global co-ordinator – and at the same time the demotion of Citigroup and JP Morgan.

On September 21, just a week after postponing, Talanx was back, this time with its flotation cut to €500m. Having already done 10 days of marketing and roadshows, the insurer simply relaunched straight into bookbuilding. The book was officially covered on the first day and pricing of 25.5m shares later came at €18.30 apiece. The stock rose on its first day of trading in Frankfurt and Talanx has climbed ever since, closing at €24.30 on April 29.

Carving a niche

Berenberg has been around long enough – going on four-and-a-quarter centuries – to avoid being patronised with an underdog’s tag. Yet it’s unusual to see a private banking expert, particularly one from Hamburg – that most staid of German merchant trading towns, cornerstone of the Hanseatic League – so thoroughly, quickly and effectively reinvent itself.

It’s hard to imagine the likes of Switzerland’s Pictet, or the German private banking trio of Bankhaus Lampe, Hauck & Auffhaeuser and Metzler, having either the scale, the desire or the capability to kick start, then co-lead, such a major deal.

But then, this isn’t a “normal” bank at all. It happily defies pigeon-holing: it is a staid private bank with a vibrant (competitors call it old school) cash equities business bolted on. Riehmer describes Berenberg as a research firm with a bank attached. McNally sings from the same hymn sheet, enthusing about Berenberg’s prospects. The bank’s structure, he said, would remain “as simple as possible. We don’t deviate from that”.

‘Equity junkies’

Again, that means research, equities, and more equities. “We are a firm of equity junkies,” said McNally. “If you build a firm filled with enough equity junkies, clients start to reward you not just financially, but also in terms of the trust they place in you and the openness they deal with you. And that puts you in a position to do deals like the Talanx IPO.”

Success has allowed the firm to systematically build headcount. Berenberg employs 70 analysts in London and 52 salespeople across the northern hemisphere, notably London, New York, Boston, Paris and Frankfurt. A further 15 execution bankers work out of Hamburg, fleshing out a cash equities business that employs, McNally reckons “around 210 people”. 

Nor was Talanx a one-off. Berenberg’s recent deal roster includes a joint bookrunning role with Credit Suisse on the US$991m March 2012 flotation of Swiss group DKSH. The bank also ran this year’s sale by private equity firm 3i of its remaining 16.7% stake in German engineering group Norma. It was called in on January 10 as the banks that had previously led Norma’s ECM transactions were otherwise engaged on ArcelorMittal’s US$4bn fundraising. An attractive backstop was offered and ensured a sole bookrunner role.

Such deals have given the bank an earnings boost, even while the European market continues to flatline. McNally said the firm’s German cash equity revenues rose 56% in 2012, while overall market revenues slumped 25%. In the year to mid-April 2013, the respective figures continue to invert: Berenberg up by 50%; the market down around 15%. Even working from a low base the numbers are encouraging.

The bank has also raised its profile in the league tables. Berenberg was placed 24th in Germany’s ECM rankings in the full-year 2010, rising to 14th place in 2012, according to Thomson Reuters data. It has continued its surge into the new year, ranking a heady fourth in Germany’s ECM rankings in the first quarter of 2013, completing two deals worth US$171m for 5.3% of the market.

The bank is painfully aware that it will have to continue fighting for market share. To that end, the bank continues judiciously to increase headcount. McNally said “10-plus” analysts and researchers will be added to its London campus on Threadneedle Street, while boosting its distribution network in the US. Other plans include pushing into Britain’s ECM space – a move to be led by Chris Snoxall who joined from Jefferies in March – and raising the bank’s coverage of UK stocks to “north of 200”, said McNally, from about 100 at present.

Made of sterner stuff?

Life will not always be this easy. European lenders who lost ground in the crisis will re-emerge, while others, notably UBS, remain clearly devoted to their excellent research teams. Post-Talanx, Berenberg has a target on its back: having shown the mettle for the fight, it will now be met with heightened wariness by its competitors.

Berenberg is determined to meet this challenge head-on, and raise it. “The Talanx deal at the time was a one-off,” said Riehmer. “Companies didn’t know what to expect from us, and clients didn’t know what to expect from us, as we had expanded so quickly. The Talanx IPO showed what we could do, and what we were made of, and now the competition is starting to defend its home turf. We are excited about this. For us, going forward, the most important thing is to get larger roles in larger IPOs.”

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