INTRODUCING THE 2011 ALL-EUROPE RESEARCH TEAM INTERNATIONAL
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Saving UBS Can veteran banker Oswald Grübel restore the bank’s former prominence? PAGE 32
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37 The 2011 All-Europe RESEARCH
Research Team
32 COVER STORY
Grübel’s Mission BY JONATHAN KANDELL
Oswald Grübel has put UBS back in the black, but restoring the Swiss bank’s former prominence is a more formidable task.
BY LESLIE KRAMER
With the euro zone lurching from crisis to crisis, investors must rely on timely insights from top analysts.
48 The 2011 All-Europe RESEARCH
Fixed-Income Research Team BY KATIE GILBERT
As sovereign-debt worries overshadow all, these analysts capture the crown for astute coverage in turbulent times.
52 Playing the
HONG KONG
China Card
BY ALLEN T. CHENG
The rise of the renminbi promises to boost Hong Kong’s status as a hub for international finance.
60 The Constant
VENTURE CAPITAL
56 Back to Business
Gardeners
PRIVATE EQUITY
BY UDAYAN GUPTA
BY JULIE SEGAL
CCMP Capital Advisors is hoping that its focus on old-fashioned turnarounds will set it apart from the competition.
Superangel investors are increasingly filling the role that venture capitalists once dominated.
GRÜBEL: RETO ANDREOL/BLOOMBERG
VOLUME XXXVI, NO. 1 • INTERNATIONAL EDITION
institutionalinvestor.com BLOGS Private investors are bypassing U.S. economic sanctions on Sudan.
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VIDEO Institutional Investor Americas Editor Michael Peltz discusses the 2011 All-America Executive Team ranking.
WEB EXCLUSIVE Two high-powered groups are trying to slow down the reforms of the Dodd-Frank Act.
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ETC
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Ticker Goldman Sachs plans to weave its own Web 2.0 from Facebook • Activists eye CEOs hoarding cash • Why say-on-pay rules are more gesture than true reform • Leveraged low-risk assets do better than unleveraged risky ones• Five Questions for John Reed • People Faces in Finance • This Month in Finance
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22 ALTERNATIVES
BY CHARLES WALLACE
BY CHRISTOPHER ALESSI
Brazilian-backed 3G Capital used a top-up to hasten its $4 billion buyout of Burger King.
For emerging hedge fund managers, seeding and other investment is thin on the ground.
20 MARKETS
23 FOREIGN EXCHANGE
Whopper with Fees
Healing Properties BY STEPHEN TAUB
CAPITAL
16
Commercial real estate is on the mend, but debt woes and job fears threaten its recovery.
21 THE BUY SIDE
Gold Digger
Institutional Rescue
BY FRANZISKA SCHEVEN
BY FRANCES DENMARK
Banker Egizio Bianchini is a heavy in the metals and mining market.
To raise returns and lower risk, big insurers are outsourcing investments.
RAINMAKERS
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The 2011 All-Europe Research Team
Portfolio managers tell us what they like most about the top-ranked teams in each of the survey’s 49 sectors. To view profiles of teams in second and third place — plus a wealth of other data from this survey — please visit our web site, institutionalinvestor.com.
Early Disappointment
Control Freaks
BY CHARLES WALLACE
Despite capital controls, investors keep buoying emerging markets.
4 Inside II 92 Inefficient Markets 93 Unconventional Wisdom 94 The Futurist 96 The Chartist
24 CEO INTERVIEW Paradise Air BY JULIE SEGAL
Onetime stunt pilot Mark Dunkerley pulled Hawaiian Air out of a dive and is pointing it toward Asia.
To see the latest on these stories or provide feedback, visit institutionalinvestor.com
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ZUCKERBERG: TONY AVELAR/BLOOMBERG
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HE CHARTIST CONTENTS INSIDE II TICKER FIVE QUESTIONS PEOPLE THIS MONTH IN FINANCE
Ossie’s Encore
www.institutionalinvestor.com
THE SPANISH PARLIAMENT
voted last month to raise the retirement age to 67 to help the country pay down its debts, the latest in a series of belt-tightening moves across Europe. Such measures are often seen as bitter medicine for citizens who for too long had lived lavishly. Perhaps it should be seen as an opportunity. Consider the case of Oswald Grübel. Nine years ago the veteran Swiss banker was called out of early retirement to help lead a turnaround at what was then a troubled Credit Suisse. He did just that before turning over the bank’s reins to Brady Dougan in 2007. Later that year, Switzerland’s other big bank, UBS, went into a near-death spiral because of massive bad bets on U.S. subprime mortgage securities. The bank would take more than $50 billion in write-downs,dismiss two CEOs and two chairmen and turn to the Swiss government for a bailout before asking Ossie (as Grübel is known) to come out of retirement once more to lead a fresh rescue attempt. Grübel is a no-nonsense banker who began trading bonds in the 1960s, before
many of the subprime whiz kids were even born. His return can be seen as a metaphor of sorts — the adults are back in charge at UBS. No doubt shareholders and the Swiss authorities hope that’s the case. So far Grübel’s second comeback is playing out very much like his first one. He’s pursuing a one-bank strategy, driving closer integration between UBS’s investment banking and wealth management units in a bid to generate growth.The method returned the bank to the black last year. Whether it will restore UBS to its old place among the elite of global banking isn’t yet clear, but Grübel vows to remain until at least 2014 — when he will be 71 — to see the job through. “Do I look like I am about to retire?” he asks Senior Contributing Writer Jonathan Kandell in “Grübel’s Mission” (page 32).
“Do I look like I am about to retire?”
INTERNATIONAL EDITOR Tom Buerkle AMERICAS EDITOR Michael Peltz ART DIRECTOR Nathan Sinclair MANAGING EDITOR Thomas W. Johnson LONDON BUREAU Loch Adamson (Chief) ASIA BUREAU Allen T. Cheng (Chief) WEB MANAGER Barry Whyte WEB EDITOR James Johnson WEB PRODUCTION/DESIGN Michelle Tom WEB INTERN Franziska Scheven SENIOR WRITER Frances Denmark STAFF WRITERS Imogen
Rose-Smith, Julie Segal,
Neil Sen (London) SENIOR CONTRIBUTING EDITORS Firth Calhoun,
Nick Rockel SENIOR CONTRIBUTING WRITERS Pam Baker,
Hugo Cox, Katie Gilbert, Fran Hawthorne, Jonathan Kandell, Leslie Kramer, Scott Martin, Ben Mattlin, Craig Mellow, Virginia Munger Kahn, Cherry Reynard, David Rothnie, Harvey D. Shapiro, Henry Scott Stokes, Paul Sweeney, Stephen Taub, Charles Wallace SENIOR EDITORS Tucker Ewing, Jane B. Kenney (Editorial Research) ASSOCIATE EDITORS Denise Hoguet,
Fritz Owens (Editorial Research) COPY EDITORS Monica Boyer, Ruth
— TOM BUERKLE INTERNATIONAL EDITOR
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Hamel,
Catheryn Keegan DEPUTY ART DIRECTOR Diana Panfil ART DEPARTMENT Alex Agius, Israt Jahan,
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February 2011 News and views from the world of finance
Mark Zuckerberg (left) and Lloyd Blankfein
INVESTMENT BANKING
$2 billion private placement: $500 million from Goldman and Russia’s Digital SkyTechnologies and a further $1.5 billion from Goldman’s non-U.S. private clients.The capital should come in handy for staying in front of fastmoving social-media rivals, such asTwitter and Zynga, and gobbling up would-be competitors. As for Goldman, which had net revenues of $39.16
ZUCKERBERG: KIM WHITE/BLOOMBERG; BLANKFEIN: DANIEL ACKER/BLOOMBERG
GOLDMAN WEAVES AWEB 2.0 THE REAL FACEBOOK PAYOFF Goldman Sachs & Co.’s investment in Facebook is a little bit about Facebook and a lot about Goldman, but mostly about whichWall Street firm gets to dominate underwriting for Web 2.0 companies. Sure, Facebook can use the INSTITUTIONALINVESTOR.COM
billion last year, the prospect of handling Facebook’s impending IPO may seem like a mere doorman’s tip. Yet the start-to-finish deal making, from the private placement to an IPO, could generate fees and profits for the firm in excess of $500 million. Still more profitable over time could be the fees that future Facebook-related transactions spin off. Hardly less important, Goldman’s private bankers
should enjoy privileged access to the multibillions of 26-yearold Facebook founder Mark Zuckerberg and the multimillions of Facebook employees and investors. Ultimately, though, what the Goldman-Facebook transaction is all about is Goldman’s seizing control of the Web 2.0 market on Wall Street. Belittled by critics as just another wacky tech bubble, the Web 2.0 phenomenon could be something more.
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The value of the IPO isn’t simply in the underwriting but in managing the wealth that the IPO creates. — Sandy Robertson Francisco Partners
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the company’s 2010 revenues. Apart from chutzpah, this demonstrated that Goldman has the clout to override prevailing market sentiment and in effect set its own valuations for IPO-bound companies. And critically, Goldman showed that it had plenty of rich investors.The firm wants nothing less than to preside over the Wall Street Web 2.0 market in the way that it did
CASH &WARY ACTIVISTS EYE CEOS SITTING ON PILES OF $$$
the PC-maker financing realm after taking Microsoft Corp. public in 1986.The fact is, Goldman came late to the technology-underwriting business. Other firms got there first. But in choosing to underwrite Microsoft, a promising but unheralded software maker, Goldman hit pay dirt. Microsoft was valued at $520 million, slightly more than three times the company’s trailing 12-month revenues.The IPO, which raised $65 million, produced a paltry $4 million in underwriting fees. But since going public, Microsoft has done numerous security offer-
ings and M&A deals. Goldman was tapped to lead a lot of these transactions. As it grew and grew, Microsoft created at least four billionaires and more than 12,000 millionaires. Astutely, Goldman established a wealth-management program expressly to handle the personal assets that would flow from the Microsoft initial offering. “They were among the first to recognize that the value of the IPO isn’t simply in the underwriting but in managing the wealth that the IPO creates,” recalls Sandy Robertson, founder of Robertson Stephens and now a private equity banker
with San Francisco–based Francisco Partners. Yet Goldman’s influence in tech-financing had waned in recent years, as if CEO Lloyd Blankfein and other top executives at the firm — like so many others on Wall Street — didn’t grasp the significance of Web 2.0 enterprises and their enormous capital needs.To get back in the game, Goldman persuaded Microsoft to buy into Facebook two years ago with a $240 million investment that valued the company at $15 billion. Goldman quickly realized that public markets couldn’t INSTITUTIONALINVESTOR.COM
JIN LEE/BLOOMBERG
Facebook, with more than 500 million users, is no Pets.com. And now a whole generation of Web 2.0 upstarts — Groupon, LinkedIn, Zynga — are poised to go public. “There’s plenty of innovation left in the Internet,” contends Ron Conway of SV Angel, an angel investor who has placed capital in almost every major Internet venture since 1994. And beyond the existing multibillion-dollar companies, says Conway, there are more than half a dozen billion-dollar babies growing up fast. But what’s so striking about Goldman’s approach to this potentially huge but often discounted market is that it was able to raise $2 billion for Facebook at a valuation that could be as high as 25 times
Pershing Square Capital Management, has a problematic but potentially rewarding activist position — a 37.3 percent stake — in ailing bookseller Borders Group. In December, Ackman told Borders management that he’d be willing to finance a cash bid by the chain for rival Barnes & Noble. Borders took him up on the offer; Barnes & Noble hasn’t commented. Meanwhile, Ackman recently got himself named to the board of J.C Penney, another of his targets. Activists aren’t bound by borPershing ders — or categories. New York– HEDGE FUNDS Square’s based turnaround specialist Ackman: and private equity manager SherBacking borne Investors aims to replace the Borders’ chairman of London-based F&C buyout bid Asset Management with Sherborne’s founder, Edward Bramson. A special general meeting was scheduled for They’re back. Activist hedge fund managers, February 3. who agitate to force out entrenched comA further sign that activism is on the rise is startpany managements, are in fighting form for ups. Keith Meister, the longtime right-hand man to the 2011 proxy season and stalking companies grizzled corporate raider Carl Icahn, is launching hoarding cash. “You’re seeing more attention paid to activism, his own activist fund. And Harbinger Capital Partners’ senior analyst Lawrence Clark has left that given corporate balance sheets’ cash reserves,” hedge fund firm to start an event-driven fund. says Jason Orchard, a principal with New York– Meanwhile, a onetime activist, Daniel Loeb, based fund-of-hedge-funds firm Spring Mountain founder of hedge fund Third Point, has toned Capital, which invests with activist and eventdown his antimanagement rhetoric in recent driven funds. “Companies are still a little leery on years, resulting in his “activist” fund receiving the this recovery, but they have so much cash.” less-provocative label “event-driven.” A butFinance 101 suggests that this capital should toned-up Loeb — who became infamous for his be put to work. ”Hedge fund managers, and the “poison pen letters” to CEOs — plus Third Point’s activists especially, look at those balance sheets strong recent results may just appeal to conserand think they can optimize them,” he says. vative blue-chip institutional investors wary of the Perhaps the best-known activist-inclined U.S. activist label. hedge fund firm, William Ackman’s $8.7 billion — IMOGEN ROSE-SMITH
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CORPORATE GOVERNANCE
NAY ON PAY? SAY-ON-PAY IS MORE GESTURE THAN REFORM Everybody talks about CEO pay, but now the discussion has an official new forum: the annual shareholder meeting.The Dodd-Frank financial reform act ordains that shareholders be given a “say-on-pay” in the form of a proxy vote on executive compensation. The vote is in up-or-down form. For instance, shareholders can’t object to the
CEO’s comp but call for the CFO to be given a bonus. And critically, the vote is nonbinding. In that sense, it may be more of a grand gesture than a meaningful reform. Nonetheless, James Barrall, a partner of law firm Latham & Watkins who specializes in compensation, reports that for this year’s proxy season, “say-onpay is the No. 1 issue.” That’s partly by default. Say-on-pay is hogging the spotlight chiefly because the Securities and Exchange Commission has not gotten around to writing, among other Dodd-Frank–mandated rules, regulations requiring a company to set up an independent compensation committee and install a clawback mechanism for revoking
MONEY MANAGEMENT
GAINING LEVERAGE Are institutional investors making the correct trade-off between risk and return? Research from AQR Capital, the Greenwich, Connecticut–based quant shop, strongly suggests not. AQR’s data seem to show that risk-adjusted returns from high-risk securities are lower than investors — and academics — suppose; conversely, returns from low-risk securities are higher. “People buy risky securities hoping they will get higher returns,” says Lasse Pedersen, a principal at AQR who also teaches at NYU’s Leonard Stern School of Business. “This creates a demand for these securities and an abandonment of safer securities. The risky securities become too expensive, creating opportunities.” The unseen force driving the AQR results is leverage — or the lack of it. Many investors can’t (or won’t) take advantage of leverage in the manner that the Capital Asset Pricing Model prescribes. Thus, they wind up chasing high-beta — that is, high-risk — stocks, depressing returns. However, investors can exploit this anomaly, the AQR study contends, by selecting overlooked but safer assets such as low-beta stocks, and applying leverage to them. Such portfolios will supposedly earn superior risk-adjusted returns, compared with concentrating on high-beta stocks. — DAVID ADLER
