Morning Coffee: Barclays is being gentle with the bankers it expects to do big things. Apollo has begun to flex on Wall Street
As well as financial capital and human capital, one of the most important inputs for an investment bank is patience. The desire to earn stable results from a cyclical industry, or to get instant results from a business based on long-term relationships, has destroyed many franchises over the years. So it is very good news to see that Barclays is being realistic about its new investment banking business plan, as set out in a “deep dive” investor presentation on its new strategy yesterday.
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Taylor Wright and Cathal Deasy, the co-heads of Barclays Investment Banking, declared that they want to reduce Barclays' reliance on debt capital markets (DCM) and “balance sheet dependent products”. They intend to do this by moving up the value chain a bit.
At present, Barclays has a well-regarded leveraged finance team, and so in principle it has good links in to all the “financial sponsors” – the big private equity firms which account for such a huge proportion of the investment banking fee pool. But the sponsors tend to see Barclays purely as a provider of finance, rather than allowing the bank to claim a share of the higher-margin advisory business.
So Barclays has what management consultants would call a “share of wallet” strategy. It's not looking for new clients, but trying to squeeze more out of the existing ones. The only problem with this sort of strategy is that in most cases, the customer’s wallet is already fully shared out. - If it wants more revenue from financial sponsors, Barclays will have to take fees that are currently going to someone else.
The easy way to steal market share is to offer cheap lending, but Wright and Deasey have already ruled that out. There are some suggestions in the presentation that Barclays could make more use of its business banking network to identify and source deals for private equity clients, but “cross-selling” synergies like this are often very difficult to deliver.
Which means that the success of this plan is going to come down to hiring good people and hoping that they deliver on the promises they made during the recruitment process. And, as the co-heads made clear, that’s what they’ve been doing. Barclays has said goodbye to quite a lot of MDs over the last year (including in the financial sponsors team), but it has also been hiring.
Like Deutsche and Jefferies, Barclays took advantage of redundancies in the bulge bracket to pick up good people for cheap. Even after last year's hiring, which the bank said yesterday was more than 60% skewed towards "senior" people, the current cost/income ratio is 61%. This is above the long term target of the "high 50s" but is also down from the 70% of last year. Taylor Wright and Cathal Deasy will be hoping that they’ve managed to execute an upgrade on their team at not much extra underlying cost.
Whether they have achieved this or not, time will tell. But the good news is that it’s going to be quite a lot of time. Not only are the revenue targets relatively unambitious (investment banking market share of 4%, which would only represent a recovery to where they were in 2019 when Tim Throsby left), but Taylor Wright made it clear yesterday that the bank is being gentle with its new senior people. “It’s reasonable to assume for strategic products that it can take 12 to 18 months for somebody to become truly productive,” he reflected. So the new hires will be able to rebuild and make their case to clients without the pressure of management demanding immediate results. How civilized.
Elsewhere, when conventional financial indicators are mixed, it’s often a good idea to ask yourself the question “Does this management team look and sound like they’re having a good time?”. In the case of Apollo Management, where the investor day slide pack included a Twitter meme, this would have given a definite signal.
Although conditions for the private equity industry are not great at the moment in terms of making “exits” and releasing cash, CEO Mark Rowan doesn’t see any problems in continuing to raise money. In fact, he’s predicting that Apollo’s assets under management will double in the next five years, and that its private credit business will originate more loans than JPMorgan did last year.
This sort of grandiose ambition and self-conscious flexing does sometimes come before a fall. But for the time being, half the secret of finance is projecting an aura of confidence, and as well as doing that, Apollo are putting their money where their mouth is; they’ve just hired Aoiffe McGarry, Citi’s head of ABS and RMBS syndicate in the USA.
Meanwhile …
Loose lips sink ships; RBC Capital Markets is serving a twelve month ban on having meetings with the Reserve Bank of Australia, after somebody leaked comments from a meeting that was meant to be private. (Reuters)
A “unified global banking team” offering investment banking products to wealth management clients, sounds like a good idea. Until you remember that under the name “One Bank”, a team like this did a lot of damage to Credit Suisse. So perhaps it’s unsurprising that all the leaders announced by UBS today are long term employees rather than CS people. (Financial News)
It’s that season again – just after the graduate programs start, we get stories about Gen Z turning their back on college degrees and wanting to become plumbers. (NY Post)
Tiger has “cubs”, Citadel has “turrets” and Millennium has “centuries”, but Katy Capital’s management are all alumni of Bridgewater, so does that make them a “stepping stone”? The new global macro fund is interesting because its principals still seem to be on good terms with Ray Dalio, so they might be using his Principles. (Business Insider)
How true to life is “Industry”? Everyone has a story, but doesn’t necessarily emphasise that they’ve had two or three of these moments in their whole career, not two dozen in half an hour. (Daily Mail)
US mid-market specialist Lincoln International has hired nine MDs in Europe this year and 19 worldwide, and it’s only 60% through its expansion program. Juan Carlos Montoya is the latest to join, from Alantra, which has been losing quite a few people recently. (Financial News)
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