Global investment firms in Asia have started to refocus their businesses on China, after a year when South-East Asia dominated the fee tables
Welcome back, China
Investment banks in Asia-Pacific have come full circle. Firms that shifted resources to South-East Asia after volumes and fees from Greater China ebbed in the last two years have the world’s second-biggest economy squarely in their sights again.
“The theme for 2014 is going to be China, because we’ve already started to see it this year, as the country starts to reassert itself in the capital markets and in terms of innovation,” said John Wright, CEO, Global Sage.
A boost in deal flow out of the PRC is one sign that demand for Chinese talent is on the rise, as it is for securities. PRC equity issuers are starting to return to the Hong Kong and US markets after a significant drought.
In September, China Huishan Dairy priced a US$1.3bn IPO at the top of its expected range, paving the way for several companies, including local banks, to issue new equity. A month later, online classified site 58.com and travel site Qunar priced successful IPOs in New York, where investors had, for the past year at least, shunned anything related to China.
Chinese companies, meanwhile, also have raised more money in the international bond markets than in any other year – and investors seem hungry for more.
These big Chinese debt and equity fundraisings have led bank executives to recalibrate their businesses towards the PRC in a different way than before. Yet, few banks will hire aggressively to handle China-related business, which left them overexposed in the past, according to headhunters.
Instead, they will redirect resources into China, including SEA-focused bankers. Still, it will not be as easy as redeploying staff from one office to another. A lot of future PRC business will come from private entities, rather than the major state-owned enterprises many bankers know best. This new crop of issuers requires some sector expertise that many banks do not have.
“China is changing from an SOE market to one focused on private companies,” said Christian Brun, a co-founder of recruitment firm Wellesley Partners. “Banks have had to shift their strategies to deal with these different clients on the mainland. One thing that has happened as a result is international banks’ China coverage teams have had to become organised around sectors and not products.”
One area that may require more attention is foreign exchange, as China moves to increase the renminbi’s role in global markets, including letting markets eventually set the currency’s price.
“There has been a shift of some resources away from South-East Asia to North Asia,” said Global Sage’s Wright. “You also have to add to that trend the growth of the renminbi as an international currency.”
More in Singapore
While investment banks account for a newly active Chinese market, they will probably maintain their recently expanded presence in SEA, a region that, for many, defined 2013. As volume in PRC-related capital markets started to decline severely in 2012, global investment banks moved more Asian talent to SEA and hired new bankers with key relationships in that region.
“There was a lot of attention on Singapore, where investment banks put more resources,” Wright said.”International firms have opened offices to access new business from the region, looking at Malaysia and Indonesia via Singapore (for example).”
In 2013, this trend extended to private-equity firms and boutique firms. Blackstone announced a new office in Singapore this October. KKR opened an office in Singapore in late 2012. CVC Capital Partners and TPG Capital also had been considering more hires in their SEA offices, sources said.
Competition for the region’s M&A business also has become a lot more intense. Boutique advisers are interested in getting in on some of the volumes that the bigger M&A shops, such as Morgan Stanley and Goldman Sachs, currently enjoy.
Evercore Partners is a case in point. It hired Keith Magnus as senior managing director for its new Singapore office in July. Magnus joined from UBS, where he was head of investment banking for Singapore and Malaysia. Moelis & Co also has appointed senior M&A dealmakers in Asia this year.
Top-tier firms also want to maintain their SEA dominance. For one, UBS has been at the centre of a lot of SEA recruitment this year. In October, Weeratos Simapichaicheth left Phatra Securities to lead the UBS corporate client solutions team in Thailand. At the same time Sufyan Abdul Jabbar, most recently a director at CIMB, joined UBS as a group head in Malaysia.
Also in October, Agung Prabowo returned to the Swiss firm’s Indonesian business as head of investment banking in the country. Prabowo had left UBS for Barclays last year. He replaces Rajiv Louis, who went to the Carlyle Group earlier this year to run its Indonesia office.
“More private equity firms are in South-East Asia and expanding,” Wright said. “When you add in the advisory firms that have opened up offices there, you see that the region is getting pretty crowded. Banks are now sourcing (more) M&A-related activity out of Singapore than they had in the past.”
Asia’s burgeoning debt capital markets have underpinned much of the growth in SEA and beyond. As of November 2013, debt sales out of Asia stood at US$134bn, surpassing the US$133.8bn for all of 2012.
“In DCM, we are seeing a decent amount of hiring, especially in the second half of the year,” said John Mullally, associate director, financial services, at Robert Walters in Hong Kong. “Bond markets in Asia have been more active recently with a greater number of corporates seeking to raise capital through new bond issuances.”
Generally, fees from bond offerings are less than on equity issues, but bankers say new bond volumes have allowed them to earn more from ancillary businesses. That includes the potentially lucrative derivatives market, which is growing quickly in lockstep with credit. The evolution of the way banks and issuers use bonds in Asia has, in turn, required bankers with new skills.
However, finding the right people remains difficult, headhunters say. Bankers with both Asia and DCM experience can command a premium in the market.
“For banks looking to hire, there is not a very big DCM talent pool, especially in Hong Kong, where the market has traditionally been focused more on equity,” Mullally said. “A greater issue, though, has been the fact that the analyst intakes into these DCM teams since 2008 have been minimal. Hence, there is a real paucity of candidates with three to five years (of) DCM experience, the level of seniority that also happens to be the most in demand.”
Credit markets will remain a permanent part of business in Asia, but headhunters say global investment banks will enjoy a more diverse stream of revenues next year, including credit, equity and M&A.
“DCM was also very important this year,” said Wright at Global Sage. “It is not going away in 2014, but, as we move forward, the market is going to welcome ECM again. There has been a resurgence of demand. I don’t think South-East Asia will continue to be as important. Cross-border M&A between China and the US, as the two markets get stronger, is going to help drive volumes.”
Patience running out
Yet, despite the increase in activity, international firms still find it difficult to make money from investment banking in Asia, sources say. A revived Chinese capital market might not be enough to prevent further cutbacks in the region, where executives at some foreign investment banks still say they are overexposed.
“Asia-based banking executives tend to focus on the long-term potential for Asia, but people at headquarters are now asking them about the nearer term,” said Emmanuel Pitsilis, a senior partner with McKinsey’s financial institutions practice.
“Many international banks have become very short-term biased because they need capital and need to shore up their returns at home. Those that are sub-scale in Asia look at poor returns on equity in Asia versus everywhere else and are starting to worry about the mismatch.”
Headhunters say banks have been unwilling to invest a lot in new talent unless they bring high-demand skills or, more to the point, a stable of local relationships. Banks set their sights on very senior talent, as a result. The highest-profile appointment of the year was well-connected banker Kate Richdale, who was named head of investment banking services at Goldman Sachs. Goldman hired her from Wall Street rival Morgan Stanley.
At the same time, as international firms have begun to rethink their Asia businesses, several senior dealmakers have opted to leave the investment banking business altogether in 2013. Kester Ng, JP Morgan’s chairman of Asian equity capital markets, retired to pursue entrepreneurial opportunities. Jonathan Popper, a Morgan Stanley managing director, left to join Singapore state fund Temasek in January. There were other departures, too.
So, if there is a China renaissance on the horizon, global firms will be meeting it with a smaller, more focused and experienced team of bankers.
“For years, Asia-based bankers at global firms have been selling the Asia growth story to headquarters,” said Pitsilis. “However, their bosses are now saying, ‘yes, I can believe that China will be bigger than the US in 2050, but I don’t care; I’ll be dead. Tell me what we should do in the next five years to generate profitable growth’.”
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