unwarranted incentive pay. “Dodd-Frank put a huge rule-making burden on the SEC,” Barrall says. And Congress has not yet given the agency money to hire more staff. Alongside say-on-pay on the proxy ballot are two other nonbinding remunerationrelated items. One is a yes/ no vote on a so-called sayon-parachutes provision that asks shareholders to approve a company’s agreements with certain executives authorizing recompense if they get ousted in a merger. (This only applies, however, to a proxy that seeks shareholder approval of a merger or other transaction.) The second plebiscite pertains to whether a company should hold say-on-pay referendums once a year, every two years or every three years. Patrick McGurn, special counsel to RiskMetrics Group’s ISS Governance Services unit, says ISS is championing an annual vote on the grounds that it offers “the most consistent and clear communication channel for shareholder concerns about companies’ executive pay programs.” Most companies don’t seem too eager to go along. Latham &Watkins says that as of January 21, 54 percent of the 149 companies that had filed 2011 proxies recommended triennial votes; just 31 percent advocated annual ones. Companies that disregard shareholders’ choice of a say-on-pay span may run afoul of ISS. Although McGurn emphasizes that it does not have a policy on directors’ responses to the “frequency” issue, ISS might take action, he says, because a board’s decision not to heed a shareholder vote is a corporate governance issue. INSTITUTIONALINVESTOR.COM
CAPITOL BUILDING: ANDREW HARRER/BLOOMBERG; PAPER: RICHARD MEGNA
or wouldn’t accommodateWeb 2.0 companies, with their humble financial origins and offbeat businesses.Yet the companies still need large infusions of capital.Why not, the firm reasoned, raise $2 billion in private equity for the famous Facebook to reestablish Goldman as a serious player in tech? But go one step further — price the deal independently of the market’s judgment. If the Microsoft IPO had been the barometer, Facebook would have been valued (based on putative net sales) at $7 billion to $8 billion. Instead, Goldman helped to establish the price initially at $15 billion through the Microsoft investment; repriced Facebook at $50 billion two years later through the private placement; and may well price the IPO at, oh, $75 billion. How many investment banks could do something like that? John Kenneth Galbraith used to talk about how advertising — especially that of a powerful brand — could short-circuit normal supply-and-demand functions in setting prices. Goldman is such a brand, and the Facebook deal is a vivid reminder of that. — Udayan Gupta
Washington wants to democratize CEO comp
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We have thousands of companies in our portfolio, and most are getting it right on pay. — Donna Anderson T. Rowe Price
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level of executive compensation as a hot-button issue; rather, they would like to see pay better aligned with corporate performance. Indeed, a two-year-old survey of the top 25 institutional investors found that the majority believed boards, not shareholders, should have ultimate sway over pay. Donna Anderson, a corporate governance specialist atT. Rowe Price, downplays say-on-pay, calling it just “one of the tools in the kit.” In any case, she adds, “we have thousands of companies in our portfolio, and most of them are getting it right on pay.” — StephenTaub
course, required a $45 billion federal bailout. Reed, who left the bank in 2000 after losing out in a power struggle with ex-Travelers boss Sandy Weill (who had proposed that the insurer and bank combine), was less a visionary than a technician. While he was at FIVE QUESTIONS FOR JOHN REED Citi, the MassaWHO’S TO BLAME? chusetts Institute ofTechnology– educated banker John Reed, who was the automated check processing chief of Citicorp from and pushed the use of ATMs. 1984 to 1998, helped Later, as chairman of the New orchestrate the big bank’s York Stock Exchange (for $1 a 1998 merger with Travelers year), he transformed it from a Insurance Group, owner of relic still reliant on the venerinvestment bank Salomon able specialist system into a Brothers.That landmark fully electronic exchange. deal created Citigroup and Now retired, Reed, 71, signaled the effective demise recently shared his hard-won of the 1932 Glass-Steagall perspective on banks and Act, which separated comexchanges with Staff Writer mercial banking from invest- Imogen Rose-Smith ment banking, and ushered Who’s to blame for the in an American era of “unibanking crisis? versal” banking. I blame it on the manageBarely a decade later, in ments and boards of the instiFebruary 2009, a contrite tutions.The fact of the matter Reed testified before Conis that managements ran gress in support of provisions businesses with insufficient in the Dodd-Frank financial reform bill intended to go a long capital. Had the government not stepped in, every one of way toward rolling back the those institutions would have 1999 repeal of Glass-Stegall. been bankrupt. “I was astounded that the banking system could colWhat do you hope comes lapse as it did,” Reed says now. of financial reform? “I understood that individual A more secure system. I used banks could get in trouble, to ask my kids,“Why do cars but it never crossed my mind have brakes?”They’d say, “You that the industry could have have brakes so you can stop.” the kind of impact on the No, you have brakes so you can global economy that it did. drive fast! Having rules allows I felt a little guilty.” Citi, of
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banks to do their business well, and aggressively, but it will insulate the economy from a devastating crash.
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Can regulators be trusted to enforce Dodd-Frank?
It’s hard.They have to really believe in it, because over time regulators become part of the industry. If there is wiggle room, they will begin to wiggle.
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Considering the problems with electronic markets — notably last May’s flash crash — has the technology gone too far?
Technology has had a big impact on trading. Most of the volume is very fast, computer-based trading. Some has liquidity benefits. But because it is softwaredriven, there is no human intervention — you can get into bottlenecks where all of a sudden parts of the market disappear.The real issue is the trade-off between time and price discovery. If you said you had to sell your house within a week, you’d get a quite different price than if you said you were going to sell over the next six months. And that is the problem with computer-based trading — you get the price that happens to be around in that nanosecond.
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Do markets risk being dominated by hyperfasttrading arbitrageurs?
The danger then is, you get some kind of misfunction, and it produces wild gyrations that make the markets unreliable.What you don’t want is to allow this supertechnology to reach the point where it distorts markets and destroys confidence. INSTITUTIONALINVESTOR.COM
DAVID SCULL/BLOOMBERG NEWS
“If we take action for a failure by the directors to follow the sayon-pay frequency supported by a majority vote of the shareholders,” McGurn says, “the entire board would be the target of our recommendations [such as that they not be reelected].” Even if companies do accept shareholders’ wishes but the upshot is say-on-pay votes every second or third year, ISS might make annual comp recommendations. Say-on-pay is no corporate game-changer. Skeptics note that shareholder resolutions proposing such a policy before Dodd-Frank rarely if ever passed. Institutional investors don’t regard the general
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PEOPLE LAZARD ADDS A POL; CUOMO MAKES NICE; KLEIN’S CRUMBY INVESTMENT As the self-described third man in Britain’s New Labor triumvirate, the brilliant and ambitious Peter Mandelson never did become prime minister, as did the other two:Tony Blair and Gordon Brown. Nonetheless, he played a crucial, at times controversial, role as a political kingmaker and stage manager of the center-left party’s political successes — and its failures. Mandelson spearheaded New Labor’s doomed 2010 election campaign. He also served in both Blair’s and Brown’s cabinets and as an EU commissioner.With New Labor ousted from power, Mandelson, now 57, has signed on as a senior adviser at an institution where political maneuvering is not unheard of: investment bank Lazard. Hiring a high-profile public figure, of course, is a tried-and-true way to cultivate business. Lazard — with 25 senior advisers, including former Australian prime minister Paul Keating, ex-U.K.Tory party chairman Archibald Norman and ex-Saint-Gobain CEO Jean-Louis Beffa — is eager to expand its already formidable global domain. Lord Mandelson, a onetime secretary of State for Business, Enterprise and Regulatory Reform and founder of consulting firm Global Counsel (which he’ll continue to chair), ought to help Lazard woo not just corporations but also sovereign governments. — Imogen Rose-Smith
ANDY CUOMO TAPS WALL STREET When he was NewYork’s attorney general, Andrew Cuomo had a testy relationship with Wall Street. He aggressively pursued a pay-to-play scandal involving investment firms’ supposed bribing of state pension officials to win mandates. And his office put out a scathing report on financiers’ pay that declared, “There is no clear rhyme or reason to the way banks compensate and reward their employees.” But now that he’s governor — and facing a huge deficit — Cuomo has decided it’s only prudent to solicit the advice of Wall Streeters (who also happen to chip in a goodly share of NewYork’s tax revenues). His new Council of Economic
and Fiscal Advisers even has a number of hedge fund managers, including Highbridge Capital’s Glenn Dubin, along with banker Felix Rohatyn, who of course has some experience with financial rescues. But given the parlous state of NewYork’s finances, one Cuomo appointment could be a little disconcerting: hedge fund manager Jim Chanos — a short-seller. — I.R.-S.
PHIL ANGELIDES’S CONTENTIOUS CREW In the end, it’s just one more tome purporting to explain the causes of the crash. Actually, it proffers three competing explanations. After 18 months and more than 700 interviews, Congress’s Financial Crisis Inquiry Commission, chaired
by former California treasurer Phil Angelides, concluded in its 545-page report that the financial “upheaval” was “avoidable” and can be squarely blamed on the usual suspects: lax regulators, reckless bankers, demonic derivatives, heedless borrowers, cynical hedge funds and desultory rating agencies, along with a “breakdown in ethics” and way too much debt. However, in an illustration of the axiom that history is the past viewed through ideology, the four Republicans on the ten-person commission issued dissents to the majority Democratic conclusion. Former California Congressman BillThomas and two other commissioners cited ten causes, conspicuous among them the credit and housing INSTITUTIONALINVESTOR.COM
MANDELSON: CHRIS RATCLIFFE/BLOOMBERG; CUOMO: DANIEL ACKER/BLOOMBERG; ANGELIDES: JOSHUA ROBERTS/BLOOMBERG
PETER MANDELSON’S NEW LABOR
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SIDE ALTERNATIVES FOREIGN EXCHANGE CEO INTERVIEW COVER STORY THE 2011 ALL-EUROPE RE Counterclockwise from top left: “Third man” Mandelson, contrite Cuomo, referee Angelides, cupcake-loving Klein, campuschanging Fall and grandmaster Thiel
twice the size of Andover’s). Fall, however, looks forward to addressing what she sees as the most pressing challenge for all endowments: creating a truly global portfolio. “It is very hard to do,” she says, “because you want to make the right investment with the right partners and the right countries at the right time.” — I.R.-S.
PETER THIEL REBOOTS
THIEL: JIN LEE/BLOOMBERG; KLEIN: 57TH ST. ACQUISITION CORP
bubbles. And Ronald Reagan’s formerWhite House counsel, PeterWallison, zeroed in on the government’s housing policy as the “sine qua non” of the crash. So who’s right? We probably won’t know that until the inevitable next financial crisis — and the inevitable next commission. —Firth Calhoun
MARK KLEIN GOES FOR CRUMBS In his long career on Wall Street, Mark Klein has scrupulously avoided mixing business and pleasure. But lately he cannot help himself. “We always bring cupcakes to our business meetings, and everybody has a smile on their face,” says Klein, 49, the former CEO of investment bank Ladenburg Thalman.Think of it as market INSTITUTIONALINVESTOR.COM
research. Klein’s 57th Street General Acquisition Corp., a special-purpose company, recently injected capital into Crumbs Bake Shop — the largest U.S.-based cupcake purveyor — to enable the 34-store chain to go public and expand to 200 locations by 2014. (The rumor that a newly activist SEC wanted to vet the deal because cupcakes are “derivatives” of cakes is false.) Crumbs’ 82 percent, threeyear compound annual growth rate could make this transaction as sweet for Klein and his investors as the cookies-andcream cupcakes he likes so much. As to skeptics who say cupcakes are a fad, Klein retorts, “Cupcakes are well known, well respected and well liked.” — Franziska Scheven
AMY FALL GRADUATES FROM ANDOVER — AGAIN Other graduates of elite prep schools may return to teach. Amy Fall went back to Phillips Academy Andover (she was in the class of 1982) in 2005 to manage money. As the school’s first official CIO, Falls, a former II-ranked Morgan Stanley high-yield bond analyst, introduced sophisticated management techniques to Andover’s endowment program.With that school assignment now completed, Fall, 46, is leaving to become CIO and vice president for investments at New York’s Rockefeller University. A virtual think tank of a school, Rockefeller already has a robust investment program for its $1.8 billion endowment (more than
It’s an old tale given a new twist by the Internet: Great entrepreneurs don’t always make great investors. PeterThiel was a co-founder of PayPal and an early backer of Facebook. Yet his once-promising San Francisco–based global macro hedge fund, Clarium, which at its peak in 2007 had $7 billion, is reportedly down to about $500 million, most of itThiel’s own wealth. But giveThiel, 43, his due as a CIO. Launched post-dot-com collapse in 2002, Clarium performed well in its early years. AndThiel made the right macro bet on the mortgage market — the fund was up 40 percent in ’07. But in 2008, Clarium entered a three-year cycle of losses, ending 2010 down 23 percent for the year. A fervent Libertarian,Thiel has been known to make big contrarian bets in line with his convictions. He recently became a seed investor in Grandmaster Capital Management, a hedge fund firm founded last month by former Clarium Capital Management managing director PatrickWolff.This isThiel’s first investment with an outside manager, and sources say it may not be his last. Perhaps picking investment talent will play more to his strengths than calling markets has. Besides, in a dot-com world you can always reboot. — I.R.-S.
