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Sunday, 20 April 2014

ECM boom coming: you heard it here first!

IFR editor-at-large Keith Mullin tries to dispel some of the gloom clouding the ECM industry

IFR Editor-at-large Keith Mullin

IFR Editor-at-large Keith Mullin

WE’RE ABOUT TO enter a Golden Period in European ECM where a potential US$200bn deal pipeline starts to unravel and unlock as sentiment starts to shift firmly in favour of equities. Surprised? Well might you be, given the pretty awful time the equity capital raising industry has experienced this year. But that was the key takeaway from IFR’s fourth annual European ECM Conference, which I chaired on October 25 in London.

One of the first jobs I did at IFR was to run the global ECM desk, which I did for quite a long time. That was more years ago than I care to remember but the ECM crowd is a lot of fun and I enjoyed hanging out with the market over those years. One of the great things is that a lot of the faces who were around doing deals when I was on the desk are still around – a major achievement in an industry so given to change for change’s sake. Just think about the equity cycles we’ve seen since the early 1990s. Those guys have been through some bad times, but they’ve also seen some boom times. It was great to catch up with a lot of them again.

So are we about to reverse the cycle of negativity that’s retarded ECM activity, and move into a new paradigm? Some of the signs are there, although I’ve got to say it’s a bit of a stretch to think growth will come quickly or in a straight line. It’ll certainly come off a low base. EMEA has produced just US$105bn of ECM throughput this year, some ways off the totals for the past couple of years.

Around half of all European activity this year has been in the form of blocks and accelerated bookbuilds. While there’s nothing intrinsically wrong with that, let’s face it, this isn’t the highest quality ECM business. IPOs have only just managed to slither over the US$11bn line. And overall, the number of US$1bn-plus deals has been paltry.

CAST YOUR MIND back to the golden years before the global financial crisis: 2007 saw almost 500 European IPOs for an aggregate capital raise of US$124bn. Those were the days, eh? Since then, it’s been slim pickings. But enough doom and gloom. We need a bit of a break and I was determined to steer our ECM conference towards talk of upside. I was delighted that the senior practitioners who took to our stage were more than happy to oblige.

For the past three years, the IFR conference has witnessed a lot of navel-gazing by industry practitioners, be it around syndicate and origination strategies, deal marketing techniques, price maximisation or aftermarket optimisation. This year I was determined not to focus inwardly or to analyse the negative influences at play – we’ve all rehearsed them for far too long – and focus instead on talking sentiment up and letting the community’s imagination run with it.

For sure, I didn’t end up presiding over a hippy-style love-in. It’s clear that industry issues will continue to play on investment banking as it seeks to reset RoE hurdles and works through ongoing restructuring initiatives. This is affecting, and will affect, headcount right across the board, including ECM.

Rupert Hume-Kendall, chairman of EMEA investment banking at Bank of America Merrill Lynch, who kicked our conference off in fine style, warned that the ECM industry needs to fight to keep headcount in place. His views were echoed by others.

He doesn’t believe for a moment that generalist investment bankers will be able to replace ECM originators in the event of product restructuring efforts and generate the kind of dealflow – and revenue – that senior management will demand of the product. And of course, the very idea that ECM headcount may be cut in an environment where the number of deals is increasing will only help to undermine the quality of client advice.

OF COURSE, IT’S all too easy to get a bunch of product specialists in a room and wax lyrical about the future. But one of the precursors of an ECM revival will be a more positive flow of funds into equities. That leg of the proposition is starting to gain traction as market strategists become increasingly vocal about the technical case for equities in an environment where fixed-income and credit are moving into overbought territory.

Now there’s a lot of assumption built into the case for proposing an asset-allocation shift favouring equities, not least of which is the fate of safe-haven flows into government bonds (US Treasuries, Bunds), the fate of Fed and ECB monetary policy including quantitative easing, the ability of the Fed to juice the US housing market, the ability of policymakers to squeeze more growth into the economy and create jobs, etc, and how corporate earnings shape up.

I reckon credit and government bond markets have become far too frothy and will lose some of their lustre in 2013. Governments have a lot of privatising to do next year and beyond; large corporates will seek to create efficiencies through carve-out IPOs; I sense we’ll see a better year in M&A both trade- and sponsor-driven, which will benefit ECM; and there’ll be more a more concerted move towards divestments and exits. Throw in a soupcon of confidence and we’re half way there.

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