Why did you decide recently to sell G-Trade - your electronic stockbroking arm - to Bank of New York?
The G-trade business is a very exciting business that had grown rapidly. But we had to decide whether it would continue to develop under CLSA's ownership. The simple answer was that an institution such as Bank of New York has a broader base that will allow them to better support the business. They are global operators that can deliver a range of transaction services, including custody and stock lending - capabilities that are relevant in the longer term. We could see a plateau in G-Trade's business if it stayed with CLSA, which now will not occur with G-Trade being owned by Bank of New York. While the price was attractive, it was not just a matter of CLSA chasing a windfall profit.
How big has G-Trade got?
It's achieved a position where it's one of the biggest executers in the global market, and has 22-market coverage, with this coverage still growing. We found that after September 11, it was our best performing business for a while. It was one of the few, well functioning pools of liquidity that was available in the world. The transaction revenue approximately doubled in the week after September 11. That showed our clients how well it worked and increased the confidence in it.
Are you going to miss this diversification of revenue that G-Trade brought to your overall business?
Yes and no. Diversification is one thing, strategic focus is another. CLSA is very good at emerging markets work and Asia in particular. A number of our competitors have dropped out or cut back. The more that our relative competitive position improves, the more sense it makes for us to focus in on our core markets. Moreover, substantial interest is returning to Asia and there will be a significant liquidity inflow, which makes the business attractive.
What opportunities do you see here with the proceeds from this sale?
For the last year or so we have been focusing on how we can broaden our product portfolio to ensure that we can fully capitalize on our client and corporate relationships. Our broking operation is a clear leader in most of the markets in which we operate.
There are two distinct directions in which we can build the business to capitalize on that core. The first is in corporate finance, the second is in trading. We have a different model from many other investment banks. We're clearly positioned as an agency broker. We deliver independent research and we do not normally act in the broking market as principals ? we don't generally fulfill client orders through market making. We do have a separately run trading business that does arbitrage trading and some directional trading. But our primary mission is not to leverage the balance sheet. It is to leverage our people and their relationships.
One key difference between the big investment banks and us, apart from the fact that Asia is our home region, is that they can be seen as capital leveraged by people whereas we are to a much greater extent people leveraged by capital. We are selling integrity, reputation, relationships, skills and service. If you are an agency broker you must avoid conflicts, but you can still make a real success of those corporate finance and risk trading businesses.
Is the world crying out for a bit of financial integrity these days?
When you look at what's been happening over the past few years, the market is well and truly ready for access to agency broking again, as long as it comes with a value-added view, service and independence. There are two extremes to the spectrum of models for investment banking. One is to be deal driven; the other is to be client driven. In Asia there are a lot of quite complex corporate groups with principal shareholders and family structures intertwined, and many operate in difficult economic environments. Many of them want assistance with balance sheet and corporate restructuring to realize their full value.
The consequence is that if you are able to supply a mix of products and advisory service, if you can do ECM and debt products, then you have the ability to manage a client through multiple stages. But it does mean that you must take a two or three year view that if you do a piece of work for a client then there is an understanding that you will get a chance to bid for other pieces of work. We have tended to focus on the middle tier of the market because that's where the sweet spot is in terms of pricing.
That's the holy grail of investment banking. What risks are there?
Such a strategy does not produce instant results, but it's not particularly high risk either, because it is an organic build. It does require, as a prerequisite, a sufficient product capability to keep the relationship and not be pushed out through lack of capability or capacity. We are able to offer substantial debt solutions in cooperation with Credit Lyonnais, our majority shareholder, and this is working very well for clients.
You are one of the few brokerages in Asia majority-owned by a French bank, which has made the commitment to stay doing business in Asia. What is the difference in thinking between Credit Lyonnais and some of the other French banks?
The difference lies in the model on which CLSA was built. We have a cohesive, entrepreneurial, culture with a substantial staff shareholding. Our headquarters are in Asia. That means that we are not just another place to work, and Credit Lyonnais understands the special value of our franchise.
Do you get any synergies from having an exclusively emerging markets focus? For instance, have you been involved in any of [Mexican cement company] Cemex's acquisitions in Asia?
Yes. We're actually working on a deal where Cemex is looking to buy an Asian company. So the cross-regional synergies are there - although we can only really work on one side of a transaction like this. There are a significant number of investors who have global mandates who want to deal with global emerging market operators.
You have recently been beefing up on people to serve the Asian hedge fund industry. What is the thinking behind that and where do you see the Asian hedge fund industry developing?
We are seeing a bigger percentage of the market falling into the category of hedge, absolute return or non-index benchmarked funds. Many of these funds are part of, or aligned with, broader fund management houses a number of whom operate funds of hedge funds. So we are not suddenly servicing a totally new set of people.
We are meeting the developing trends within the market. We supply trading ideas and service to people running these funds, and aim to make this a point of differentiation against prime brokerage operators. To do this we have to be quite nimble and supply a value added product. There are quite of lot of small funds run by very capable management teams who are very performance driven, so they tend to be quite demanding. The cookie cutter approach will not work.
Why is there so much interest in hedge funds in Asia at the moment?
It is just a lot of people looking for absolute returns. The index concept does not fully satisfy some classes of investor. But it is still a relatively small allocation of the total pool of investment. The reason why hedge funds are important to investment banks is that they tend to trade more often. So although the assets under management may only be single digit percentage of the total pool, they might account for a multiple of that when it comes to trading volume.
Finally can we talk about your JV in China with Xiangcai Securities, and your business in China?
That is still being processed by the authorities. We have heard nothing to suggest that the application will not be processed, even though the CSRC recently announced some new regulations. In the longer term, many of our deals in China are likely to come from the small, promising, private sector companies many of which will aggregate into national enterprises over time and become quite large.
Secondly you will see a growing tendency for Taiwanese initiated operations in China. And they will have partial, local spin offs to raise cost effective local capital. The market can be seen as having three key components. Our JV will initially be focused on equity capital markets. But there is also secondary trading, which we would like to expand into, although at present the permissions do not exist. The M&A and advisory market tends to be serviced at least partly through cross border services from experienced international operators, including CLSA.
So there are any number of ways that our JV could evolve. It could cover all those things; it could end up being segmented. We take a total view of the China market and we want the JV to go ahead. But if it is delayed, it will not stop us continuing to operate in a fairly substantial way in China, within the limits of the relevant regulations at the time.