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OPLE OPENING THIS MONTH IN FINANCE RAINMAKERS DONE DEALS MARKETS THE BUY SIDE ALTE
Capital requirements were formerly determined from credit-based models of nationally recognized statistical ratings organizations. But insurance companies demanded a move away from that platform when the market deteriorated because ratings became volatile, unreliable and too harsh. BlackRock Solutions was hired last year to replace the model with one based on loss projections. “This kind of takes the uncertainties and vagaries of the ratings process out of the picture,” says one insurance company executive. “[However], the finalized version of BlackRock’s expected losses [on insurance companies’ CMBS] presents a darker outlook than anticipated and could potentially force insurance companies to sell bonds they would otherwise hold.” — Real Estate Finance and Investment
CONSULTANTS TOUT GOING “ACTIVE” IN ’11 • Endowment and foundation consultants expect markets to return to a semblance of normalcy in 2011, presenting an opportunity for active management and unconstrained mandates. Nonprofits are also expected to focus on international investments, while inflation will continue to be a key concern in the year. “Correlations have come down fairly significantly,” says Lori Dusen, an executive director with Convergent Wealth Advisors. “We’re starting to see fundamentals to be more rewarded, and there are some interesting opportunities for good stock pickers. It makes less sense to index
now than it did over the past year and a half.” — Foundation and Endowment Money Management
NON-U.S. BANKS WANT OUT OF SWAPS RULES • Seven major foreign derivatives dealers have tag-teamed federal regulators in a push for a broad carve-out from several proposed Dodd-Frank Act rules on swaps. In a letter to the Commodity FuturesTrading Commission, the Securities and Exchange Commission and the Board of Governors of the Federal Reserve Board, the banks asked to be allowed to continue to book their swaps business as a single foreignbased institution and be overseen largely by their home country regulators. “Foreign bank swap dealer registration may be incompatible with home country requirements, objectionable to home country supervisors, prohibitively expensive, impossible to achieve in the necessary time frame and impractical from an operational perspective,” said the signatory firms, Barclays Bank, BNP Paribas, Deutsche Bank, Royal Bank of Canada, Royal Bank of Scotland, Société Générale and UBS. — DerivativesWeek Finance industry news briefs compiled by Institutional Investor’s Newsletters division. INSTITUTIONALINVESTOR.COM
ANDERS WENNGREN
are risk-adjusted based on the Capital Asset Pricing Model, however, the risk-adjusted returns are actually negative (i.e., a similarly risky security will produce a higher return). In other words, despite the THIS MONTH stock price rising IN FINANCE after a positive GOOD NEWS? MUST cover story, it is BE TIME TO SELL time to start considering selling the stock and certainly GLOWING COMPANY not the time to consider buyCOVER STORY? SELL ing the stock.” On the other • According to an old saw on hand, “with negative cover Wall Street, if a business mag- stories, there is no superior azine does a positive cover or inferior performance on a story about a company, soon risk-adjusted basis after the afterward that company’s story is published.” stock proceeds to decline; — Journal of Wealth conversely, a negative story Management, Fall supposedly gives a lift to its shares. The theory here is that by the time the publication readies an article for print, the impact of the news driving the stock price will have dissipated. To test this notion, professors Tom Arnold, John Earl Jr. and David North of the Robins School of Business of the University CMBS GUIDELINES of Richmond tracked the COULD PACK WALLOP stocks of companies featured • Risk-based capital requirein either preponderantly ments for insurance companies positive or preponderantly negative cover stories in Busi- that invest in commercial mortgage-backed securities could nessWeek, Forbes and Fortune. be substantially higher than Their conclusion: “We find that adjusting for risk in mea- the initial guidelines released by the National Association of suring the performance of a Insurance Commissioners last stock after the publication November. “We estimated that of a cover story is important, for an average CMBS holding, because we do see positive the capital requirements could returns after positive and go up 50 to 60 percent,” says negative cover stories. When JuliaTcherkassova, an analyst the positive returns after the publication of a positive story at Barclays Capital.
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UESTIONS PEOPLE THIS MONTH IN FINANCE RAINMAKERS DONE DEALS MARKETS THE BUY SIDE A
CAPITAL
few deal makers are as hot as Egizio Bianchini. As prices of the precious metal jumped nearly 30 percent last year, gold-mining-related deal volume hit a record $40 billion, a 90 percent jump over 2009, according to Dealogic. Bianchini, theToronto-based co-head of BMO Capital Markets Corp.’s metals and mining group, won the biggest chunk of that business. BMO, an arm of Bank of Montreal, topped the sector’s M&A league table in 2010 by advising on $14.7 billion worth of deals, including the year’s largest transaction, Kinross Gold Corp.’s $7.1 billion purchase of Red Back Mining. Bianchini, whose family moved to Toronto from rural Tuscany when he was six, knows the mining industry from the inside. He earned an undergraduate degree in geology from the University of Toronto in 1981, then picked up an MBA from the University of British Columbia four years later before going to work as a corporate development analyst at Echo Bay Mines in Edmonton, Alberta. As keeper of the gold miner’s production and financial models, Bianchini had plenty of contact with securities analysts. “I liked the idea of what they did, and they got paid six or seven times more than me,” he recalls. “So I decided, ‘I can do that job too.’” Since switching to finance, the 51-year-old banker hasn’t wandered far afield. In 1989, Bianchini started work as a research analyst at theToronto office of NesbittThomson & Co., a brokerage that had been acquired by Bank of Montreal two years earlier, and has stayed put ever since. “I think I had the same phone number for 15 years,” says the ardent soccer fan, who seldom misses a televised game of his favorite team, ACF Fiorentina of Florence, Italy. Over the past decade, Bianchini and his co-head, Jason Neal, have turned BMO into the world’s largest mining research group.
Gold Digger
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KC ARMSTRONG
FEW MARKETS ARE AS HOT AS GOLD THESE DAYS. AND
Bianchini began the push with a 2002 presentation to senior management in which he urged the company to go global in anticipation of a rise in cross-border deals. “The beginnings of the trend that we are seeing right now were beginning to emerge,” he says.Today, BMO’s 48-member team has a presence in 26 cities and covers 160 metals, mining and fertilizer stocks. Almost 50 percent of the team’s business involves operations outside Canada and the U.S. The firm’s global reach and perspective helped win the Kinross mandate. Bianchini first approached Toronto-based Kinross in 2007 and suggested that it make a bid for Red Back Mining, a Vancouver-based company that operates two early-stage mines in the West African countries of Ghana and Mauritania that are believed to have rich production potential. “You have to continue to increase your reserves and invest in properties that produce mines,” says Bianchini. “Any time you have an opportunity to buy an elite asset, you should take it.” As the world’s fifth-largest gold producer, Kinross had the expertise and resources Banker Egizio Bianchini is to ramp up production, but a heavy in the metals and the company took time to mining market. do its own due diligence BY FRANZISKA SCHEVEN on Red Back’s properties. “Whenever you are making a $7 billion or $8 billion bet, you want to do it with the best information you can get,” Bianchini explains. Once Kinross executives grew confident in their estimates, they didn’t hesitate.The company announced terms of a friendly merger with Red Back last August and completed the deal in just six weeks. Although some analysts have recently raised estimates of Red Back’s gold reserves to nearly 20 million ounces, compared with about 15 million at the time of the merger, a true assessment of the deal’s value is still some ways off.“It’s hard to estimate the value when you buy a development company,” says Bianchini. “You never know what you get until you have been able to delineate the property.” The prospects for future deals remain bright in light of concerns about the value of the dollar and strong demand for gold in China and India, Bianchini believes. He aims to keep BMO in the middle of that activity, and of mining transactions generally.The bank plans to beef up its capital markets capabilities in Asia and Australia and to expand its coverage of coal producers, European metals and mining companies and Canadian mid- and microcap outfits. Pressed for details, Bianchini reveals little more. Silence is golden.
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ALTERNATIVES FOREIGN EXCHANGE CEO
Bianchini advised on 2010’s biggest gold mining deal
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MAKERS CAPITAL DONE DEALS MARKETS THE BUY SIDE ALTERNATIVES FOREIGN EXCHANGE CEO I
Whopper with Fees
Brazilian-backed 3G Capital used a top-up to hasten its $4 billion buyout of Burger King. BY CHARLES WALLACE
I BARRY FALLS
N A REVERSAL OF THE TRADITIONAL GLOBAL
acquisition scenario, a Brazilian-backed buyout firm recently bought an American icon in Burger King, the fast-food rival to McDonald’s. It’s another sign that the leveraged buyout is back after 18 months on ice. For $4 billion, 3G Capital purchased Miami-based Burger King Holdings, 35 percent of whose business is overseas. Behind New York–based 3G is Brazilian billionaire Jorge Paulo Lemann, who helped engineer InBev’s 2008 acquisition of Anheuser Busch Cos. Another Brazilian at 3G, managing partner Alex Behring, will become Burger King’s co-chairman. The new CEO is Bernardo Hees, former head of railway giant América Latina Logística. The Burger King deal, which closed in October, was the first of a flurry of LBOs that has turned around a moribund market. According to Dealogic, there were $199.37 billion worth of buyouts worldwide in 2010, up from $105.4 billion in 2009. After lying low for INSTITUTIONALINVESTOR.COM
almost two years, the 1,600 U.S. private equity firms have some $1 trillion in unused “overhang” to invest, according to professional services firm PricewaterhouseCoopers. “You have a lot of dry powder out there, and the financing in the form of high-yield debt is available to do the acquisition,” says Timothy Hartnett, U.S. private equity leader at PwC. John Robertshaw, co-head of the private fund group at Credit Suisse in NewYork, says bankers are also more flexible about how much they will lend in LBOs. In the recession the average fell to between 1.5 and 2.5 times debt to cash flow, but now it’s 4.5 to 5 times. “For the right deals, the financing markets are wide open,” Robertshaw says. As well, corporations are more comfortable selling underperforming divisions now that the market has rebounded, says Jeffrey Bunder, Americas private equity leader for advisory firm Ernst &Young.When talks on the Burger King sale began last summer, the company was struggling. Sales had dropped 2.3 percent over 2009, and its share price had tumbled from $23.88 to $17.28. No stranger to private equity firms, Burger King had previously been sold off in a 2006 IPO by Bain Capital, Goldman Sachs Funds and TPG Capital.That transaction proved to be a whopper for the trio:The IPO valued Burger King at $2.26 billion, up from the $1.5 billion they paid for it in 2002. Sources close to the deal say 3G’s Brazilian backers thought they could better promote Burger King in the increasingly vital emerging markets. 3G is providing $1.5 billion in equity financing, and there is a $1.9 billion senior secured credit facility from JPMorgan Chase & Co. and Barclays Bank, along with $900 million in unsecured notes. The purchase price was about 9 times earnings before interest, taxes, depreciation and amortization.With so much debt, it could be tough to outdo Burger King’s previous private equity owners. Both parties wanted to close the deal quickly: “Businesses don’t usually thrive when they are in that transition phase,” says Eileen Nugent, a partner at NewYork–based law firm Skadden, Arps, Slate, Meagher & Flom, which represented Burger King.To speed things up, they opted for a tender offer instead of a conventional merger. 3G needed 90 percent of Burger King stock to achieve a short-form merger and avoid a time-consuming shareholder vote. But it had no guarantee of doing that, and its financiers were reluctant to lend if there was a lag between acquiring a majority of shares and completing the merger. So buyer and seller agreed to an unusual arrangement called a top-up, in which Burger King issued new shares to boost 3G from a simple majority to 90 percent. Top-ups in private equity deals were frowned on by some plaintiff’s lawyers, but last November the Delaware Court of Chancery ruled in favor of the practice. R. Alec Dawson, a New York–based partner at law firm Morgan, Lewis & Bockius, says top-ups make it simpler to meet margin rules set by lenders: “Private equity sponsors can have a much easier time using a tender offer route as opposed to a typical merger.”
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EALS CAPITAL MARKETS THE BUY SIDE ALTERNATIVES FOREIGN EXCHANGE CEO INTERVIEW COV
Healing Properties Commercial real estate is on the mend, but debt woes and job fears threaten its recovery.
improvements lately in vacancy rates and increases in valuations of properties,” says Robert Merck, head of agricultural and real estate investments at NewYork–based Metropolitan Life Insurance Co. BY STEPHEN TAUB But for the most part, pricing is not recovering.TheWashingtonbased Mortgage Bankers Association notes that one widely followed commercial property price index ended 2010 at 57 percent of its alltime high in 2007, while another finished at 64 percent of peak value. Driving demand are domestic REITs, real estate families and foreign investors. In a recent survey byWashington’s Association of Foreign Investors in Real Estate, respondents said the U.S. market has the best potential for capital appreciation. By lending again, banks and life insurance companies are fueling the rebound. In 2010, MetLife almost doubled its originations of real estate loans from the previous year, to $8 billion. Commercial-mortgage-backed securities have revived too. N MARCH 2009, WHEN PRIVATE Thomas Fink, managing director of NewYork CMBS information equity firms Normandy Real Estate Partners and Five Mile Capital provider Trepp, says $16 billion in CMBS debt was issued in 2010. Partners bought Boston’s John HancockTower at a foreclosure auction A fraction of the $230 billion in 2007, this sum is still crucial. “The for $661 million, approximately 20 percent of the 62-story building’s result is greater liquidity in the marketplace, particularly for properrentable space was vacant. But Morristown, New Jersey–based Nor- ties in secondary and tertiary markets,” says Patrick Halter, CEO of mandy knew the once-venerable office building, New England’s tallest Des Moines, Iowa–based Principal Real Estate Investors. structure, had great potential. So it did extensive renovations and took Lenders are willing to finance or refinance well-leased, cash advantage of the low purchase price to offer attractive lease packages. flow–strong properties in top-tier cities like Boston, NewYork, San Last October, Boston Properties, the real estate investment trust led Francisco and Washington, as well as Chicago, Los Angeles and by billionaire Mortimer Zuckerman, agreed to pay $930 million for Seattle. Merck says that Dallas and Houston also look promising. the 96 percent-leased tower. “We were not necessarily counting on a Experts are most bullish on multifamily properties, whose resurgent economy or a decline in unemployment to make our invest- shorter leases make them better candidates for rent hikes than ment work,” says Normandy managing principal Jeffrey Gronning. strip malls and office buildings. “Apartments tend to bounce back This deal underscores the turn in U.S. commercial real estate. faster from a downturn since people need a place to live,” says Mitch According to New York–based research and consulting firm Real Roschelle, U.S. real estate advisory practice leader at professional Capital Analytics, sales hit $134.1 billion in 2010, more than double services firm PricewaterhouseCoopers. that of the previous year. December’s $27.4 billion in transactions For office buildings, there is strong interest in trophy properties in was the highest one-month total in three years. “We have seen some NewYork, San Francisco, Washington and other gateway cities, on the grounds that these centers will lead in job creation. But commercial real estate has a long way to go, TOP TEN U.S. CENTRAL BUSINESS DISTRICT OFFICE SALES OF 2010 partly owing to a gloomy employment picture. MeanPRICE PER while, Roschelle says, $1.4 trillion worth of comPRICE SQUARE TRANSACTION LOCATION ($ MILLIONS) SQUARE FEET FOOT BUYER mercial real estate loans come due in the next four years.Their value often exceeds that of the underlying 111 Eighth Avenue New York $1,770 2,961,071 $598 Google property; with bid-ask spreads still wide, owners are John Hancock Tower Boston 930 1,723,352 540 Boston Properties reluctant to sell. Banks extending loan terms also 300 North LaSalle Chicago 652 1,302,901 500 KBS Real Estate stop the market from hitting what some see as its Investment Trust natural bottom. As those loans come due, they will Hyatt Center Chicago 625 1,472,460 425 Irvine Co. either hinder recovery or create a big opportunity for 1 1330 Sixth Avenue New York 400 535,600 747 RXR Realty investors who refinance the debt. 353 North Clark Street Chicago 385 1,184,000 326 Tishman Speyer Still, there are signs that the worst is over for Properties commercial real estate, says Randall Zisler, CEO CB Richard Ellis Oakland 355 1,983,455 179 CB Richard Ellis Investors Investors of Zisler Capital Associates, a Marina del Rey, Wells Fargo Building San 333 655,398 508 Korean California–based investment advisory firm: “We Francisco Federation of expect a significant decrease in uncertainty in the Community Credit next two years as the general economic recovery Cooperatives1 strengthens.” HSBC Headquarters New York 330 865,000 382 IDB Group1
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125 Park Avenue 1Partial interest.
