Investment banking: Difficult times may give rise to a different model

Very interesting article publshed in Financial Times (www.ft.com), writed by Brooke Masters and entitled "Investment banking: Difficult times may give rise to a different model":

"Of all the financial services sectors, investment banking has been hit the hardest by the turmoil of the past year or so.

Not only have such venerable houses such as Bear Stearns and Lehman Brothers disappeared, but the survivors have had to find well-capitalised partners or reconstitute themselves as traditional commercial banks.

Volatile equity markets, the credit squeeze and the sharp decline in activity on Aim have made it hard for corporates of all sizes to raise money and have hit the bottom lines at bulge-bracket investment banks and smaller boutiques alike.

Many institutional investors are sitting on the sidelines and most banks are reluctant to lend.

Yet companies still need to raise money: to keep going, refinance debt, or take opportunities. That makes them even more dependent on their advisers to help them find a way through what everyone agrees are difficult times.

“In these volatile times, it is crucial to be close to the markets, so we can advise clients on how shareholders will react to corporate developments. When it comes to capital-raising, our ability to judge the market and move quickly are important,” says Naguib Kheraj, chief executive of JPMorgan Cazenove.

Very few deals are likely to get done before Christmas and some bankers think the slowdown could continue through the first few months of next year.
Investors and lenders, they say, are waiting to see first quarter 2009 results to get a sense of where earnings will go.

As a result, many corporate advisers are using this period to help clients get ready for tough scrutiny.

“Cash is still king, so advisers will be spending a lot of time over the several months helping their clients take a hard look at their balance sheets to determine the most advantageous mix of assets.

“Those who have managed their resources well will have a big advantage,” says Marisa Drew, a Credit Suisse managing director who is co-head of the European global markets solutions group and the European leveraged finance origination group.
The next year may see the return of private equity-backed deals, albeit on a far smaller scale than in pre-crunch days.

“Private equity deal volumes have fallen away, but dialogue and the search for opportunities has not,” says Simon Tilley, head of the European Financial Sponsors Group at Close Brothers. “Identifying and delivering bolt-on acquisition opportunities is a key focus for private equity sponsors and for our business.”

Some bankers believe the financial crisis will prove to be a great opportunity for the big universal banks, such as Citigroup and JP Morgan, which can talk up relationship banking, their top-tier mergers, and how they can offer acquisition advice, financing, foreign exchange and cash management all at once.

“Historically, we have supported our clients through difficult times and we expect this downturn to be no different,” says Tom King, head of Europe, Middle East and Africa Banking at Citigroup.

Companies interested in tapping the big banks for financing may find they have to offer other businesses as a sweetener. Lenders have become highly selective about which deals they will back, and institutional investors are also having to husband their cash.

“Companies need to foster and guard relationships with these organisations, as it is longer-term knowledge, shared experiences and the resultant loyalty that will have a bearing on the provision of services and financial backing – be that equity provision from fund managers, debt funding from banks or advice from investment banks,” says David Currie, head of UK investment banking at Investec.

On the other hand, difficult markets may also prove to be an opportunity for a completely different model because some companies will want independent advice that does not come with strings attached.

They are likely to turn to a wide variety of service providers, ranging from Rothschild and Lazard via boutiques such as Greenhill Partners and Fenchurch, to the corporate finance arms of the big accounting and consulting firms.

“Independence from a trading arm and balance sheet for funding will be an advantage both in terms of escaping the fallout and also reputation and reliability – and this is something that corporate finance boutiques and professional services firms alike will be able to leverage and benefit from,” says Neil Sutton, Head of UK Corporate Finance, PwC.

“We may therefore see a re-ordering of adviser brands, where independence and agility in the face of turbulence win over more traditional investment banking names or newly established boutiques.”

After the 2001 dotcom crash, some financial services industry observers predicted the emergence of a “barbell effect” in which universal banks and independent boutiques would prosper, while those in the middle were pushed out.

Independents certainly grew. According to Thomson Financial, in 2000, independent advisers advised on 19 per cent of global M&A. In 2007, the figure was 38 per cent.
But the banks in the middle prospered as well, because the whole pot got bigger and all sizes and kinds of investment banks did well. This downturn may bring about that long-expected squeeze. It may already be under way.

The last big US independent investment banks – Morgan Stanley and Goldman Sachs – are rushing to add a retail component, and retail banks such as Barclays – which picked up large parts of Lehman’s US business – and Bank of America – which is merging with Merrill Lynch – are expanding their advisory side.

It will be up to their clients to make clear which model they prefer.

Copyright The Financial Times Limited 2008