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Sunday, 23 November 2014

Future of investment banking: collaborate don’t build

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CA-CIB/UniCredit with Kepler Capital Markets; BTG Pactual with VTB Capital and SMBC; CIMB with RBS; Macquarie with Kasikornbank and Foundation Securities; ICBC with Standard Bank. Collaborations, it seems, are all the rage. They’re nothing new, to be sure, but could pairings like these become the norm in investment banking and capital markets?

IFR Editor-at-large Keith Mullin

IFR Editor-at-large Keith Mullin

On the basis that they make good sense and on the proviso that they’re properly structured, scoped and managed, I’d say yes.

Working with well placed incumbents offers a potentially much quicker basis for growth and a cheaper way of breaking into new markets and the collaboration of course works both ways. One of the trade-offs is that each party has to give up or compromise on control but for new market opportunities or intellectual technology transfer, that’s likely to be less of an issue, even with the potentially thorny issue of shared economics.

For the majority of houses that want to have investment banking in their product armouries but which don’t have the deep pockets or don’t want to waste shareholders’ money to finance ambitious build-outs, collaboration is a great way to go especially in a world of higher capital requirements, lower ROEs and a generally more expensive and testing operating environment.

The strategic co-operation that BTG Pactual and VTB Capital signed recently will further the ambitions of both banks in their quest to become global emerging markets-based organisations as they ply the potentially lucrative Russia-CIS-Latin America axis across investment banking, asset/wealth management and private equity.

BTG Pactual signed a similar deal in 2011 with Japan’s SMBC covering structured products and securitisation, and cross-border M&A. SMBC will also distribute Brazilian financial products to its client network in Japan and the rest of Asia.

Predominantly domestic deals

For all of the talk of being global, BTG and VTB have overwhelmingly domestic – not even really regional – M&A and ECM dealflow. Nothing intrinsically wrong with that: of the 42 M&A deals involving Latin American targets that BTG has advised on year-to-date, only four (excluding its own acquisition of Colombian broker Bolsa y Renta) have been non-Brazilian and the bank advised Brazilian acquirers on three of those.

BTG is number one in Latin America ECM YTD, but all its deals bar one have been Brazilian. And the only non-Brazilian deal was the rights offering for Chilean shipping company Compañía Sud Americana de Vapores and it only earned the credit on that deal through its judicious acquisition of Chilean investment bank Celfin Partners.

In this context, the BTG/VTB agreement makes a lot of sense, not just for M&A and capital markets origination opportunities but also for distribution of securities and research, and for origination of wealth management mandates.

In Asia, domestic banks are starting to flex their muscles regionally and it’s in this context that CIMB’s co-operation agreement with RBS was signed. The deal – which came at the same time as RBS sold its Asia-Pacific investment banking and cash equities business to the Malaysia-based bank – covers capital markets, M&A, equities, derivatives, loans, trade advisory and financing, cash management and agent or custodian arrangements.

In similar vein, Macquarie’s exclusive strategic alliance with Thailand’s Kasikornbank and Pakistan’s Foundation Securities offers the Australian group opportunities to enter the domestic investment banking arena that it simply couldn’t easily or quickly have generated for itself.

The most recent major collaboration came last week when Credit Agricole CIB said it was delegating its European equity sales, trading and research to Kepler Capital Markets (KCM) by selling KCM its broker Chevreux

The Thai deal covers equity capital markets, inbound and outbound M&A, institutional equity sales and brokerage services as well as co-branded research to domestic clients. The Foundation deal broadly covers investment banking and securities operations.

ICBC’s partnership with Standard Bank is a classic China/Africa play and stems from the Chinese bank’s acquisition of a 20% stake in Standard. It covers investment banking, resource banking, global markets, corporate banking and the formation of a Global Resources Fund.

The most recent major collaboration came last week when Credit Agricole CIB said it was delegating its European equity sales, trading and research to Kepler Capital Markets (KCM) by selling KCM its broker Chevreux.

The deal comes amid CA-CIB’s deleveraging and refocusing programme that has also seen it sell 19.9% of CLSA to CITIC Securities for US$310.32m (along with an irrevocable put option to acquire the remainder for US$931.68m); offload its private equity business to Coller Capital; its credit correlation book to BlueMountain Capital Management, and its retail bank Credit Uruguay Banco to BBVA.

CA-CIB will become a long-term partner and a strategic shareholder in the new group, Kepler Chevreux. It’s similar to the deal UniCredit struck with Kepler in two stages earlier this year. As part of the deal, KCM will distribute and provide research on CA-CIB’s ECM deals. Interestingly, UniCredit said it might take a minority stake in Kepler Chevreux, and CA-CIB and UniCredit will look at partnering in ECM.

There will need to be some careful ring-fencing and Chinese walls built as the new arrangement takes shape early in 2013, but the collaboration should be value-accretive to all parties.

Dynamic collaborative web

Kepler is fast becoming the centre of a dynamic collaborative web. In 2011, it signed a research distribution agreement with Danske Markets Equities relating to clients in Denmark and Finland. Also last year, KCM took over the equity brokerage unit of Italy’s Banca Leonardo. That agreement came at the same time as the Italian bank acquired 5% of KCM at the time of Kepler’s capital raising; a deal that also saw BlackFin Capital Partners take a 21% stake, Caisse des Depots 14% and Credit Mutuel Arkea 7%.

In a much less formal arrangement, US investment bank Jefferies and Rabobank recently entered into a loose business facilitation arrangement in European leveraged finance and high-yield capital markets, where Jefferies will be looking to engage Rabo’s balance sheet to help it win business.

The two firms recently led the Fokker Technologies refinancing and demerger from Stock Technical Services (STS), resulting in a €150m term loan B at 800bp over Libor and a €50m revolving credit facility at 650bp over.

The final stage of the refinancing – a €315m high-yield bond via Jefferies and Goldman Sachs – was due to print last week but was pulled at the last minute. The borrower is reviewing the deal with a view to getting it redone imminently. Rabobank, incidentally, was sole underwriter and mandated lead arranger on STS’s acquisition of Scottish oilfield services firm RBG Group.

I’ve long argued that the kind of macho business building with no credible rationale that had taken over the investment banking industry is an unacceptable business strategy in today’s environment. Playing to traditional strengths but leveraging off the strengths of others to create value-added returns is the way to go that over time will change the investment banking landscape. And for the better.

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