New York
330
603,433
547
SL Green Realty Corp.
Source: Real Capital Analytics.
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W
HILE PENSIONS,
endowments, hedge funds and traditional asset managers adjust to a new landscape that features smaller portfolios, more-volatile markets and tighter regulations, insurance companies have been quietly remaking their investment practices. Increasingly, the global insurance industry wants external help to manage its $22.6 trillion in assets. Once favored only by the smallest insurers, investment management outsourcing now appeals to firms of all stripes. “We took the decision in 2009,” says David Blumer, who runs a partly outsourced $156.5 billion portfolio as head of the asset management division at Swiss Reinsurance Co. in Zurich. In the wake of the crisis, Blumer recalls, “we asked ourselves, How do we want to manage our assets going forward?” What began as a trickle after the tech wreck has become a flood following the deeper downturn of Postcrisis, managing 2008 and 2009. “Third-party insurance assets just insurance assets takes more exploded as a result of the credit crisis,” confirms To raise returns and lower risk, big expertise and resources. David Holmes, whose Louisville, Kentucky–based insurers are outsourcing investments. Low interest rates make it BY FRANCES DENMARK consulting firm Eager, Davis & Holmes spearheaded tough for insurers, which a 2010 insurance asset management survey of 14 have traditionally invested leading investment firms. Among its findings: 62 90 percent of their assets in percent of managers got more requests for proposals fixed income, to meet their from insurers in 2010 than in 2009. asset-liability requirements. “The financial crisis created a crisis of confidence, and more and After the credit crunch, Swiss Re’s Blumer led a portfolio de-risking more executives of insurance companies are recognizing they have that raised cash levels from 11 percent in 2008 to 19 percent today. to focus on risk management,” says Kristen Dickey, head of the Short-term investments also got a boost, to between 12 percent from financial institutions group within BlackRock’s global client group. 4 percent. For help adding returns and for advice on its other investAt New York–based BlackRock, the largest third-party insurance ments, Swiss Re gave BlackRock a $23 billion mandate to manage asset manager, Dickey oversees $200 billion for Swiss Re and other its corporate bonds and nonagency securitized products. insurers. She reports a 23 percent compound annual growth rate in Managing insurance assets is different from managing, say, pension these assets since 2001, and 29 percent growth since 2008. funds. “You have to have a deep understanding of liability streams, Insurance assets run by the biggest asset managers rose 19.5 accounting and tax issues and the regulatory environment,” Blackpercent annually from 2001 to 2009, according to Swiss Re. As of Rock’s Dickey notes. Also, most insurers’ investment offices are not 2009, roughly $1.032 trillion was outsourced, up from $798 billion equipped to deal in hedge funds and other alternative investments. in 2008, estimates Eager, Davis & Holmes.With just 5 percent of that “There are just certain asset classes they cannot build in-house,” says $22.6 trillion outsourced to date, there’s plenty more to come, and Sunny Patpatia, who helps insurance companies with outsourcing. managers are jockeying for it now that other business has slowed. Insurers are also bracing for new regulations, such as Europe’s “We believe it will grow to $3 trillion in the next five years,” says Solvency II. Credit rating firms and insurance supervisors will expect Eric Kirsch, global head of insurance asset management at Gold- higher capital requirements. Changes to accounting standards may man Sachs Asset Management in NewYork. Kirsch was hired away cause more volatility in financial statements, and derivatives face from Deutsche Asset Management’s insurance division in 2007 closer scrutiny. None of this is likely to stop the coming wave of when Goldman decided to build a 50-person team to manage its insurance assets looking for outside management. —Additional reporting by Franziska Scheven insurance assets.With $70 billion, Goldman ranks seventh among external insurance asset managers, according to Patpatia & AssociComment? Click on Asset Management at institutionalinvestor.com. ates, a Berkeley, California–based financial services consulting firm.
KEITH NEGLEY
Institutional Rescue
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SIDE CAPITAL ALTERNATIVES FOREIGN EXCHANGE CEO INTERVIEW COVER STORY THE 2011 ALL-E Martineau: Among the fortunate few
N SEPTEMBER 2009, LARCH LANE
Advisors seeded fledgling hedge fund manager Didier Martineau, CEO of Sothic Capital Management, with $75 million. So far, London-based Sothic has not disappointed; by last month the European distressed-situations and event-driven fund’s assets had topped $260 million. As early-stage managers flood the market in Europe and the U.S., Martineau is well aware of his good fortune. “Not everyone is going to get funded,” he says. What an understatement. In the year through September, according to Chicago-based Hedge Fund Research, 945 hedge funds launched. That’s the highest 12-month total since the year ended July 31, 2008. But demand for emerging hedge fund managers remains slim because investors prefer well-established shops. Smaller managers — often former proprietary traders who lost their jobs thanks to theVolcker provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act — must try to find a SkyBridge Capital; before the seeding firm willing to take a big risk. crisis it was typically 10 to 15 For emerging hedge fund managers, seeding percent. SkyBridge, which took Competition is fierce. “There is an and other investment is thin on the ground. over Citigroup’s seeding busiexceedingly high bar to cross to get BY CHRISTOPHER ALESSI seeded,” says Todd Williams, director ness last June, has seed with of seeding strategies for Rye Brook, 14 managers. For the handful New York–based Larch Lane. One of of those deals that took place the top five hedge fund seeders, Larch postcrisis, it provided each with Lane has helped launch a couple dozen about $20 million. But a seeded managers since it was founded in 1999. The firm looks for people hedge fund still needs investors — no easy feat for small managers. with pedigrees and track records,Williams says: “Second- and third- All of SkyBridge’s seeded managers have fought to sustain growth generation hedge fund managers can be attractive seed candidates since the crisis, Nolte says. “The largest hedge funds continue to garner the vast majority of capital,” he adds. based on their experience.” However, Nolte foresees renewed interest in emerging managMartineau — most recently a managing director of London- and New York–based GlobeOp Financial Services, a technology firm tar- ers, who he says often yield better returns than their larger peers: geting hedge funds — founded Sothic with a team whose members “The funds are more nimble because they have smaller amounts of fit that description. He has hedge fund experience too: In the 1990s capital.” Other seeders agree that investors like this flexibility. “Many he was a senior strategist at Long-Term Capital Management. In institutional investors are interested in smaller, younger managers 2008, Martineau joined forces with Sothic CIO Gertjan Koomen to diversify their portfolio,” says Patric de Gentile-Williams, COO and several other prop traders from the London office of JPMorgan of London-based seeding firm FRM Capital Advisors. Chase & Co., where they had specialized in distressed situations. But Sothic’s Martineau admits that inexperience, smaller infraStill, some seeders won’t even consider former bankers. “We do structure and vulnerability to redemptions make new managers not seedWall Street prop desks,” says JeffreyTarrant, co-founder and riskier than big funds. He says there’s also a “question mark around CEO of New York’s Protégé Partners, which has 18 active seeds. A the ability of a [manager] to transition from managing money in a larger supply of emerging managers doesn’t equal more talent, says bank environment versus a hedge fund.” If investors were satisfied with the answer, there would be far fewer Tarrant, who distinguishes between those with real hedge fund experience and traders with little or no background in running a business. ex-bankers looking for work. For early-stage managers lucky enough to find seed, there are Comment? Click on Hedge Funds/Alternatives often strings attached. “People are willing to give up 25 to 40 percent at institutionalinvestor.com. of their business,” says Raymond Nolte, CIO of New York–based
Early Disappointment
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NATIVES CAPITAL FOREIGN EXCHANGE CEO INTERVIEW COVER STORY THE 2011 ALL-EUROPE RESE
Control Freaks
Despite capital clampdowns, investors keep buoying emerging markets.
BY CHARLES WALLACE
P
RIVATE CAPITAL FLOWS
to emerging markets will balloon to $833 billion this year from $581 billion in 2009, according to the Washington-based Institute of International Finance. To slow the torrent of socalled hot money, many countries with floating exchange rates have imposed new capital controls. These range from Brazil’s taxes of 6 percent on fixed-income securities and 2 percent on equities to South Korea’s 14 percent withholding tax on government bonds. But such measures have done little to deter investors. Capital controls usually have a dual purpose: to dampen shortterm foreign investment and thus ease upward pressure on domestic currencies so exports stay competitive. Recently, their track record has been mixed.While exchange rates keep rising, in most cases the ascent has slowed. But high local interest rates often trump control efforts, and in many places foreign inflows have picked up. Despite its country’s punitively steep taxes, the Brazilian real is one of three Latin American currencies favored for 2011 by British bank HSBC Holdings, says emerging-markets currency strategist Clyde Wardle. In a recent report, HSBC noted that “while intervention tends to cap nominal appreciation, it does not impair total returns in high yielding currencies like the real.” The nominal interest rate for the real is 10.75 percent, with the market pricing in a further 50 to 75 basis points for the first quarter. Japanese investors, who earn less than 1 percent on their savings at home, have poured $60 billion into Brazil since 2008, according to HSBC. In 2010 the real rose 4.6 percent against the U.S. dollar. Jens Nordvig, global head of foreign exchange strategy at Nomura Securities International, also advises buying the real, but for different reasons. Nomura expects Brazil to tighten its fiscal policy, letting interest rates fall in a rerating of its bond market, Nordvig says: “If you own a bond, you are going to make money by that shift in rates.” Nordvig is also a fan of the South Korean won, which gained 3.5 percent in 2010. “Capital flows will be allowed to come into Korea, and overall capital restrictions will be fairly moderate, so the INSTITUTIONALINVESTOR.COM
won could outperform significantly,” he predicts. Goldman Sachs Group has boosted its 2011 GDP forecast for South Korea from 4.5 percent to 4.7 percent and anticipates a 1 point rise in interest rates. Deutsche Bank favors the real and the won too, but takes a more nuanced approach. It expects both currencies to gain in the next few months, then for the Brazilian and South Korean central banks to squeeze the dollar higher. “It would be quite beneficial to buy something that would play in this reversal pattern,” says Henrik Gullberg, a foreign exchange strategist at Deutsche’s London office. Deutsche suggests dollar-real and dollar-won three- to six-month straddles, a play that involves buying a call and a put on each currency pair. In Asia foreigners bought $19.6 billion worth of South Korean stocks in 2010, about $3.4 billion of that in December alone.They also snapped up $3 billion inTaiwanese equities that month, nearly a third of the year’s tally. “The currency component is only one part of the total return,” says Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. Most emerging markets beat developed Europe and the U.S. last year, but HSBC’s Wardle says investors must be savvier in 2011. HSBC recommends going long the Mexican peso against the dollar and shorting the Chilean peso in light of Santiago’s plan to devalue it by buying $12 billion worth this year. In 2010 the two currencies gained 5.5 percent and 9 percent, respectively, on the dollar. HSBC backs the Singaporean, Malaysian and Taiwanese currencies; the latter two have capital controls. One of Nomura’s top Asian picks is the Chinese renminbi, which may have the toughest controls of all.The market calls for the renminbi to appreciate only 2 percent this year, but Nordvig reckons it will rise 6 or 7 percent. After developing countries with capital controls drew far — Jens Nordvig more investment than their peers Nomura Securities International in 2010,the International Monetary Fund finally stopped opposing the limits. But Ilan Goldfajn, chief economist of Brazil’s Itaú Unibanco, says controls succeed only if they buy time for government reforms:“If they are imposed for their own good and the government is not willing to change anything, then they won’t work.”
“
Capital flows will be allowed to come into Korea and overall capital restrictions will be fairly moderate, so the won could outperform significantly.
