From the monthly archives:

February 2013

The first month of 2013 marked a strong start in the initial public offering (IPO) business, with year-to-date deals tripling their 2012 volume. According to an HITC Business report, investment banks facilitated a very strong $10.6 billion in transactions in the month of January. The strong start to the year will certainly be welcome news to those in the investment banking industry that have seen IPO revenues struggle to regain their footing following the financial crisis in 2007.

The majority of the IPO activity has come from real-estate investment trusts (REITs), including a $2.6 billion offering from Zoetis in New York and a $1.6 billion deal from LEG Immobilien AG in Frankfurt. Rounding out the major IPO deals in January was a $1.1 billion IPO of the Nippon Prologis REIT from Japan. Together, real estate deals have accounted for 30 percent of the total global IPO activity in January.

Merger and Acqusition Activity Also Strong to Start the Year

Not to be outdone by those on the IPO desk, mergers and acquisitions activity also had a strong start to 2013. In contrast to the real estate deals seen in the IPO market, Tech, Media and Telecom (TMT) was the leading segment when it came to mergers. Leading transactions included a $21.7 billion bid for Virgin Media and the $18.1 billion offer for Dell Inc. Mergers and acquisitions announced in the TMT segment alone have tripled compared to the previous January, marking a very strong start to the year.

Boutique Firms Carry Forward Momentum

In an interesting development, boutique advisory firms are taking a leading role in many of these major deals. While the IPO market is still being led by giants such as Goldman Sachs and Deutsche Bank, small firms are increasingly playing in the merger and acquisition advisory market. LionTree Advisors scored a major coup when they landed the $21.7 billion mandate for the Liberty Media bid for Virgin Media, which represented the biggest deal in the firm’s history. In addition, fellow boutique firms Centerview Partners and Ondra Partners participated in the $3.3 billion Biogen bid for drug rights from Elan Corp. Participation in such high profile deals is certainly evidence of a shift towards smaller firms playing a bigger role in merger and acquisition advisory.

What Does This Mean for Investment Banking Job Seekers?

After several years of negative revenue trends, the news that 2013 is off to a strong start will certainly bring some cautious optimism for those looking for opportunities in investment banking. Major international IPO activity will certainly provide some of the revenues required for many Wall Street firms to avoid major cuts in the near future.

Most interesting is the increasing role that boutique firms are playing in a range of advisory activities. The increase in the number of smaller firms taking on big deals bodes well for the industry as a whole, as more opportunities should be created as these groups expand. Further, it opens the door to experienced and enterprising professionals in the industry to perhaps take a run at launching their own advisory operation.

In either event, cautious optimism will be the outlook as 2013 rolls on, with industry eyes focused on whether the investment banking can sustain this pace over the first quarter and the remainder of the year.

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The investment banking industry has faced a number of threats over the past years since the financial crisis. From aggressive regulators motivated by political demands to declining transaction volume, it seems that the titans of Wall Street have been under constant attack. And now the industry faces yet another challenge – this time from within the broader financial industry. Private equity firms are increasingly becoming involved in investment banking deal underwriting and some of the biggest firms are making it known that they expect to be leading players in the game in short order. How the established ranks deal with this new threat could dramatically change the shape of the industry.

Blackstone Group the Latest to Seek Out Investment Banking Opportunities

The large private equity giant Blackstone Group is the latest private equity firm to make a run at establishing itself in the investment banking landscape. Private equity firms such as Blackstone are eager to diversify revenue streams in light of potential taxation changes on carried interest, along with the questionable future prospects for leveraged buyouts. Investment banking revenues would also provide a bridge in terms of cash flows as general partners await the arrival of carried interest revenues from their private equity partnerships.

It should not come as a surprise that Blackstone is the most recent private equity group to take a long look at investment banking. Its founder, Stephen Schwarzman, comes from an investment banking background with a long track record of success on Wall Street. His experience and leadership, along with Blackstone’s size and resources, certainly make the group a formidable threat in entering the business.

Blackstone is certainly not the first private equity firm to enter the investment banking landscape. Both Apollo and KKR secured licenses to operate as underwriters and KKR is already generating about $100 million a year in underwriting fees.

What Does this Mean for Investment Banking Job Seekers?

The entrance of private equity firms into the investment banking landscape is a mixed bag for those seeking opportunities for employment in the industry. On the negative side, these firms will put increasing pressure on the established players at a time when they can least afford additional competition. Margins are already tight for most of the bulge bracket firms and motivated new entrants could drive revenues even lower. The new players also don’t have established cost structures to weigh them down and perhaps could bring increased efficiency to the industry. This could threaten existing jobs.

On the other hand, many will welcome new players to an industry that has consistently seen firms exit the market for several years. Perhaps this is an indication that private equity firms see a near term recovery in investment banking revenues, and are simply lining up in order to take a share of that. In any event, it does open up new opportunities as private equity firms look to augment their ranks with investment banking experience and knowledge. How this will impact the industry as a whole remains to be seen.

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After a prolonged series of negotiations, consultations and political lobbying, the European Central Bank released its fact finding document on January 28, addressing the future of banking in Europe. At the heart of the discussions were concerns about the risk investment banking activities posed to the less risky deposit taking operations of large integrated banks. While many politicians lobbied for rules requiring a complete split between investment banking and traditional banking operations, the ECB rejected these demands in favor of a more balanced approach. The results of the ECB report are important as it will begin to assert regulatory authority over Europe’s largest financial institutions beginning next year.

While the report may seem like a victory for the investment banking industry on the surface, significant reform is still expected, and will come at a heavy cost to Europe’s largest banks. Limitations on risk taking are widely expected to be part of a longer term solution and additional oversight and regulatory burden is almost assured.

Liikanen Proposal Still Hangs over Industry

The report of an EU advisory panel, named after the group’s leader Erkki Liikanen, still hangs over the European financial industry as further reforms are considered. The authors of the report proposed a complete split of investment banking and proprietary trading activities from deposit taking functions at all European banks.

The ECB report did not do much in addressing the fears of the industry, with comments generally supportive of the report’s findings. The ECB report seemed to agree with Liikanen with the statement, “in general, the Eurosystem sees merit in separating certain high risk activities of financial institutions that are not associated to the provision of client-related services.”

However, it seems that there will be some moderation in the approach, with additional comments in the report including, “further analysis is warranted on the possible scope for allowing market-making to be carried out by the deposit taking entity, subject to certain limits.”

What Does This Mean for Investment Banking Industry Job Seekers?

It seems as though European financial reform will take a moderate approach after all. This is significant for the investment banking industry as strong armed changes to the structure of the financial industry may have forced many investment banking jobs offshore, or in the extreme case, forced the closure of many large European financial institutions.

While the extreme case may be off the table, additional restrictions on risk taking and increased regulatory compliance requirements and oversight are on the way. As a result, most institutions will be under increased pressure to ensure their investment banking arms are producing returns in excess of their cost of capital. If they are not, the banks as a whole may be better off accepting the lower regulatory requirements of an institution without riskier investment banking divisions. This increased pressure will bring about job cuts, the closure of “redundant” offices and more streamlining of operations. On the other hand, the heightened level of regulation may bring about new and expanded job opportunities in compliance related activities.

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Investment Banking Bulge Bracket Set to Shrink

February 4, 2013

As further downsizing and industry exits take hold across the financial industry, the investment banking segment is set for a major upset in the coming years. According to a recent Bloomberg article covering a McKinsey & Co. report entitled “After the Reckoning,” only five or six companies will remain leaders in the field, otherwise known as […]

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