Investment banks need to localise their operations if they want to be successful says Peter Burnett, Standard Chartered’s head of North Asia corporate finance.
In an interview to mark FinanceAsia’s 20th anniversary, Burnett says it is no longer enough to import outside experts and believes the Chinese banks will be able to successfully internationalise their operations over the next couple of decades.
Burnett is an old Asia hand with longstanding experience in Asian equity markets particularly during the early days of China’s privatisation programme and through the restructuring of Korea Inc following the Asian Financial Crisis.
As head of Asian equity capital markets at UBS during the early noughties, Burnett helped to define syndicate practices as the region’s equity issuance started to take off.
Here he also explains why the Hong Kong initial public offering (IPO) market has become corrupted and needs to change to become institutionally driven once more.
You’ve lived in Asia for a long time now. What is it you like about this region?
Yes - I first came to Asia at the end of 1995 and Europe feels very foreign to me now. I’ve become an emerging markets guy and enjoy doing Asian deals because there is never anything programmatic or mechanical about their origination or execution. Every deal is different.
What were the markets like when you first arrived?
Pre-Asian Financial Crisis (AFC), our work was mainly concentrated in Korea, Taiwan, Thailand and Indonesia. In those days deals were smaller – sometimes as low as $50 million to $100 million, but fees were also much higher – 2.5% to 3% on a standard ADR or GDR or CB.
In addition, markets like Korea and Taiwan were partially closed to foreign investors so hot stocks like Korea Mobile used to trade at a significant foreign premium in the ADR. Investment banks did very well earning fees on deals and by taking margin out of the premium through trading on their own book. They can’t do that any more.
Once the crisis hit you spent a lot of time in Korea working on government restructurings and privatisations.
I’ve always enjoying working in Korea. Everything is always incredibly well planned. It’s a joy turning up at the airport and knowing a driver will be there with a detailed itinerary.
The Korean people are very organised and disciplined. I remember going to a pitch for KT&G’s privatisation at the height of the AFC when the government had asked companies to save money by keeping the air con switched off until the temperature hit 27 degrees.
It was May and the room was probably 26 degrees. The windows were closed, the Koreans were smoking and I was obliged to present in my banker suit under the direct glare of the sun.
But we won the deal. One of the other aspects I’ve always loved about Korea is the way its people are prepared to challenge the status quo. It’s a country where dissent is welcomed and tolerated.
They also have a reputation for being very challenging during pricing meetings.
I came to realise there was a very simple trick to executing Korean deals. Issuers needed to find the point of no return.
Even if it was a small $50 million CB they would push and push and push until they reached the point of capitulation where we were prepared to walk away. Once they had reached that point they pulled back and the deal was done.
But the process was very important to them. They wanted to know they were getting the best possible deal.
That mentality was always there before and after the crisis. It’s Korean determination combined with great creativity. I remain very positive about Korea. It’s a great country to do business.
What’s changed now?
One thing, which hasn’t changed, is how high profile the chaebol still are. But smaller private sector companies have also broken through and established themselves in, for example, the robotics and tech sector, which is a very positive move.
The really big change has been the development of domestic liquidity. Korea and Taiwan were both incredibly active international equity issuers from the mid 1990’s to the mid noughties. But they just don’t need US dollars like that any more.
My personal turning point was the $1 billion dual Seoul and New York listing of TFT-LCD producer LG Philips in 2004, which I led at UBS alongside Morgan Stanley. It was the first time a company had listed in Korea and the US at the same time and it demonstrated the depth of domestic liquidity.
Soon after companies didn’t need the ADR part anymore.
What’s your view on the Hong Kong IPO market? Has it become dysfunctional?
The use of cornerstones has been taken to a level, which was not originally intended. They were designed to underscore the quality of the issuer. Now they’re being used to pre place a substantial part of a deal, as a derisking exercise.
The whole process needs to be better managed. The bookbuilding process should determine the valuation through broad market price discovery.
If you use cornerstones to determine pricing, ahead of bookbuilding, public market investors will lose transparency and issuers won’t get the best deal even though it may feel like they have greater security.
But isn’t that the whole point? They are getting better security because they’ve underpinned the deal at a valuation they want?
It’s not unknown for cornerstones to lowball the valuation. Also I’m not saying there shouldn’t be cornerstones at all. Just that there needs to be a proper bookbuilding process as well.
Cornerstones do have value. I worked on one of the first deals, which deployed them: MTR Corp’s privatisation in 2000.
It was a $1 billion plus deal, which was big for its time and we were concerned investors wouldn’t be interested in a yield play at the height of the dot.com era. So we went to the hongs and asked them if they would agree to support this Hong Kong icon by buying a portion of the deal and agreeing to a lock-up, which would be flagged in the prospectus.
It was a great strategy and it was transparent. Now what you see are huge shadow books and sometimes banks are only mandated on the basis of how many cornerstones they’ve introduced.
That’s not how the international IPO market works. Syndicates should be finalised by the time the A1 filing is made.
You mentioned the MTR Corp privatisation. Another transformational deal you were closely associated with was the $2.66 billion IPO for Bank of China (Hong Kong) in 2002.