”
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DE ALTERNATIVES FOREIGN EXCHANGE
CEO INTERVIEW COVER STORY THE 2011 ALL-EUR
T THE AIRLINE INDUSTRYALWAYS
seems to be in the crosshairs of consumer groups, not to mention latenight comedians. It’s an irresistible target, given flight delays, stranded passengers, ubiquitous fees and the occasional berserk flight attendant. Mark Dunkerley can empathize with frequent fliers — he is one — but he’s had issues of his own with the airline business. In 2002 he joined Hawaiian Airlines as president and COO — just as it was going through bankruptcy. When the carrier emerged from Chapter 11 in June 2005, he became CEO and turned Hawaiian Air’s fortunes around. The captain’s hat seems a perfect fit for Dunkerley, 47. A native Briton who has a bachelor of science degree from the London School of Economics and a master’s degree Hawaiian’s Dunkerley: in air transport economics from the A long-term vision U.K.’s Cranfield Institute of Technology, he began his aviation career as an acrobatic pilot. Before land- Onetime stunt pilot Mark North American acrobatics championship. Does being at ing at Hawaiian Air, he was COO of Dunkerley pulled Hawaiian ease in the cockpit color your view from the corner office? Belgium’s Sabena Airlines Group. Air out of a dive and is Somehow it’s become vogue for CEOs to approach cerDunkerley also spent ten years at pointing it toward Asia. tain industries with no deep experience of them. I very British Airways, rising to senior vice BY JULIE SEGAL unashamedly say that I have a passion for aviation in all president of its Latin America and its forms, whether it is flying acrobatics or 80-year-old Caribbean division. airplanes from the first years of man’s flight or running He recently sat down with Staff an air carrier. My unbridled passion for aviation in all its Writer Julie Segal to discuss how he pulled Hawaiian Air out of a tailspin and how he sees the prospects forms gives me a deep perspective on the industry as a whole and an abiding appreciation for what it takes day in and day out to deliver of the airline and its industry. good, safe, efficient air transportation that customers actually enjoy.
Paradise Air
You don’t have to be a chef to run a food company or a designer to run a clothing company. But you are a pilot — you’ve even won a
What drew you to an airline that was in bankruptcy?
If you’re going to work in the airline industry, you’ve got to be INSTITUTIONALINVESTOR.COM
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ROPE RESEARCH TEAM THE 2011 ALL-EUROPE FIXED-INCOME RESEARCH TEAM HONG KONG PRIVA
prepared to take risks and rise to challenges. It was a personal risk. But the underlying market position of Hawaiian was stronger than its performance suggested. So it was an opportunity to improve the business, to fulfill the latent promise of the franchise. How did you accomplish that?
In a company in trouble, everybody’s confidence is at a low ebb. Companies rarely do well one moment and find themselves in deep trouble the next. Generally, there is a multiyear erosion of performance. Everybody in the company becomes aware that things are getting worse and worse and worse. So it’s important to find a way of changing how employees view themselves and view the company.And the secret is to find something relatively short-term and easy to accomplish, and you set that as a target.You can get people focused and start building confidence. For us, that issue was on-time performance. You felt that would be “easy” in an era of notorious delays?
When you’re a little carrier like Hawaiian and you’re surrounded by major airlines, it’s pretty easy for people to imagine you’re less good than everybody else — that you don’t have the same depth of resources, the fleets of hundreds of airplanes and so forth. But what we do have is the ability to get really focused on delivering service. I believed — and we’ve subsequently proven — that we could be the most punctual airline in the land. We Deutsche Bank set that as the task, and we did it one day at db.com/FX a time.There was no magic bullet. A lot of people worked very hard. But pretty soon we were the most punctual.We did that to communicate internally that this is a better airline than employees were apt to feel it was at the time. But what’s interesting is that this subsequently became a valuable external message. It was never intended as such. So you boosted morale. But what were some of the other fundamental problems you needed to fix?
Speaking of the need for diversification, what about another important mainland: Asia?
To continue to diversify, we had to take a step back and ask,Where in the long term — not the short term — would visitors to Hawaii come from? It doesn’t take much investigation to conclude that Asia is the source of the tourists of tomorrow. Then the question becomes: When do you start flying to Asia? If you do it too soon, the demand isn’t there and you lose a lot of money. If you do it too late, somebody else beats you to it and you’re left out in the cold. What has been very fortunate for us is that, alone among U.S. airlines, we’ve been profitable through the high fuel prices and this last recession. And by staying profitable, we’ve been able to keep to our long-term plan. So we’ve been able to expand into Asia, order airplanes and build relationships there. Our timing should be pretty good. How much of your sales come from Asia now, and what’s your goal?
International revenues are about 10 percent — small. Our goal for the long, long term is upward of 30 to 35 percent. You’ve grown consistently in an industry riddled with failure. How?
Our company has done a really good job of making the most of
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Getting people to rally around a long-term vision. When you’re in trouble, all of the focus is on the short term. It became very, very important to get employees to understand that there was a long-term vision and that by making short-term decisions — which by themselves didn’t sound all that momentous — they were contributing to building a long-term vision. What was that vision?
I wanted our people to focus not only on the interisland business but on carrying people back and forth to the U.S. mainland. I wanted to diversify away from our traditional core and also to deliver a level of service that exceeded our competitors’. And we did that. INSTITUTIONALINVESTOR.COM
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ANGE CEO INTERVIEW COVER STORY THE 2011 ALL-EUROPE RESEARCH TEAM THE 2011 ALL-EUROP
opportunities. For example, the U.S. and Japan agreed to allow four new routes between the U.S. and Haneda Airport in downtownTokyo. Everybody else uses Narita Airport, which is a long way out of town. All the major airlines competed for the routes, and many analysts doubted we would win one. But we did, and the reason is that we were better prepared. We articulated how this was part of our long-term strategy, and we demonstrated how we were ready to exploit the opportunity fully. How do you keep your customers happy?
“By staying profitable, we’ve been able to keep to our longterm plan. So we’ve been able to expand into Asia, order airplanes and build relationships.”
Our employees are absolutely terrific, and they deliver service with real caring, empathy and a smile.We carry roughly 8 million customers a year. Let’s say a customer has an interaction with us a dozen times on average. So that works out to 100 million individual transactions a year. And we’re a very small airline. Well, there is no way you can script 100 million transactions.You have to rely on the goodwill, efficiency and dedication of frontline employees to deliver good service. What are the big issues facing your industry?
One is the increasing regulatory burden that’s befalling us. And there doesn’t seem to be much distinction being made between issues of transparency that allow consumers to make informed choices, which are generally good for competition, and other regulations that are outright edicts. Thou shalt do this, and thou shalt not do that. However well-intentioned they are, they generally have negative consequences.The other issue is that now that we’ve gone through a period of great economic uncertainty and businesses are trying to find their feet in more stable times, we’re seeing regulatory and legislative uncertainty replacing economic uncertainty. That can be every bit as damaging. Which rules and regulations have the biggest impact on Hawaiian?
We are an industry that deals with an unbelievable volume of regulatory requirements. Air carriers are commenting right now on proposed new consumer regulations. Obviously, there is a lot of safety regulation. Being a public company, we are also dealing with all of the financial regulations that were created over the last decade. We deal with a lot of employee- and union-related regulations. In almost every facet of our business, we face a veritable telephone book’s worth of complex regulations. There are some that we can more easily see the cost-benefit of than others. In light of all the controversy over executive pay, do you see CEOs’ compensation in general as maybe excessive?
First, I don’t think you can say that on the whole CEOs are overpaid or underpaid; it’s very much a case-specific question. Second, in terms of my own situation, I’m enormously fortunate. Most people that are able to become CEOs of companies are very, very fortunate. It would be wrong to characterize the way we feel about pay as somehow a sense of entitlement. But do you ever get frustrated by the public perception of CEO pay?
I don’t lose any sleep over it. I don’t spend a lot of time focused
on the characterization of some bank CEO’s pay, because it doesn’t really have anything to do with the work that we as airline CEOs do. What has the financial crisis taught you?
That we’ve been very lucky — we’ve been profitable throughout it.The crisis underscored that you need to make sure that you are not the weakest in your industry. What happens when difficult times come is that the weakest perish, and that creates opportunities for strong participants. So it’s very important — even when you think times are actually pretty good — to make sure that when you look at the league table of your competitors, you’re not on the bottom of that table. The U.S. has a serious unemployment problem. Where do you see the jobs of the future coming from?
It’s more difficult for the Western economies — not just the United States — to produce and manufacture things that have low intellectual-property content, so the Western jobs of the future are likely to come in the service industry. They’re likely to be jobs associated with the fact that for the next few decades the center of consumption is likely to remain in the Western economies. So jobs that are close to the consumer — as opposed to close to the raw material at the other end of the spectrum — are likely to be where Western employment comes from. I think there is a question about whether the Western economies as a whole are focused on that economic reality and are really doing what they can to prepare for it. The centers of consumption will really be in the West?
The trend is for the global share of consumption to drop in theWest compared with the developing world. But it’s going to take decades before we’re living in a reality where that share of consumption is at parity. You recently negotiated with your own labor unions. How are your relations with them?
We’re very fortunate to have good relations with our unions. It’s a very different environment here than at most of our competitors. Quite candidly, it’s taken a lot of hard work on the management side, but it’s taken hard work on the union side as well.The relationship between unions and employers has everything to do with whether both parties are negotiating to prepare for the future or negotiating to preserve the past.The changes in the global economy are irreversible and inexorable, and they should be embraced rather than resisted. Negotiations characterized by trying to preserve the past are destined to fail. What’s going to keep Hawaiian Airlines flying high?
We have identified our unique selling proposition — we sell Hawaii — and we understand our marketplace better than any other participant does. Our future success is going to come from positioning that unique understanding in a broader marketplace, and we believe there is ample scope for expansion of our business model.
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BENCHMARK BORROWERS
EUROPE
SLOWLY REHEATS
T
he good news for European sovereign, supranational and agency (SSA) borrowers is that the worst now seems to be over in terms of their huge funding requirements. According to estimates published recently by Fitch, gross government borrowing for the 16 countries that had adopted the euro as of the end of 2010 will decline by 13 percent in 2011, to the equivalent of 16.5 percent of GDP. By contrast, government borrowing is expected to equal 25.2 percent in the US and more than 50 percent in Japan. Declining funding requirements are being underpinned in Europe’s largest economies by better-than-expected economic performance and successful debt buyback programs, allowing governments such as those of Germany and France to revise their financing needs down. As Agence France Trésor (AFT) comments in an update published in January: “Medium and long term debt issuance, net of buybacks for 2011, has been set at €184 billion, rather than €186 billion as initially stated in the draft budget bill released at the end of September, and down from €188 billion in 2010.” At the same time, the dramatic rise in the stock of short term debt issued by EU governments in 2009 has started to unwind, with maturities of medium and long-term debt rising by 13 percent in the EU-15. The bad news is that total funding requirements for euro zone governments to cover large deficits and roll over existing debt remain formidable, at a gross €1.866 trillion, according to the Fitch data. Equally unsettling is that the fall in average annual yields across the euro zone as a whole (from 3.7 percent in 2010 to 3.5 percent in 2009) should not be allowed to camouflage the gulf that continues to exist between Europe’s haves and its have-nots. It was, after all, the core Euroland governments
Europe expects a decline in borrowing and plenty of demand from reserverich buyers this year, but the perfect recipe for monetary union remains elusive.
