02/02/2023

For at least the past five years, UBS and Macquarie Capital have consistently been in the market’s top three investment banking revenue earners. But now might be the moment to break that stranglehold.

This year, the flurry has already begun.
And rather than chase inflated salaries, for many, it’s about positioning themselves with the next round of winning franchises.
“People realise there is $7 billion to $7.5 billion in fees, but they only gain the benefit from that if they are viewed as trusted advisers. It’s a mature market, it is an overbanked market, there is demand for trusted advisers,” said recruiter Gary Howard.
Attracting talent is not just about a large pay cheque, Mr Howard added. In uncertain times, being attached to a firm with a big balance sheet and international reach is also more important than ever.
Challenging the ruling order
Barrenjoey had one false start months ago, when it began picking off staff from bulge bracket firms, sent out contracts and then rescinded the offers before deciding it was willing to proceed.
Now it follows New York-based Jefferies opening up under Michael Stock. New Zealand’s Jarden has also entered the local market, helmed by ex-UBS-ers Robbie Vanderzeil, Aidan Allen and Goldman Sachs’ Sarah Rennie.
Like many of its predecessors, the expectation is Barrenjoey along with Jarden and Jefferies wants to upset the existing pecking order where the top five firms in equities have more than 50 per cent market share, and the top two have as much market share as the bottom 60 firms.
Local investment banking business has for years been dominated by a tight-knit group of three or four firms.
For at least the past five years, UBS and Macquarie Capital have consistently been in the market’s top three investment banking revenue earners, according to Dealogic investment banking revenue.
But now, some are hoping, might be the moment to break that long stranglehold.
UBS’ top spot is regarded as vulnerable, after the firm lost many of its key people following the end of a ring-fenced local structure.
The European banks are not what they used to be: Credit Suisse is talking about merging with UBS, in response to increased regulatory focus and capital requirements. Deutsche Bank has dramatically scaled back its presence as part of a global strategy.
Those that are jumping across to one of the new firms are betting the new firms can successfully challenge the long-term winners.
Historically, it has been hard to crack into that top tier.
There have been plenty of comparisons to Macquarie’s path to the top as well as Goldman Sachs’ partnership with JBWere.
The partnership was sold to Goldman Sachs after eight years building the business for about $1 billion, based on 1.7 times book, demonstrating it can be done.
“It’s a very good model to grow a business, not to be hamstrung by a big global investment bank, to have autonomy,” said one senior banker.
“That’s the opportunity hire good guys, they’ve got the cash to do it, giving equity when they need to … and there’s the potential to double or triple equity in the next five to 10 years.”
Limited room at the top
All the new entrants are selling the dream of cracking the top tier with equity as one incentive to bring new people across.
It is now standard to have deferred compensation paid out sometimes partly in cash, more often in shares. The real art is in getting more than that in the form of retainers, better bonuses or something else with or without a move.
That is why there is so much focus on Barrenjoey’s valuation, which is public because of Magellan’s $155 million investment in the new firm.
CLSA analyst Ed Henning (Jefferies built much of its equities headcount by plucking people out of the Citic-owned house) described the investment as “questionable”, based on the fact Magellan trades around 23 times, and investment banks tend to trade at between 11 and 14 times earnings.
Another valuation metric for investment banks is between one and one-and-a-half-times revenue, which assumes at least $400 million of revenue when Barrenjoey is yet to do a deal.
That is a big number, bankers say, noting that it would imply a top three spot in the market, on equities and M&A or some very successful investments.
Barrenjoey is still to complete its hiring spree, having said it plans to be ready to go early next year. That may leave time for people to stay for bonus season typically December to late January, or March for Macquarie bankers.
While the team and the structure is considered to suggest Barrenjoey will be a success, some rival bankers say it is a long game, and there are still unanswered questions about Barrenjoey.
For instance, what terms are attached for the $10 billion provided by Barclays?
And there is not room for everyone to win, bankers warn.
“There’s a lot of potential movement there in the market, consolidated down to a dozen or so real revenue writers in the market, that can carry a board room, get to pick and choose who is on senior bench, pick off best and brightest,” says a senior banker, noting that hiring good junior bankers can also be time-consuming and take time to bed down.
“There is going to be some carnage on the way, this is not going to work out well for everyone.”