That was the first big Chinese privatisation mandate UBS won. It was also a hugely important deal for China in setting the benchmark for all the other bank IPO’s, which followed.
It was also the reason behind my meeting with premier Zhu Rongji who was a formidable man. After the mandate was awarded he called an underwriters’ meeting so he could understand the process.
What really impressed me was the fact he didn’t sit and lecture us. He had the intellectual confidence to admit that he didn’t know all the answers and asked a lot of very probing questions so he could learn and understand for himself.
He was also extremely open and candid about the challenges China faced in terms of economic development, societal change, corruption, rule of law etc. It was quite amazing, particularly as Xinhua News Agency was in the room and taking notes as well.
If I ever have grandchildren it will be one of the stories I will be telling (whether or not they are prepared to listen).
I was with Lord Leon Brittan who was UBS vice-chairman at the time. He knew China very well because he’d previously worked on the country’s WTO accession when he’d been the EU trade commissioner.
Normally Leon would only ever require a good set of briefing notes to prepare for a meeting which, like a good politician, he would read and digest thoroughly beforehand. When we met Zhu Rongji it was the only time he ever wanted an extensive two hour “in person” briefing to prepare.
That was for me a measure of the respect that even a seasoned hand like Leon Brittan had for Zhu Rongji and for his leadership and intellect.
Would you agree that the big story of the past 20 years has been China?
It’s the great story of our age, although that wasn’t obvious to everyone in the 1990s when I first came to Asia. When UBS merged with SBC in 1998, I remember one of my new senior colleagues telling me there wasn’t any point going to China because nobody ever made any money there and the risks were too high.
I didn’t share that view and remember thinking, 'wow we’re going to be on a very steep learning curve here'. I think you commit a great error if you ever discount China and its potential. It’s just got so much going for it.
There are a few naysayers around who want to see it fail for all sorts of bad reasons. I suppose it’s the inevitable consequence of its rising prominence on the world stage.
But RMB internationalisation and the One Belt One Road (OBOR) project are all new positive developments for China. The latter is all about trade and development.
The Chinese saw what huge benefits infrastructure had delivered to their own country and they’re now transporting that model to other countries too.
And Standard Chartered is very strong in a lot of those countries.
Yes, in countries across our footprint – Asia, Africa & the Middle East - where we have deep, deep roots.
When I joined Standard Chartered three years ago I also realised there’s an enormous affection for this bank across our footprint, for example in countries like Bangladesh. I call them my Bengali brothers as I was born in Calcutta.
I met a company chairman from Dhaka for lunch recently. I asked him how long he’d banked with Standard Chartered and he said it was his grandfather who opened the account. He himself was in his 70s. That history is important.
For us the next big business opportunity has to be Belt & Road – China going into our footprint. We’ve got a number of OBOR-related projects on the go: bringing together foreign equipment suppliers, ECP contractors, engineers and other counterparties etc. But now China will be a source of capital.
China as the capital source represents another big shift over the past two decades.
The last 20 years was about China importing capital, mainly through IPOs in Hong Kong, and exporting goods. Ditto Korea and Taiwan.
Now we’re starting to see China export capital and import goods Belt & Road is a manifestation of this phenomenon.
How successful have Chinese banks been at internationalising?
They’ve come a long way. When I executed the big China privatisations for UBS in the early noughties, the Chinese banks were only just learning the ropes and were just there for the ride really.
They didn’t contribute much in meetings. That’s all changed.
Citic’s acquisition of CLSA was a very interesting development. It’s still very much an Asian-based business, but it won’t be long before there are more international acquisitions outside of Asia.
You were at UBS when it formed the JV with Beijing Securities. How did that come about?
By the mid-noughties, most of the international banks were actively hoping to set up securities joint venture operations in China. UBS was the only one which was able to gain management control even though the bank didn’t own a majority stake. Goldman Sachs had negotiated something similar but not quite as simple.
The UBS JV was thanks to Wang Qishan who had just become mayor of Beijing. If you remember, his predecessor had been criticised for the way he had handled the SARS [severe acute respiratory syndrome] situation, or rather the way information about it was disseminated.
Wang was a financial markets expert. He’d been instrumental in setting up CICC and bailing out GZI. One of the government’s major tasks was handling the fallout from the trading losses China’s securities firms had racked up at that time.
Many of them were technically broke. Wang trusted UBS and as a result the bank agreed to take a lesser 20% stake in Beijing Securities, but got management control. UBS’s vice-chairman in China, He Di, was also incredibly important to help navigate the labyrinth of approvals and process.
To be successful in Asia you have to have a local business these days. You can’t just import experts from outside any more.
Some international banks are still not set up for this and have carried on relying on their hub and spoke models based out of Hong Kong or Singapore. They’re not as well positioned as banks like Standard Chartered with a really deep local presence and often a long local history, in my view.
The future for international banks in the Asian region is as good as it has ever been but the model has changed. You can no longer run a business by importing global expertise into the local market. You have to start with expertise in the local market and then go global.