that drove the fall in average yields, driven principally by a strongerthan-expected economic recovery generating healthy tax receipts and in turn bringing down projected funding requirements for 2011. Euroland’s peripheral government borrowers were not so fortunate. As Fitch points out, Greece and Ireland were priced out of the market completely last year, while Italy’s 10year yield reached 182 basis points over Germany at the end of 2010, BY PHIL MOORE with Spain’s at 255 basis points and Portugal’s at a dizzying 380. True, that gulf appeared to narrow slightly in January, driven in part by a series of supportive announcements both from within and outside the euro zone about the longer term prospects for stability in Europe. From within came positive comments from Germany about the expansion of the European Financial Stability Fund (EFSF). From further afield came pledges from China and Japan that they would be prepared to buy into euro zone debt. There may, of course, be any number of geopolitical rather than commercial reasons underpinning this support, but that has not made it any less welcome for Euroland-based issuers. “Russia has also indicated publicly that it may be supportive of the EFSF,” says Jeffrey Diehl, Global Head of Public Sector Capital Markets at HSBC. “Clearly, the market has taken comfort from the fact that there is support coming from a number of countries that are so reserve-rich.” The announcements from Asia were certainly supportive of February 2011 • Institutional Investor Sponsored Report • 1
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the €5 billion five-year transaction from the European Union (EU) in the first week of January. Some argued that it was the pricing level of 12 basis points over swaps, more than anything else, that turbocharged demand for the EU’s benchmark, which generated orders in excess of €5 billion. But irrespective of the pricing, the support of Asian institutional investors, which bought more than a fifth of the EU’s transaction, was taken as an important vote of confidence in Europe’s prospects. Even more striking was their support for the EFSF’s €5 billion five-year benchmark later in the month, which generated record-breaking demand of €44.5 billion from more than 500 investors, with Asia accounting for 38 percent of final distribution. Spain as Stand-Out The success of the EU’s benchmark also provided a valuable platform for other euro zone borrowers, with SSA issuers from some of Europe’s more troubled governments completing jumbo transactions soon afterwards with varying degrees of success. Spain was probably the stand-out, generating over €12 billion of demand for its €6 billion 10-year benchmark in mid-January. The success of that transaction allowed Instituto de Crédito Oficial (ICO) to launch its first syndicated deal of the year later in the same week, printing a five-year €1 billion benchmark in line with guidance at 245 basis points over mid-swaps. “We were clearly able to benefit from the momentum that was created by the success of the Kingdom’s 10-year benchmark,” says Rodrigo Robledo, head of capital markets at ICO’s Madrid headquarters. “It may be too early to say that the worst is over, but the tone in the market seems to have changed and perception towards Spain has improved.” Among other so-called peripheral government issuers, Belgium, which issued a syndicated transaction in the slipstream of the Spanish deal, was less fortunate with its €3 billion 10year benchmark priced at the wide end of guidance. Although
this generated a high-quality order book of about €6 billion, its timing fell foul of European politicians’ mercurial response to the sovereign debt crisis. As Société Générale, which led the Belgian benchmark alongside BNP Paribas, Fortis, RBS and UBS, explained in its deal summary, “news coming out of the Ecofin meeting of European finance ministers at lunchtime set a more negative market tone and peripheral euro zone sovereign markets weakened significantly.” Anne Leclercq, Director of Treasury and Capital Markets at the Belgian Treasury, says that the outcome of the Ecofin meeting and the volatility that followed was unexpected when the books for the syndicated linear bond (OLO) were opened in the “It may be too early morning. “Everything was calm to say that the worst and stable at the beginning of the is over, but the tone in the market seems day,” she says. “But headline risk to have changed and is something we all have to live perception towards with at the moment.” Spain has improved.” The more fundamental gulf RODRIGO ROBLEDO, ICO between core and peripheral Europe, however, was probably most graphically illustrated in January by Portugal’s €599 million 10-year auction. Yes, Portugal’s auction was technically a success. But at what price? Pimco’s Bill Gross was among those who made no secret of his view that the sale by a Euroland government of a 10-year bond at close to 7 percent could hardly be described as a success. This is a view that is hard to contest, given that it is unsustainable for countries with low growth rates and high fiscal deficits to borrow at levels that increase their interest payment burdens. The pricing of the Portuguese auction certainly added grist to the mill of those who argue that it would be premature to declare that the European sovereign debt crisis is past its worst, let alone over. RBC Capital Markets, for one, cautioned at the start of
EU15 Central Government Borrowing Requirements in 2011 (% of GDP) 25
20
15
10
5
0 Source: Bloomberg, national debt agencies, Fitch
2 • Institutional Investor Sponsored Report • February 2011
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BENCHMARK BORROWERS
the year that “we have long conjectured that the end game and nadir for this polemic remains some way off.” It added “a degree of peripheral government debt rescheduling will be required before the situation can claim to have been ‘fixed’ and that other sovereigns will be forced to tap the ECB/EU/IMF for funding.” Some investors agree, with one based in the US saying he remains unconvinced by Europe’s response to its debt crisis. “We have clearly reduced our exposure to Euroland and we’re not the only one,” he says. “I don’t think the powers that be in Europe have grasped that their lack of resolve is not conducive to encouraging investment from some of the larger pools of money elsewhere in the world.” The same investor adds that he fears the EU is facing an increasingly stark and unappealing choice between fiscal federalism and a break-up of the Union. As few in the EU are likely to have the stomach for the political federalism that would accompany fiscal union, this would imply a reversal of monetary union. Sustainable Framework too Important to Rush That, however, seems to be an extreme view. The more general consensus appears to mirror the conclusion reached by Fitch in a Sovereign Review published in December: “Fitch’s current judgment is that the euro area will ‘muddle through’ rather than break up in the wake of systemic sovereign debt defaults or transform itself into a ‘United States of Europe.’” Christopher Marks, head of EMEA debt capital markets at BNP Paribas in London, says he is now considerably more positive about the outlook for the euro zone than he was this time last year. But he is also adamant that the creation of a sustainable framework in which to take monetary union forward is much too important to rush, and if that means muddling through, then so be it. “I don’t believe there is any option for Europe other than muddling through,” he says. “That is not because of a lack “Given that we have of political far-sightedness. It a larger funding is because if there are good requirement, the main change has been that political and economic reasons we have set up a 144a for the Union to continue program to reach a new to exist it is essential that a investor base in the US.” sustainable and comprehensive PATRICE RACT MADOUX, CADES financial architecture is put in place, which takes time.” Nevertheless, it is apparent that European borrowers are increasing the energy and resources with which they are exploring opportunities to diversify their funding sources beyond their home market. No European SSA borrower will say so— certainly not in public—but it may be uneasiness about the future of the euro that at least partially explains the stampede towards the US investor base that has gathered momentum over the last 12 to 18 months. One of the most striking examples of a European-based SSA borrower that has identified US investors as an important target this year is France’s Caisse d’Amortissement de la Dette Sociale (CADES). And with very good reason, given that CADES is one of the few SSA borrowers in Europe that will have a rising 4 • Institutional Investor Sponsored Report • February 2011
funding requirement in 2011. Having raised a relatively modest €13.8 billion in 2010, the French agency will need to issue between €30 billion and €35 billion this year. CADES’ Chairman, Patrice Ract Madoux, says that he is aiming to generate the equivalent of between €12 billion and €14 billion of this total from the dollar market. “We issued $2.5 billion in Eurodollar format in a very successful three-year deal in January,” says Ract Madoux. “What was very encouraging about that transaction was the support we had from central banks, which accounted for more than half of distribution, and from Asia, which accounted for 30 percent.” “But it is clear that the one source of demand we have not yet targeted is the US domestic investor,” Ract Madoux adds. “Given that we have a larger funding requirement this year, the main change in our borrowing strategy has been that we have set up a 144a program to reach a new investor base in the US.” Bankers say that there are plenty of reasons beyond uncertainty about the euro that will underpin supply-demand dynamics for European SSA borrowers in the dollar market. “The dollar market will continue to be a focus for European issuers because the basis swap is so favorable for them,” says Diehl at HSBC. “This is being influenced by European banks with limited access to dollar funding borrowing from the ECB and swapping the proceeds in order to fund their dollar assets.” At the same time, says Diehl, European borrowers are being alerted to the potential that is being opened up in the 144a market as the range of alternative investment opportunities open to US investors diminishes. “We’re seeing a wave of redemptions in the government-guaranteed market and issuance from US government-sponsored enterprises such as Fannie Mae and Freddie Mac is shrinking,” Diehl says. “That is leading to an increase in demand from US investors for high quality overseas issuers ranging from European SSAs to Canadian provinces and selective issuers in the covered bond market.” Guy Reid, head of frequent borrower coverage at UBS in London, agrees that this is an opportune time for European SSAs to explore a broader range of funding options. “SSA issuers are looking at pockets of liquidity that in the past they may not have needed to access,” he says. “A good example is the 144a market, which will continue to be busy this year. But so too will be markets such as sterling, which has been very active recently. For a long time the economics of sterling issuance only worked for borrowers with a sterling requirement, which very few SSAs have, or for issuers with large funding requirements that needed to spread the load across markets. Now the economics work much better, and with many central banks and UK real money investors eager to diversify out of gilts, demand for sterling is strong.” Reid warns, however, that the sterling market remains a relatively expensive market for borrowers looking for maturities beyond five years, which many are. With demand in the dollar market also generally concentrated toward the shorter end of the curve, euros, and to a lesser extent Australian dollars, are more promising options for issuers looking for longer-dated funding. ●
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COVER STORY
Grübel’s Mission
Pulled from retirement to save crisis-scarred UBS, Oswald Grübel has put the Swiss bank back in the black, but can he restore its former prominence? By Jonathan Kandell
O
N PARADEPLATZ, THE CENTRAL
Zurich square dominated by the offices of Switzerland’s two largest banks, executives of Credit Suisse and UBS can gaze into each others’ offices and wonder how their institutions measure up. Oswald Grübel doesn’t have to wonder. He has run both banks. In the past decade, Grübel led a turnaround that revived profits and morale at Credit Suisse before retiring as the bank’s chief executive officer in 2007.Two years later the board of UBS, hoping for a similar result, asked Grübel to take the helm of its deeply troubled bank, which ran up massive losses during the financial crisis and needed a Swiss government bailout to survive. “All the time I was at Credit Suisse, I heard how much better a bank UBS was,” Grübel, 67, tells Institutional Investor in a recent interview in a conference room at UBS headquarters overlooking the luxury stores and private banks of snow-swept Bahnhofstrasse, the city’s main avenue. “Now the same people are telling me that Credit Suisse is so much better than UBS. They were wrong then, and they will be proved wrong again.” Grübel will need to summon all his determination and experience to prove the skeptics wrong, given the extent of UBS’s decline.The bank was the world’s largest wealth manager and a bulge-bracket global investment bank a mere four years ago, but it nearly foundered because of its own missteps during the financial crisis. UBS gambled recklessly on subprime mortgages and other toxic investments,
CEO Oswald Grübel aims to pull off one last turnaround INSTITUTIONALINVESTOR.COM
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COVER STORY
and ended up taking more than $50 billion in securities write-downs — a greater amount than any other bank.The fallout badly damaged the bank’s vaunted wealth management franchise, causing clients to withdraw more than $200 billion in funds.The losses prompted the forced departures of two chairmen and two CEOs in the space of 18 months and spurred dozens of other senior executives to defect to sounder rivals. The Swiss National Bank had to step in to stop the hemorrhage, taking tens of billions of dollars of bad assets off UBS’s books and injecting Sf6 billion ($5.7 billion) of capital into the bank. As if those problems weren’t enough, UBS was caught helping wealthy American clients hide billions of dollars from U.S. tax authorities and had to pay $780 million to settle the charges and maintain its U.S. banking license. Since taking over as CEO in February 2009, Grübel, a tall, sturdy German with a baritone growl who’s known to almost everyone simply as “Ossie,” has been working methodically to restore the bank to health. He pressed forward with an initiative launched by his predecessor Marcel Rohner to chop $1 trillion off the bank’s $2.5 trillion precrisis balance sheet. UBS had slashed assets by Sf943 billion by the end of September 2010, including the transfer of almost $40 billion of illiquid mortgage-backed securities to a fund established by the Swiss National Bank and the deeply discounted sale of $22 billion in U.S. residential-mortgage-backed securities to fund manager BlackRock. Grübel also moved aggressively to reduce annual expenses by Sf3.5 billion by cutting nearly 20,000 jobs, or almost one quarter of the bank’s payroll. Even as he moved to stanch the bleeding, Grübel recruited a cadre of senior bankers to help lead a turnaround at UBS. He installed two former Credit Suisse colleagues in senior posts: Ulrich Körner, a former CFO and COO at Credit Suisse, is driving the cost-cutting campaign as chief operating officer, while Lukas Gähwiler, who ran the credit business of Credit Suisse’s private bank, heads up UBS’s domestic banking business. Grübel also recently promoted Carsten Kengeter, a former Goldman Sachs Group trader who joined UBS’s key fixedincome, currencies and commodities unit in late 2008, to head the investment banking division, in a bid to revive its fortunes. “We tell potential hires that UBS is a fair and exciting place to work — a real global turnaround story,” Kengeter says. Grübel has set his team the ambitious goal of achieving pretax profits of Sf15 billion by 2014. Tying all the initiatives together is Grübel’s so-called one-bank strategy. He wants UBS’s investment banking, wealth management and asset management arms to work together more closely to generate business and wring greater fees, and profits, from customers. To that end, the bank is providing wealth management clients with greater access to the investment bank’s expanded offering of equity and bond research. Similarly, wealth management clients with their own companies can turn to the investment bank to arrange financing for their businesses. “Deals across departments will be
rewarded,” promises Grübel, who pursued a similar strategy at Credit Suisse and handed out bonuses known as “Ossie dollars” to reward investment bankers and wealth managers for working in tandem to service clients. Matthew Clark, a London-based analyst for Keefe, Bruyette & Woods, says Grübel’s one-bank strategy pulled Credit Suisse out of its own doldrums in the past decade. “The same playbook is being used,” Clark says. So far, Grübel’s measures are bearing fruit. UBS returned to the black in 2010 after three years in which it recorded a total of Sf29.2 billion in net losses. UBS posted net income of Sf5.9 billion in the first three quarters of 2010, compared with a loss of Sf2.7 billion in the same period a year earlier. At the pretax level, which Grübel is targeting, the bank showed a profit of Sf6.2 billion in the first three quarters, compared with a loss of Sf2.6 billion a year earlier. “UBS is definitely out of the woods, though clearly there is work to be done,” says Citigroup banking analyst Kinner Lakhani. Indeed, there is. Notwithstanding the progress Grübel’s team has made, UBS has a long way to go to regain its former luster.The wealth management division, under the leadership of UBS veteran Jürg Zeltner, has managed to stop the bleeding of client funds but is lagging rivals in pulling in fresh money. The investment bank, which was a leader among European players and hot on the heels of Wall Street’s giants before the crisis, has slipped noticeably. Last year, UBS ranked eighth among global banks in investment banking revenues, with $2.8 billion, or 4.0 percent of the market, down from sixth place with a 5.4 percent market share in 2007, according to Dealogic. Over that period, Deutsche Bank and Credit Suisse leapfrogged UBS, rising to fifth and sixth place, respectively, last year, with market shares of 5.3 percent and 5.2 percent, while Barclays
“Our investment bank was blown apart by the crisis. We were left with hardly any fixed-income activity. And you cannot run a global bank without fixedincome trading.” — Oswald Grübel, UBS CEO
Capital trailed just behind UBS with a 3.9 percent share. Especially worrisome to Grübel, a former bond trader, the investment bank’s fixed-income trading operation has fallen far behind those of its big rivals. “Our investment bank was blown apart by the crisis,” says Grübel. “We were left with hardly any fixed-income activity. And you cannot run a global bank without something as basic as fixed-income trading.” Kengeter has been hiring bond traders and salespeople aggressively over the past year to close the gap, but those moves have yet to pay off. Considering those hurdles, many analysts are skeptical that UBS can hit the Sf15 billion profit target, which Grübel considers necesINSTITUTIONALINVESTOR.COM
PREVIOUS SPREAD: GRUBEL: ©ARND WIEGMANN/REUTERS/CORBIS KENGETER: UBS VIA BLOOMBERG; ZELTNER: DENIS BALIBOUSE/REUTERS/CORBIS
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approach from Credit Suisse, Union Bank’s board agreed to acquire SBC for $19.7 billion in stock in 1998. The merger knocked Credit Suisse off its top perch and created what was then the world’s No. 2 bank by assets, behind Bank of Tokyo–Mitsubishi. The new UBS faced an early trial when the collapse of Long-Term Capital Management forced the bank to take Sf950 million in losses for its exposure to the hedge fund. Mathis Cabiallavetta, who had overseen the buildup of that exposure as CEO of Union Bank, resigned as chairman, leaving UBS firmly in the hands of chief executive Ospel and his former SBC colleagues. Determined to make UBS a global investment banking powerhouse, Investment bank chief Carsten Kengeter (left) and wealth management’s Jürg Zeltner Ospel agreed to buy U.S. brokerage PaineWebber Group for $11.5 billion sary to ensure sustained profitability and to regain the confidence of in 2000.The following year he appointed John Costas, former head shareholders. “This is a very tough market, yet Grübel is promising of fixed-income trading at Union Bank, as CEO of the investment more than anybody else,” says Martin Janssen, Zurich-based CEO of bank. Costas, an American, expanded his division with the aim of Ecofin Research and Consulting, a firm that offers investment advice overtaking Goldman Sachs as the top earner of investment banking to Swiss pension funds, all of which have stakes in UBS. fees within six or seven years.That audacious goal didn’t seem imposNot only is UBS trying to play catch-up, it must do so with a sible. By 2003, UBS had risen to fourth place, lagging only $410 milhandicap: The bank, along with Credit Suisse, faces much higher lion behind Goldman Sachs’ $2.5 billion in global fees. Costas also capital requirements than its global rivals. The Swiss government, expanded a proprietary trading desk in the fixed-income group that aware that the big banks’ liabilities vastly exceed the size of the generated an increasing share of profits. Before long, the investment domestic economy, doesn’t want a future crisis to leave the country bank eclipsed wealth management within UBS, accounting for looking like Ireland. It is insisting that the two banks boost capital more than 60 percent of the group’s earnings by 2005, compared to as much as 19 percent of risk-weighted assets, well above the new with less than 15 percent in 1998. “We cobbled together what was Basel III standard of 7 percent. Closer regulatory scrutiny also will the first real threat in those years to enter the bulge bracket on Wall impede efforts to rebuild the business, especially in the investment Street,” says Costas. The expansion also swelled the investment bank. UBS is under pressure from shareholders and regulators to bank’s balance sheet fourfold over the same period, to $1.5 trillion, keep a lid on compensation while revenues are still low and dividends building up risks that would become apparent when the subprime nonexistent. Former executives, including ex-chairman Marcel mortgage crisis erupted. Ospel and CEO PeterWuffli, gave back some Sf70 million in bonuses In 2005, at a time when many investment banks were losing top in 2009 to appease shareholder anger. traders to hedge funds, Costas persuaded the bank to back him Such regulatory rigor will impose a heavy burden on UBS. Still, in creating an in-house hedge fund, named Dillon Read Capital Grübel is confident of achieving his goals and restoring UBS to its Management. Staked with $3 billion of the bank’s own capital and former prominence. “We still have quite a lot to do to catch up with staffed initially with 100 people drawn from the investment bank’s our competitors, but we should be able to do this,” he says. trading desk, DRCM intended to manage the bank’s own money as well as funds from outside institutions. The unusual arrangeTHE IDEA THAT UBS WOULD STRUGGLE TO COMPETE IS ment, as well as Costas’ lack of hedge fund experience, raised some a humbling one, considering the bank’s heritage. UBS was born eyebrows. “If John Costas was so good, he should have taken his big and rich, the offspring of the 1998 merger of Union Bank of people and tried to risk capital outside UBS,” says Davide Serra, Switzerland, then the country’s second-largest lender by assets, founding partner and fund manager at Algebris Investments, a with Swiss Bank Corp., the third largest. Union Bank was renowned financial-sector-focused hedge fund. for its Swiss retail and commercial banking operations but had DRCM performed well early on, generating $700 million in pretax a reputation for conservatism and faced pressure from activist earnings in 2005 and $740 million in 2006. But in early 2007 the shareholder Martin Ebner to boost returns. SBC’s strong suit was fund’s big bets on subprime mortgage securities began to sour as the investment banking, thanks to its purchases of London merchant housing market stumbled; it racked up $138 million in losses between bank S.G.Warburg & Co. in 1995 and Wall Street investment bank mid-March and mid-April of that year. UBS executives concluded that continued on page 79 Dillon Read & Co. in 1997. After spurning an opportunistic takeover INSTITUTIONALINVESTOR.COM
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THE 2011 ALL-EUROPE RESEARCH TEAM
THE
2011 ALLEUROPE RESEARCH By Leslie Kramer
TEAM
PHOTOGRAPHS BY JULIAN WARD
WITH THE EURO ZONE LURCHING FROM CRISIS TO CRISIS, INVESTORS ARE DEPENDENT ON TIMELY INSIGHTS FROM ANALYSTS — AND SAY THESE ARE TOPS IN THEIR FIELD.
