International boutique investment banks are finding Asia’s leading companies more receptive to their pure advisory business models than ever before, yet demand from the region’s nascent capital markets continues to fall short of expectations.
Boutique firms like Rothschild, Evercore Partners, Moelis and Lazard have increased their presence in Asia Pacific over the past couple of years to take advantage of an expected growth in deal flow.
Merger and acquisition fees sourced in the region, especially from China-related business, have swelled recently. However, that does not always mean pure advisory firms are earning as much their larger competitors. Those bulge-bracket firms often use their access to capital markets to win advisory business, as well.
Yet, as the capital markets in Asia develop, the willingness of the region’s more prominent corporate executives to pay for advice has increased, said dealmakers at advisory-only firms.
“Asia is changing, but not as quickly as we would like,” said Rohit Elhence, deputy head of global financial advisory (GFA) in South-East Asia at Rothschild. “The fee pool is still expanding and the number of additional clients is growing as the market evolves. Some companies are only going to pay for advice as long as it comes with financing attached. We know that that’s just a fact of life.”
Pure advisory firms are at a disadvantage when a potential client wants M&A advice with cheap financing attached. However, they had advantages bigger firms did not have, sources said. One important benefit of being smaller is that boutique firms can weather difficult market conditions more easily as they wait for demand to pick up.
“We can, hopefully, adjust with the times because we don’t have a great big infrastructure,” said Stephen CuUnjieng, Asia chairman of Evercore Partners. “That will allow us to be more resilient.”
Still, all advisers in Asia – whether or not they provide financing – face similar challenges. The region’s economies and capital markets are not as advanced as they are in Europe and the US. That translates into smaller M&A volumes in a given year versus other fee-paying services like equity and debt underwriting.
“One of the biggest challenges for firms like ours is that in Asia, M&A is a smaller part of the market,” CuUnjieng said. “The balance here is much more skewed towards financing and funding because this is a developing region and development requires funding, not M&A.”
However, M&A professionals generally believe Asian demand for their product is at an important turning point.
“So, the question has been: is it still worth it? Yes, well we obviously think it is, but it is not as broad and established as in the US,” CuUnjieng said.
The China lure
The prospect of China growth has attracted investment banks, including pure advisers, to the region, even if deal volume is not what many expect.
M&A fees from China have grown rapidly in the past five years. Last year, revenues from M&A advice totalled US$911m, up 17.5% from the US$775.9m reported for 2012, according to Thomson Reuters. In the first four months of this year, fees related to China transactions totalled US$226.3m.
One recent high-profile success for advisory firms related to China was Dongfeng Motor’s planned purchase of a stake in France’s PSA Peugeot Citroen, announced in February. Lazard advised Dongfeng and Rothschild advised Peugeot.
Still, whatever the ultimate deal volumes, executives at independent advisers do not expect to be at the top of the M&A league tables in Asia or more amenable markets in the West. Their business models and their expectations are different, sources said.
Lazard and Rothschild, for instance, are eighth and 10th on Thomson Reuters global announced M&A volume league table. Each firm has a roughly 10% share of the market – the largest of any independent adviser. They illustrate how the advisory-only business model can be successfully used to compete against larger firms.
“All that we have is the advice we provide,” said Glenn Porritt, managing director, head of Singapore investment banking at Lazard. “We live and die by our advice, and we can’t be successful if we don’t get it right and that means, sometimes, we have to advise a client not to do a transaction, which may mean we won’t be paid a fee.”
However, full-service firms tend to dominate the league tables globally, in part because they can provide financing.
Goldman Sachs, Morgan Stanley and Bank of America Merrill Lynch, for example, are the top three global M&A advisers, based on announced deals, in the first four months of the year. They have a combined 74% of the market.
Not only M&A
While M&A contributes, by far, the most to boutiques’ total revenues, firms often provide other products, including advice on equity and debt financings.
Recently, Alibaba Group gave the advisory-only business model a vote of confidence when it hired Rothschild to advise on its upcoming US IPO, expected to be the largest such fundraising for a technology company.
The firm is not an underwriter. Instead, it is expected to help the issuer manage its underwriter group, comprising Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Morgan Stanley and Citigroup.
In this case, Alibaba chose Rothschild specifically because the firm did not provide balance sheet or capital markets access like the other chosen underwriters, sources said.
As a result, its IPO advice is expected to have less bias because the firm is not competing for a bigger share of the new offering.
Advice from independent firms could also help put a stop to the rampant growth in the number of underwriters participating on Asian IPO syndicates, sources said. WH Group, for instance, appointed 29 underwriters, and no IPO adviser, for a Hong Kong flotation that failed to materialise as planned.
Difficulties associated with organising such a large bank group contributed to the deal ultimately being pulled, sources said.
Indeed, if more companies find that Asian markets are not amenable to their plans, pure advisers may find their own businesses start to pick up.
Claire Suddens-Spiers, head of GFA for Rothschild in SE Asia, said the firm’s equity and debt units tended to do better in difficult markets.
“Equity capital markets in Asia, in terms of volumes, have been hit lately, but our advice business often thrives in difficult markets because we don’t need to do 30 transactions a year to stay profitable and people often realise they need our advice in bad markets more than they do in good markets,” she said. “When the market is really going, the mentality is that deals get done all by themselves.”
While Rothschild provides services similar to those available from other banks, such as financial modelling, it adds value in one way that underwriters cannot: “Our role is to keep the banks honest – really to make sure that someone is there without a conflict of interest,” she said.
“There aren’t many things that we do that the underwriters don’t also do, but we’re looking at it through the company’s lens.”
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