Rethinking the model

IFR Asia Awards 2012
10 min read

A good year for investment banking is boom time for Asia’s recruitment consultants. After another dismal showing, however, many are rethinking their approach. The next big payday looks likely to be a long way away.

To John Wright, CEO of Global Sage, this has been the toughest year of his career. “If banks in Asia have felt the crushing pressure of miserable business and flagging margins, then the financial services recruitment industry felt it doubly. In 2012, nobody was hiring; nobody was paying; and no one is likely to do those things in the foreseeable future.”

Harry O’Neill of Heidrick & Struggles set the scene. “It’s been pretty rough,” he said. “The first half of the year was terrible. By November last year [2011], things had slowed down decidedly, and the normal hiring season just didn’t happen. All the activity you expect to see in November and December, with people starting searches to hire in February and March once people had been paid bonuses, didn’t happen. Banks were cutting staff and deal activity was very low.” Things have improved since and “every month has been a little better than the month before”, but it is still a far cry from the good times.

In such an environment, financial services businesses have had to reshape in order to survive. Christian Brun at Wellesley Partners, for example, says that in a difficult year, his house has done a lot of work on the asset-management side, particularly around private equity and hedge funds.

Wright claims Global Sage has “been ahead of the curve in terms of implementing changes, but has had to do a complete rethink of its strategy and approach to executive search”. A key change, he says, has been to diversify the client base: “We’re not wedded any longer to the traditional investment banks as much.” Areas of momentum have included a range of asset management, risk, corporate and insurance work, as well as anti-money-laundering and technology.

Global Sage has changed strategy more than many financial recruitment groups, having undergone not one, but two mergers or alliances in the space of 12 months. In the first deal, announced in January, it sold a stake to Bó Lè Associates, the general executive search firm focused on China with a growing South-East Asian presence. In June, it signed an agreement with The Rose Partnership, the London-based financial services headhunters firm.

They are interesting moves. Bó Lè’s stake gave Global Sage badly needed funding to do other things, but the firm has a different model, covering not just banking, but consumer and retail, industrial and manufacturing, new media and pharmaceuticals. Subsidiary BRecruit is different, too, focusing on mid-level positions and large recruitment projects. Rose Partnership looks a lot more like Global Sage, with a focus on investment banking, risk and compliance, wealth management, private equity, asset management and board practice.

So, is headhunting now a scale game? “Absolutely,” said Wright. He will maintain his firm’s global tilt. “I think there’s a lot more to be done in North and South America. In terms of strategic direction, that’s where a lot of our focus is going to be.”

In traditional investment banking, clients are still trying to work out the right business model that is going to revive them. “You cannot run the sort of businesses that all the investment banks have been running in this new world,” said O’Neill. “Under Basel III, it doesn’t make sense.”

That is not to say, however, that the good times are gone forever. “If you look at the banking industry, it has been very good at regenerating itself through hundreds if not thousands of years, and this is another one of those exercises: figuring out what the new model looks like and how to make money from it,” O’Neill said.

Brun agreed. “Investment banking in Asia is going through a secular change and it’s not going to come back in the form it was before. Even if markets come back, people are going to have to reconfigure themselves in a new world, focusing on profitability rather than share of wallet or league tables as they did before.”

Big hires have still taken place in this environment. One of the biggest was the move of Deutsche Bank’s former Asian investment banking chief, Boon Chye Loh, to head global markets for Asia at Bank of America Merrill Lynch. “It was, without doubt, the banner move of the year,” said O’Neill. “Putting Boon Chye in charge of that business is a phenomenal hire for BofA Merrill, and they should expect great things from that business in 2013.”

Another was Margaret Ren, a renowned China rainmaker, rejoining BofA Merrill from BNP Paribas. Jefferies has been active, hiring a team led by former JP Morgan and RBS banker Sherry Liu. “Everybody is hiring somebody for something,” said Wright. “There are things to do, and things our clients need, but they’re not huge. It’s not like there’s a massive volume of work just waiting there to be had.”

What about the money? As bonus time rolls around, few should have any reason for optimism. “It’s going to be very defined around the people who have performed and those who have not,” said Brun. “There are going to be a lot of zeroes, but, generally, numbers are going to be down.” There may be exceptions. Goldman Sachs is heard to be increasing its bonus pool on last year, for fewer people. However, the overall trend is clearly down. Brun estimates a 20%–30% year-on-year decline, while Wright thinks it is more like “plus or minus 10%, but, compared to before the credit crisis, easily down 66%”. Wright says there will be “either zero bonuses, or faux bonuses. As in: here’s your bonus, it’s mostly stock, and you’ll see it in five years if you’re still here.”

O’Neill expects numbers to be down 10% to 15%, but notes that third-quarter figures from many banks were “not all that bad and, as long as that continues, there will be people paid in line with last year and maybe a little more”.

“The compensation curve has become increasingly steep,” he said. “There is a relatively large group of people who don’t get paid beyond their base salary, and then a small group at the top, who are very well compensated.”

In this environment, the meaning of a zero bonus has changed. “Traditionally, zero was the message to move out,” said O’Neill. “That’s not necessarily the case anymore. If someone is getting a base salary of US$300,000 a year, a bank may say: I’m happy to pay you that, but I don’t see how you generate anything to justify more.”

The major capital-markets shift of 2012, with deal-making shifting from equity to debt, has not been reflected in clear hiring trends. Equity teams had already slimmed before this year and don’t tend to be all that large anyway; and debt capital markets, carrying a relatively low fee margin, seem to involve the same people handling the increased deal flow for the same money as before.

“They just have to roll up their sleeves and stay later at night,” O’Neill said.

Wright says that, rather than hiring more in DCM, “what banks have done mostly is to get people to cross over. Debt capital markets aren’t far from equity-capital markets; they just use existing teams”.

What next? Financial services recruiters are likely to continue to bolster their efforts in asset management, where there are, at least, larger sums of money under management to chase as pension funds become institutionalised in Asia.

Wright says asset management “has been doing musical chairs all year long and will continue to do it. There are more players, more money being swept up, and people are looking for sales forces”. As regulation has changed, more asset managers have moved from being equity only to fixed income, as well, and, increasingly, alternative investments, too.

“With the Volcker Rules set following the Obama re-election, the growth of hedge funds and risk trading houses is almost guaranteed,” said Wright. “However, in investment banking, it is all about having better people doing more with less. The war for talent couldn’t be greater.”

They have also had to shift focus to names beyond the bulge bracket and towards boutiques. There are, generally, fewer big hires at UBS, Credit Suisse, Goldman, Morgan Stanley or Deutsche than at Jefferies and Blackstone, for example.

However, in traditional sources of work, it will be is tough. “There’s still going to be activity around investment banking, but people have to be clever about it,” says Brun.

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Rethinking the model