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THE 2011 ALL-EUROPE RESEARCH TEAM
S
SOVEREIGN-DEBT CRISES IN EUROPE DOMINATED THE man bank claims a whopping 37 total positions — 20 more than last headlines throughout much of the past year, casting a pall over year — and triples its number of teams in first place, to six. economies still struggling to recover from the market meltdown of Deutsche’s stunning advance bumps longtime champ UBS, 2008. Real gross domestic product growth in the euro zone inched which had ruled the roost for the past nine years, down to second up only 1.9 percent year-over-year in the third quarter, according place, even though the Swiss bank enjoys its own enviable gains, to statistics from the European Union, while unemployment in the adding six positions, to bring its total to 34 — eight of which are region has hovered just above 10 percent for months. The silver for teams ranked No. 1. In fact, when the results are weighted lining to those dark clouds is the buying opportunity that arose as on the basis of rank, UBS retains the top spot (see Weighting the Results, page 43). stock prices fell. BofA Merrill Lynch Global Research also strengthens its reputa“We’ve reached a point where equity markets are at a multiyear low in terms of valuations,” says Timothy Whittaker, Barclays tion as an equity research powerhouse, rising from fifth place to third Capital’s head of equity research for Europe, the Middle East and after picking up seven positions, for a total of 28.Two firms that tied Africa. “Many companies have been delivering positive quarterly for second place last year, Credit Suisse and J.P. Morgan Cazenove, results and outperforming consensus estimates, making the equity slip to share fourth-place honors with Morgan Stanley, which vaults markets an attractive place to invest.” from seventh place; the three firms win 23 positions each. Not all investment opportunities are created equal, however. “It’s The biggest gainer is Barclays Capital, which rockets from No. 14 times like these when lots of stocks tend to be treated in the same way, to tie for eighth place with Sanford C. Bernstein, last year’s No. 9 but the ability to differentiate between those stocks is dependent on firm. BarCap picks up ten team positions, for a total of 12, while your understanding of the fundamentals,” adds Jonathan Jayarajan, Sanford C. Bernstein adds two positions but sees its number of teams associate director of EMEA equity research for Deutsche Bank. in first place soar from two to seven. Results are based on responses Investors need reliable guidance to help them distinguish from more than 1,900 money managers and investment officers at some 700 institutions between shares managing an estiunjustly dragged THE LEADERS mated $5.6 trillion in down by market turTOTAL TEAM FIRST SECOND THIRD RUNNERSEuropean equities. moil and those that RANK POSITIONS TEAM TEAM TEAM UP Profiles of the tophold little promise 2011 2010 FIRM 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 ranked teams in each for growth. The ana1 6 Deutsche Bank 37 17 6 2 5 2 9 6 17 7 of the survey’s 49 seclysts whom portfolio 2 1 UBS 34 28 8 7 6 7 7 3 13 11 tors can be found in managers credit with 3 5 BofA Merrill Lynch 28 21 4 6 5 9 6 2 13 4 Research & Rankings, providing the most Global Research beginning on page 66. astute investment 4 2 Credit Suisse 23 22 3 3 5 6 7 4 8 9 Complete results, insight can be found 4 2 J.P. Morgan Cazenove1 23 22 7 8 5 5 4 1 7 8 including profiles of at Deutsche Bank, teams in second and which catapults five 4 7 Morgan Stanley 23 15 5 3 4 1 1 1 13 10 places to finish in first third place, can be 7 2 Nomura International 18 22 1 5 4 5 2 5 11 7 place for the first time found on our web site, 8 14 Barclays Capital 12 2 0 0 4 0 0 0 8 2 on the All- Europe institutionalinvestor. ResearchTeam, Insticom. 8 9 Sanford C. Bernstein 12 10 7 2 1 2 2 2 2 4 tutional Investor’s 26th With sovereign10 8 Citi 10 12 1 1 2 0 0 3 7 8 annual ranking of the debt woes on many 1 and team positions in 2010 were for J.P. Morgan; Cazenove tied for No. 16 last year, with one team region’s best equity Rank investors’ minds, position. In January 2010, JPMorgan Chase & Co. acquired Cazenove Group and thereby 100 percent researchers.The Ger- ownership of J.P. Morgan Cazenove. many firms have been INSTITUTIONALINVESTOR.COM
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STÉPHANE DÉO UBS ECONOMICS
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THE 2011 ALL-EUROPE RESEARCH TEAM
ALBERTO GANDOLFI UBS RENEWABLE ENERGY, UTILITIES
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PAMELA FINELLI DEUTSCHE BANK EQUITY DERIVATIVES
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THE 2011 ALL-EUROPE RESEARCH TEAM
MARTINUS (MARTIJN) RATS MORGAN STANLEY OIL SERVICES
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WEIGHTING THE RESULTS This table shows the top firms if a rating of 4 is assigned to a first-teamer, 3 to a second-teamer, 2 to a third-teamer and 1 to a runner-up. RANK BY WEIGHTED FORMULA
RANK IN LEADERS TABLE
FIRM
WEIGHTED TOTAL
placing greater emphasis on investors wondered if, when and 1 2 UBS 77 macroeconomic coverage and where another European nation strengthening ties between anawould need to be bailed out — 2 1 Deutsche Bank 74 lysts and strategists. and whether assistance would 3 4 J.P. Morgan Cazenove 58 “The workload has increased even be available. 4 3 BofA Merrill Lynch Global Research 56 dramatically because of the sov“The political economy 5 4 Credit Suisse 49 ereign crises and other events,” began with the Greek crisis,” says Stéphane Déo, who leads the Déo says. “The clients’ level of 6 4 Morgan Stanley 47 UBS team to No. 1 in Economics sophistication is a big part of the 7 8 Sanford C. Bernstein 37 for a third consecutive year.“The story, because people outside 8 7 Nomura International 31 way I do my research has changed Europe often have difficulty — there is a political dimension understanding what’s going on. 9 8 Barclays Capital 20 now, and it is extremely imporFor example, the probability of 10 10 Citi 17 tant to have as many contacts as a breakup was very small — that possible in the diplomatic world.” was very clearly not an option Sharing political insights with other researchers has become vital — but people outside the euro zone were talking about that a lot.” for economists, according to Richard Smith, Deutsche’s director of Concerns that the union might unravel were driven in large part by EMEA equity research.“Over the last 12 months, we have made sure what appeared to be the reluctance of member countries to intercede to have strong interconnectedness between our economists, who are on Greece’s behalf, but that perception was misguided. “When you well plugged in to what is going on with peripheral countries within take a decision in Europe, you have 16 people bargaining in the euro Europe, and our own company-research analysts,” Smith explains. zone and 27 people in the EU,” Déo explains.“That’s a lot of bargain“We make sure that our equity analysts are on top of what is going in ing — there are many issues — and it can be difficult to get a clear view.” the world around them.” The uncertainty has been keeping money managers on edge. And what a world! In late April, Standard & Poor’s downgraded “Understanding the appetite for intervention is critical; if invesGreece’s sovereign-debt rating to junk status; the move — and fears tors thought there was no appetite to intervene, then some of the that the country would default on its obligations — sent shivers sovereign-debt stresses would have become a full-blown financial through world markets. The following week, euro zone countries crisis,” Deutsche’s Jayarajan explains. “Markets need reassurance and the International Monetary Fund agreed to lend Greece up to that there is a willingness to intervene at any cost.” €110 billion ($146 billion) to shore up its ailing economy — provided Deutsche sponsors what it calls “reverse road shows” to help keep that Athens impose a number of austerity measures, including tax clients abreast of developments. “We take investors to see major hikes, pension and pay cuts for public sector employees and an increase players in real estate markets, local government officials and central in the retirement age. The agreement sparked protests and rioting, bankers,” says Smith. “They speak to a range of individuals who can with tens of thousands of angry demonstrators taking to the streets. give them local color on what is happening and offer unique insight.” As the year continued to unfold, soaring budget deficits in other Money managers are interested in learning about developments countries on the euro zone periphery — notably Ireland, Italy, Portugal that will affect not only stocks but also related instruments. “We’ve and Spain — began to resurrect the spectre of sovereign-debt defaults worked more with our research colleagues in areas such as credit and even cast doubt on the future of the region’s single-currency system. and foreign exchange derivatives to assess the cost of protection in In November, Ireland became the first country to be bailed out with different markets, both to interpret signals coming from asset classes funds from the European Financial Stability Facility, an entity created outside of equity and also to see where protection may be the most in the immediate wake of the Greece bailout and one that is backed by cost effective,” explains Pamela Finelli, who with Nicolas Mougeot euro zone countries,the European Central Bank and the IMF.However, guides Deutsche’s Equity Derivatives team to the top spot. “With an market reaction to Ireland’s €85 billion rescue package was muted, as increasing focus on tail risk and a proliferation of funds dedicated to INSTITUTIONALINVESTOR.COM
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THE 2011 ALL-EUROPE RESEARCH TEAM
monetizing extreme market events, sourcing inexpensive protection is an ongoing theme these days.” That theme became more dominant over the past year, she adds. “Since the financial crisis started — and in particular after the May sovereign sell-off — we’ve seen a greater awareness of risk management from our clients,” Finelli says. “We’ve been conducting more customized work for investors who wish to thoroughly analyze how a hedge may change the risk profile of their portfolios — and using equity derivatives to better manage risk remains at the forefront in the minds of many of our clients.” Downside protection is crucial in a market environment in which all stocks are vulnerable, regardless of their relative merits.That was the case last year, according to Deutsche’s Luis Fañanas Martinez, whose team makes its first appearance atop the ranking in Small- & Midcapitalization Stocks. “It was a period of market collapse where there was no differentiation, everything was collapsing — the good companies, the great and the bad,” the Madrid-based analyst says. Small- and midcap companies lagged large-caps for the past couple of years, Fañanas says, but that trend is reversing and smaller companies are poised to outperform.To help clients identify likely winners, the team launched a new quarterly publication in July,“Pan-European Quality andValue Selection,” that assesses smaller companies on the basis of valuation, earnings momentum and other criteria. “We apply the value-investing philosophy, which is trying to select great-quality companies at the lowest possible price,” Fañanas explains.“For us the most important issue is the competitive position of the company and the barriers to entry into the business.” Smith says more and more clients are looking for guidance in determining which companies are best positioned to deal with the sustained economic slowdown, what impact foreign exchange volatility is having on company earnings and the likely effects of quantitative easing, an often-controversial practice in which a central bank increases the supply of money in an attempt to stimulate the local economy — but at the risk of spurring inflation.Two quant analysts were among the six Deutsche hired, bringing its department head count to 94. The firm’s analysts now track 706 stocks, up from 681 at this time last year, and Deutsche plans to hire six more in the coming year so that it can continue to expand its coverage. At Morgan Stanley, “demand for more time with our economists and macro teams has been exceptional this year,” says Rupert Jones, head of European equity research. In response the firm launched a series of Blue Papers, in May, that focus on investment themes
across regions, sectors and asset classes and include insights from analysts, economists and equity strategists.Topics addressed have included an analysis of the petrochemicals industry and Solvency II, EU regulations that take effect in January 2013 and require insurers to align their capital reserves more closely with the risks to which they are exposed. The need for more sources of oil has fueled interest in the Oil Services sector, newly added to the survey this year. Martinus (Martijn) Rats, who shepherds Morgan Stanley’s squad to first place, points out that the credit crisis has proved advantageous in that the cost of building new energy infrastructure fell significantly in 2009. “The reason for this decline was the worldwide slowdown in demand for many different items, such as steel and equipment, and also for subcontracted services,” he notes. “Basically the oil companies were saying, ‘Look, we are sitting on very significant reserves, and the oil and gas needs to be developed at some point.We’d better build these gas-processing plants, refineries and chemical installations now that the cost of infrastructure is very low.’” The boom in developing new facilities has spurred a rebound in the sector, largely because of increased expectations about future earnings, Rats explains. In addition, he says, “what has been a really encouraging factor over the last 12 months is that oil demand globally has turned out to be strong and robust.” To keep money managers informed of emerging trends and developments in a time of extreme volatility, Morgan Stanley implemented Sunday night calls. “People want to be updated on key breaking issues such as bank stress tests ahead of the market opening, so we started ad hoc our Sunday night conference calls, which have been extremely well attended,” Jones says. Morgan Stanley’s 70 European researchers, who increased stock coverage by about 10 percent over the past year, to 800 companies, have also been availing themselves of the expertise of colleagues in Asia and Latin America, to provide clients with broader-based insights into European companies with exposure to emerging markets. “They need to know which companies are best placed to tap into global growth, which means they need us to properly mobilize our global research effort,” Jones explains. BarCap followed a similar approach. “We have a global research team, and we work with our colleagues based in different regions to understand what is going on around the world,” research director Whittaker says, noting that over the past year the firm has published reports with a macroeconomic focus on issues such as health care INSTITUTIONALINVESTOR.COM
