Steve Metcalfe had been out of the investment banking market for three years when the call came in. Dividing his time between London and Hong Kong he had a portfolio of business interests: a film production company with Mark Hamill (he of Luke Skywalker fame), a wine brokerage and an oil company in Thailand. But in September this year he decided to go back into the markets. Not to one of the bulge bracket global investment banks where he had learnt his trade but to a newly energised Samsung Securities.
“It is great to be back in the business,” he said. “There is a tremendous enthusiasm here.”
Metcalfe is one of a growing number of ex-global investment bankers who have decided to join smaller, regional players, attracted by the opportunity to build a new business away from the politics and pungency that infuse the global investment banks.
There have always been local investment banks and there have always been regional banking boutiques. But rarely have there been so many fast growing regional investment banks all fighting over the same intra-emerging market deal flows.
“Does the world really need another bulge bracket investment bank?” asked Martin Newson, CEO of Religare Capital Markets, the investment banking business of India’s Religare group. “The one thing that is absolutely clear, however, is that if you look forward five years you will see one or two banks from Brazil, Russia, India and China who will go out of their local market and go global.”
The likes of Religare Capital Markets, Renaissance Capital (RenCap) in Russia and BTG Pactual in Brazil are staking a claim to be the leaders of a new type of investment bank, what could be termed the super regionals. They will have a strong base in one of the fast-growing, large emerging markets; they will seek to tap into the cross-border business between say Asia and Latin America, or Russia and Africa; they will avoid businesses that rely on debt and large chunks of capital; and they will all market themselves as being more focused than the big boys.
“The strong and sustainable growth in emerging and frontier markets is undeniable and it is much greater than most developed markets. It is a trend that will continue,” said Nick Andrews, global head of equities at RenCap in Moscow.
If any firm can be said to be the blueprint for this trend it is RenCap. Founded 15 years ago as a mid-sized Russian brokerage, it got a new lease of life in September 2008 when Russian billionaire Mikhail Prokhorov bought the firm. The senior management -- including Stephen Jennings, the New Zealand CEO -- decided that the way to grow was to focus on the regions where the global banks were absent and on the burgeoning flows between the new money centres of Asia, Middle East, Russia and Latin America and the frontier markets.
“In large part, the globals cover the main emerging markets but to the extent they cover smaller or frontier markets, it is by remote, offshore research or third-party execution,” said Andrews. “With emerging and frontier markets, local knowledge is critical; being there on the ground with research, trading, sales, understanding local flows and sentiment. This is what we offer.”
RenCap’s credibility as the leading global emerging markets investment bank is based on what it has achieved in Africa. In little over five years it has carved out a niche for itself as the only pan-African investment bank, with sales and trading in the larger markets of Nigeria and South Africa and representative offices in the smaller but equally fast growing countries such as Kenya and Ghana.
It is now focusing on Asia. Jeremy Sparrow has been transferred from the firm’s London office to set up a regional headquarters in Hong Kong. Rep offices are being opened in Beijing and in Mongolia. Bankers focusing on commodities and agribusiness have been hired in Hong Kong. In India a JV has been signed with Kotak Mahindra and Indonesia is next on the play list. It is a busy time.
What these banks possess in ambition, however, they do somewhat lack in Asian revenues. This is largely a function of their novelty. Newson at Religare Capital Markets said that his firm is in the process of acquiring and setting up an emerging markets investment banking platform with global offices, from which revenue will flow and be reinvested around the world. “You would expect secondary trading to be leading primary business and M&A by about nine months,” he said.
Naysayers might point to this relative paucity of deal flow as an indication that while such banks can get up and running, they are operating in an environment where there is very little competition. That is probably fair when it comes to deals, but in one crucial respect these banks are winning, mainly in the quality of the people they are hiring.
“RenCap and Religare Capital Markets are very interesting, developing market stories,” said Harry O’Neill, head of the Asian financial services practice at executive search firm Heidrick & Struggles in Hong Kong. “They are really getting involved in these big new capital flows between the emerging markets.”
People such as Andrews (whose previous job was global head of emerging market equities at J.P. Morgan in Hong Kong) would not join a bank such as RenCap if they did not think the world had fundamentally changed. Indeed a lot of it is personal: after the trauma of the past three years, many bankers -- like Metcalfe -- had thought that they had left the business altogether. What attracts them back is the chance to build a new franchise in an environment with far less toxicity than that which permeates the global investment banks. It is a human capital story as much as one about capital flows.
“These new banks represent an interesting opportunity for people who have got bored with the politics and like to get into build situations,” said O’Neill. “And most of the big banks are built.”
O’Neill describes the chance to join one of these firms as “a big adventure”. Talking to the likes of Andrews, Metcalfe and Newson, one thing is patently clear: they have refound their -- dare one say it -- love for the business. “There is nothing more attractive to me than having the chance to build a business again,” said Newson.
