Campbell reflects on 50 years as a broker

The retiring CEO of Goldman Sachs JBWere says investment banks have to put their capital to work to survive in todayÆs market.
Two weeks ago, Terry Campbell stepped down as CEO of the Australian investment bank Goldman Sachs JBWere after 10 years at the helm. He handed over the reins to Craig Drummond, his second-in-command, but is staying on as the bankÆs chairman.

Campbell was a key player in forming the 2003 partnership between Goldman Sachs and JBWere which saw the US investment bank take a 45% stake in the Australian business. Last year, the firm was one of three global co-ordinators working on the A$15 billion Telstra 3 placement alongside UBS and ABN AMRO. Campbell himself headed up the T3 sales team.

Here he reflects on his years as a broker and a deal maker at JBWere û a firm he joined in 1959.

After nearly 50 years in investment banking, what do you plan to do in your retirement?
Terry Campbell: IÆm not really retiring. As chairman I will still be very much involved in the bankÆs activities and will spend a lot of time talking to our clients about what we can do for them. IÆll no longer be managing the day-to-day operations of the bank which essentially means I can pare back to a five-day-week. And hopefully IÆll be able to take some extended breaks overseas too.

What has changed about the way investment banks operate since you took over the role of CEO in 1997?
The bread and butter business of simple equity broking no longer pays the bills. In a lot of cases, there is no margin on the equity trading side of a deal. Investment banks have really had to put their capital to work in order to create solutions for clients and facilitate transactions on their behalf. Clients want us to use our balance sheets to facilitate their own strategies. The ability for us to use our capital more efficiently has been helped along by an explosion in the derivatives market. New computing technologies that allow for greater quantitative analysis and better risk modelling have led to tremendous growth in the derivatives market. This means we can be more innovative in the way we structure deals and apply our capital.

Are you pleased with the partnership with Goldman Sachs?
I think it is working exceptionally well. At our Australasian conference in New York last week, Lloyd Blankfein (the CEO of Goldman) went out of his way to say what an exceptional success the relationship has been. Even though the business is still majority owned by Australasian partners and staff, we feel very much part of the Goldman Sachs group. We share a similar history in that we were both tightly held partnerships with our roots in broking. The organisation thrives on a team approach but succeeds because each individual absolutely believes that they can achieve what they set out to do.

How much access do you have to the Goldman SachsÆ balance sheet? Do they apply a fairly rigid risk assessment to Aussie credits?
We have our own not-insignificant balance sheet and we use that balance sheet up to a prudent level without the need to discuss it with them. But the dialogue between us is constant and so far they have been supportive of everything we have done. Yes, we can tap into their balance sheet and yes they have a prudent risk management policy. In fact, they have such a fantastic risk management system that we have been steadily importing it into the local office.

Is the brand working? ItÆs a long name?
YouÆre right, it is a long name, but everyone seems to be prepared to say it in its full length. They call us Goldman Sachs JBWere, and the brand is sticking.

What will be key to maintaining momentum at the firm now that you have stepped down? Can Drummond continue to generate a 16% increase in annual profits?
Profit growth is determined by the markets so the key to momentum is a healthy market. But you canÆt be complacent. The last 15 years have been a period of exceptional growth for global markets and for Australia in particular and this canÆt go on forever. As Lloyd Blankfein said recently, ôtrees donÆt grow to the skyö.

So weÆre in for a large correction?
I wonÆt say how large it will be, but the current correction certainly hasnÆt run its course. The markets are very volatile, which isnÆt a bad thing for some investors. The downturn for the Australian markets isnÆt over yet.

Some pundits say that the Australian market will always do better than others because of the amount of superannuation money constantly flowing into the system?
There is no doubt that there is a lot of local support for the market. And the fundamental story for Australia is good too with its rich resources and its relationships with China and Japan. However, as stocks get more expensive in Australia, I see superannuation funds investing more overseas. This is one of our challenges as a bank û to provide clients with opportunities to invest in offshore markets. Right now, these opportunities are in structured products. We recently launched a capital protected product that gave clients exposure to a basket of Asian indices.

How important was the capital protection element of this product? Does it suggest that institutional investors are still anxious about the risks of investing offshore?
The level of capital protection needed to get these structured products off the ground is already winding back. So I think itÆs fair to say that our clients are getting more comfortable with taking a full exposure to overseas markets.

On reflection, why do you think the T3 transaction was so successful?
I think the dealÆs detractors underestimated the support that would come from high-net-worth investors. There are lot of individuals that have a spare few million dollars to invest in good yield plays like Telstra and it was these investors that werenÆt affected by the noise surrounding the deal.

The transaction was certainly highly structured with many layers of incentives designed to attract different investors. Is this the future for equity placements?
Not really. The structure was more a function of the large number of shares that needed to be sold and the fact that Telstra is in a transformation phase. In the end, the partly-paid structure was a good move, and the high yield and the valuation made it a very attractive opportunity for investors.

Goldman Sachs JBWere recently began raising money for a wholesale private equity fund. What is the thinking behind this move?
The firm has run a very successful private equity business in New Zealand for some time and now we want to replicate that in Australia. Obviously Goldman Sachs globally is a big player in this space too. The New Zealand team has been headed by Clark Perkins and now he is running our trans-Tasman merchant banking business. We are also hiring new people for the Sydney office.

There have been a lot of high-profile private equity deals done in Australia, how do you intend to compete?
I think thereÆs been a lot more noise than actual activity in the private equity market. We will follow the strategy of our successful mezzanine fund. We donÆt want to be the biggest player in the market and wonÆt need to do mega-deals in order to get our capital invested.
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