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An interesting aside is that many of the people who are joining these firms were on the beach. They had made their money and felt no desire to get back into the bear pit of a global bank. Newson, the former head of global equities at Dresdner Kleinwort, took the top slot at Religare Capital Markets in September 2009. Andrews had left J.P. Morgan in 2009 (despite being heavily tipped to be the next global head of equities) and had moved to London to be with his family. He joined RenCap in February 2010.
There was also the comfort factor that they were joining franchises that were already staffed by their old colleagues from the global banks. At Samsung, Metcalfe has joined two ex-colleagues: Paul Chong is Samsung’s head of investment banking and principal investments and worked with Metcalfe at SBC Warburg in the 1990s, while SJ Hwang, CEO of Samsung Securities Asia and global head of equities was the ex-head of cash equities at Credit Suisse when Metcalfe worked there in the first half of the decade. “To be honest I am not surprised, but there is a real gathering of people from Credit Suisse, UBS and Deutsche Bank here,” Metcalfe said.
Samsung might look like a curious addition to the ranks of the super regionals but two facts could propel it into the top league. Samsung itself is now the largest conglomerate in the world with a market cap of more than $250 billion. It operates on every continent and can be considered an emerging market all of its own. Time will tell if the non-Korean investment banking business that was established only a year ago can win non-house mandates and execute them outside Korea.
A rich seam of discontent
It is impossible to look at the rise of these super regionals without a negative comparison to global banks. Indeed a key motivating factor for these bankers joining the regional firms is that they are not the global banks. This is also undoubtedly how they will pitch their services to clients. Most of the hires that the super regionals have made are in equities and M&A, two businesses within the global investment banks that have struggled for relevance since the global financial crisis.
The third quarter results from the global investment banks shows that when it comes to overall performance, equities and M&A are rounding errors compared to the fixed-income, rates and currency businesses that got them into so much trouble in the first place.
Morgan Stanley posted a net loss in the third quarter of $91 million due to a writedown of an investment in a casino and sharply lower trading revenues. Even though Morgan Stanley’s CEO James Gorman, said there was “strength” in the investment banking numbers, it was the fixed income side of the business that ruined the day for everyone else. Gorman summed up the difficulty of running a client-focused banking business with such huge legacy fixed-income problems skewing all the numbers. “Although we continued to make progress across some key businesses this quarter, our results in aggregate clearly do not reflect the true potential of Morgan Stanley’s global client franchise and I am not satisfied with our overall performance,” he said.
Even Citi, which posted an unexpectedly large profit of $2.2 billion in the third quarter, was only able to achieve this by cutting its loan-loss reserves and writing back some assets it held on its balance sheet. For corporate finance bankers and those in equities, it is still the case that their bonuses and even their careers are dependent on large parts of the business over which they have no control. It is a rich seam of discontent that the super regionals are tapping into.
Newson continues: “At Religare, we believe that the client-driven relationship banking model is returning and it’s here to stay. The emphasis has shifted away from short-term fixed-income trading and clients are increasingly looking for niche players that have proven sector experience, strong distribution and a full range of expertise to perform consistently in the long-term.
“Religare’s proposition has enabled us to bring together bankers of the very highest calibre who have the experience and global credentials which are perfectly aligned with the group’s unique and ambitious expansion plans.”
A case in point came in June this year when Newson hired Sutha Kandiah, a 20-year veteran of Asian investment banking, latterly at UBS, to be Religare’s new global head of banking.
Who’s the Panda?
There remains one curious absence from this global trend: the giant panda in the room. Of all emerging markets, China is the biggest and the most exciting. And yet, China has singularly failed to produce an investment bank that can compete outside its own borders. China International Capital Corp (CICC) had a theoretical chance, but for many reasons did not grasp it.
One securities firm that people are starting to mention is Citic Securities. It has the ambition and connections to be a dominant domestic house, and since its acquisition of 10% of CLSA, it also shows that it has regional aspirations. A full marriage of CLSA -- with its regional research, distribution and mid-market corporate finance -- and Citic Securities with its Chinese connections and capital would be a formidable competitor.
Such a model could look similar to CIMB, which has defied the sceptics and built a genuine pan-regional investment banking business in Southeast Asia. True, it does have the capital of the largest bank in Malaysia behind it, but it would not be able to win and execute global mandates such as the IPO of Petronas Chemical if it did not know what it was doing.
For the other super regionals, winning and executing global mandates will be the proof that this is more than a passing fad. They have demonstrated they can hire some of the best people in the market, but whether this actually translates into clients giving them the business is another matter. In many ways they are not trying to win business from the global banks, but rather operate in the areas that those globals have ignored or have had to pull back from, such as frontier markets, mid-sized deals or markets where legacy problems prevent the global banks from operating.
“Take Africa,” said Andrews. “Most global banks cover South Africa, but not all. And none is on the ground across all functions in places like Nigeria, Kenya, Zimbabwe and Zambia. The same is also true in Ukraine and Central Asia. So we will continue to focus on emerging and frontier markets and stay several years ahead of the globals.”
This story was first published in the November 2010 issue of FinanceAsia magazine.