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SARBJIT NAHAL BOFA MERRILL LYNCH GLOBAL RESEARCH SOCIALLY RESPONSIBLE INVESTING
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THE 2011 ALL-EUROPE RESEARCH TEAM
and financial ser vices reform in the U.S. and the drug pipelines of global pharmaceuticals companies. That’s a fairly new concept for the bank, which only began building a global equity research team after Barclays acquired the North American assets of the bankrupt Lehman Brothers Holdings in the fall of 2008. Since then the firm has been aggressively hiring analysts in Asia and Europe. Although Whittaker declined to disclose the number of European equity analysts the firm employs, he does note that his researchers track about 400 companies. BofA also has been widening its coverage universe; its 100 Europe analysts, six more than the firm had last year, follow 650 companies, 20 more than a year ago, according to Simon Greenwell, head of EMEA equity research.“It was a year when country risk reemerged in the euro
“THE WAY I DO MY RESEARCH HAS CHANGED — THERE IS A POLITICAL DIMENSION NOW.” —Stéphane Déo, UBS
zone,” he observes. “Investors continue to seek our input on macro concerns affecting interest rates, growth rates and sovereign debt.” Clients have also been requesting more information about environmental and corporate social responsibility programs, Greenwell notes.The massive oil spill that followed the explosion of BP’s Deepwater Horizon oil rig in the Gulf of Mexico last April raised awareness of the potential for environmental disasters and the need for better safety and sustainability measures. “It’s on investors’ minds, prodding analysts to look at companies over the long term not just the next 12 months,” he says.The interest in CSR compels analysts “to look at nonfinancial metrics when evaluating stocks,” he adds. To meet this rising demand, BofA hired three senior analysts in London and two junior analysts in Mumbai to make up its Socially Responsible Investing team, and evidently they have already impressed investors:The group, under the direction of Sarbjit Nahal, is No. 1 in the sector.“For ten years people have been saying SRI is just a fad — well, it’s not just a fad,” declares Nahal. However, he agrees that the BP oil spill has prompted more fund managers to consider factors beyond a company’s financials. “In the past people have said that safety is not an issue, but when you have 11 fatalities and $40 billion in damages, they start to look into the matter,” he explains. Nahal’s team has been developing a set of metrics that will enable
investors to highlight environmental risks that companies may face, and the analysts have published research on issues such as the corrosion of pipelines, safety challenges posed when oil and gas exploration companies look to drill in such areas as the Arctic, and regulatory changes. “We look at how these issues will impact business models to find out which companies can benefit and which could be at risk,” Nahal says. “We look at what issues are on page 43 of the newspaper that are going to be on page one of the paper in five to seven years.” A key element of SRI is looking at companies that find ways to reduce greenhouse gases and protect the environment through the use of Renewable Energy, another sector added to this year’s survey. The UBS team debuts in the top spot under the direction of Alberto Gandolfi, who (with Per Lekander) also co-leads that firm’s topranked team in Utilities, and Patrick Hummel. Gandolfi says that investors are demanding to know whether governments will continue their support of renewable-energy companies, many of which have subsidized wind- and solar-powered projects, or focus their attention elsewhere. “Given the economic backdrop, the pressure put on consumers, and rising unemployment, the debate shifted from the high growth prospects of renewables to access to subsidies,” Gandolfi explains. “The market has become too negative on subsidies and has taken the view that troubled governments will not pay for renewables.” However, with the sector’s stocks at bargain prices, now is the time for investors to take another look, he adds.The UBS team has been publishing reports that emphasize long-term growth prospects as well as current cash flow and valuations. “This is going to be key for the next year,” Gandolfi says. “The news flow will be less intense, now that stocks are discounted, so we are looking more closely at fundamentals.We try to see what return expectations are reasonable.” Managing expectations is essential in a time of market turmoil, which is why many analysts and research directors temper their long-term optimism about Europe’s equity markets with a note of short-term caution. “Europe still has challenges to face, as many countries are showing large deficits, but it’s unlikely that we’ll see the same kinds of bailouts being necessary,” says BarCap’s Whittaker. With valuations low, “it’s a multiyear opportunity to invest in equities right now,” he adds. Investors looking to avail themselves of that opportunity would do well to seek the guidance of the battle-tested analysts on the 2011 All-Europe ResearchTeam.
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THE 2011 ALL-EUROPE FIXED-INCOME RESEARCH TEAM
The 2011 All-Europe FixedAs sovereign-debt worries overshadow all, these analysts capture the crown for astute coverage in turbulent times.
By Katie Gilbert
T
HE WORLD OF FIXED-INCOME INVESTING HAS OFFERED
up more than enough reasons for investors to feel skittish. In the latter half of the last decade, credit markets began to change dramatically. First, trading volume surged as those markets, particularly in Europe and the U.S., were flooded with highly rated securitized products, which were often backed by subprime mortgages and other assets that turned out to be toxic. Then, in 2007 and 2008, as a bubble in the U.S. housing market was rapidly deflating, many banks were so highly leveraged and heavily laden with subprime debt that eventually they stopped lending — even to each other. The frozen credit markets began to thaw only after governments around the world pledged trillions of dollars in assistance and economic stimulus packages. But just as the corporate-debt markets began to show signs of returning to normalcy, trouble erupted in the sovereign-debt markets — first in Dubai, then in Europe. INSTITUTIONALINVESTOR.COM
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Income ResearchTeam In the wake of Greece’s near-default last spring and Ireland’s request for financial rescue in November, plus ongoing fears about the creditworthiness of other countries with soaring deficits, demand for European fixed-income research skyrocketed. “Most clients see the world as incredibly risky given the size of fiscal deficits in Europe and the U.S.,” observes John Normand, global head of foreign exchange strategy at J.P. Morgan. Which banks provide the guidance that money managers find most helpful as they seek to navigate these risks in search of investment rewards? No one does it better than J.P. Morgan, according to participants in Institutional Investor’s 2011 All-Europe FixedIncome ResearchTeam survey.The firm wins 12 total positions, including seven teams that are ranked No. 1 in their respective sectors. Deutsche Bank claims second place, with six positions; the German bank has five teams in first place. Barclays Capital and Morgan Stanley tie for third, with four positions each. The top-ranked teams in five research and eight strategy sectors are listed in the table on page 51; complete results can be found on our web site, institutionalinvestor.com. At the same time that the fixed-income marketplace was undergoing profound changes, many firms began to reconsider the way they cover these newly dynamic — and INSTITUTIONALINVESTOR.COM
From left: Deutsche Bank’s Richard Phelan, J.P. Morgan’s John Normand, Morgan Stanley’s Jacqueline Ineke and Deutsche’s James Reid
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THE 2011 ALL-EUROPE FIXED-INCOME RESEARCH TEAM THE LEADERS TOTAL volatile — markets. Some firms have stopped publishTEAM FIRST SECOND THIRD RUNNERSRANK FIRM POSITIONS TEAM TEAM TEAM UP ing fixed-income research altogether and moved their publishing analysts to the trading desk so they can more 1 J.P. Morgan 12 7 3 1 1 directly serve their most active clients. Other firms have 2 Deutsche Bank 6 5 1 0 0 adopted the desk-analyst model in only certain sectors, 3 Barclays Capital 4 0 1 2 1 and some have expanded their research operations after having scaled them back several years ago. (Only those 3 Morgan Stanley 4 1 1 0 2 analysts who publish independent research as it is defined 5 Nomura International 2 0 1 1 0 by the Financial Services Authority are eligible to be rec5 Royal Bank of Scotland 2 0 0 1 1 ognized in our survey’s research sectors — for example, High Yield and Investment Grade. No such restriction 7 BNP Paribas Securities 1 0 0 0 1 applies in Economics & Strategy, in accordance with FSA 7 BofA Merrill Lynch Global 1 0 0 1 0 Research regulations. For more information about the methodology, please visit our web site.) 7 Citi 1 0 1 0 0 Terrence Belton, global head of fixed-income strategy 7 Credit Suisse 1 0 0 1 0 at J.P. Morgan, says his firm opted not to move any of its 40 7 Goldman Sachs 1 0 0 0 1 European fixed-income analysts to the trading desk:“Our International commitment to publishing research is as strong as ever.” 7 UBS 1 0 1 0 0 As default risk in Europe’s sovereign markets has catapulted to the top of the list of investor concerns, he adds, his department has benefited from increased collaboration among by Normand, told clients that the euro would underperform the its analysts who specialize in emerging markets, interest rates and region’s currencies. They were right. “At the beginning of 2010, macroeconomic issues. “Having that breadth of coverage has been the euro versus Norway was around 8.4, and at the end of the year, really important over the last year or two, particularly in staying it was around 8.1. So the euro had declined pretty substantially,” ahead of the sovereign crisis,” says Belton, who is based in Chicago. Normand says. “There was a similar move in Sweden — the curThis emphasis on cooperation has not led the firm to add ana- rency was around 10.3 early in the year, and we anticipated that the lysts; instead, “it’s a different kind of research that’s being pub- euro would fall to around 9.5. It ended the year at 9.3, so Sweden lished,” he explains. “For example, our rates research has had to appreciated considerably.” refocus a bit and think about government bonds in a way that we Deutsche decided to follow a different path with regard to pubhaven’t had to in the past.” lishing versus desk analysts. In 2007, as fixed-income trading Drawing on information from colleagues on the relative strength volumes soared, the firm relocated its five European investmentof European economies and the sovereign-debt situation, the grade securities researchers to the trading desk; it already had 11 firm’s top-ranked Currency & Foreign Exchange team, directed distressed-debt analysts on the desk. (Deutsche’s five high-yield analysts stayed put and continue to publish research.) “Historically, there’s been a lot less volatility among investmentWEIGHTING THE RESULTS grade entities, and there’s significantly more volatility as you go down the credit scale,” according to Richard Phelan, head of This table shows the top firms if a rating of 4 is assigned to a first-teamer, 3 to a second-teamer, 2 to a third-teamer and 1 to a runner-up. European fixed-income research and leader of the No. 1 team in High-Yield Basic Materials. “In investment grade the impact of the RANK BY RANK IN WEIGHTED LEADERS WEIGHTED research we published was relatively limited — there weren’t big FORMULA TABLE FIRM TOTAL credit changes that were occurring, and the calls were much more 1 1 J.P. Morgan 40 macro-oriented — so being close to the desk and the trading flow 2 2 Deutsche Bank 23 makes more sense.” Phelan acknowledges that if volatility in Europe’s debt market 3 3 Morgan Stanley 9 returns to historic norms, some of those analysts could be moved 4 3 Barclays Capital 8 off the desk and back into a publishing role, but, he says, “we at 5 5 Nomura International 5 Deutsche Bank feel that it works in investment grade, and I abso6 7 Citi 3 lutely don’t think that we’ll change that anytime soon.” Among Deutsche analysts who do publish, James Reid achieves 6 5 Royal Bank of Scotland 3 a rare accomplishment: He leads not one but two teams that finish 6 7 UBS 3 in first place: General Strategy and Investment-Grade Strategy. In 9 7 BofA Merrill Lynch Global Research 2 December 2009, Reid and his associates published a comprehensive outlook for the year ahead that included general strategy, high 9 7 Credit Suisse 2 yield, investment grade and leveraged finance.The analysts noted 11 7 BNP Paribas Securities 1 that “history is littered with examples of inflation, devaluations 11 7 Goldman Sachs International 1 and sovereign defaults after financial crisis” and alerted clients that
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“we continue to run the risk of sovereign land mines disturbing the benign corporate landscape.” Four months later one of those land mines exploded, in Greece. The team also predicted that in the high-yield space, issuance would be robust, owing to low rates and demand’s outpacing supply — but the high-yield market in the U.S. would be even better, because it’s larger and more liquid. “We expect U.S. high yield to outperform the European high-yield market” and the latter to outperform European investment grade on a total as well as excess return basis, the analysts said, and they were right: U.S. high yield advanced 14.2 percent last year, compared with 12.3 percent for European high yield and 4.7 percent for European investmentgrade, Reid says. Rising demand for fixed-income investments prompted BarCap to add to its analyst head count. “We see a real opportunity in the credit business in Europe,” says Laurence Kantor, BarCap’s New York–based global head of research. In October the firm added three high-yield analysts to its Europe fixed-income team, bringing its total to 99. BarCap also has two desk analysts covering high yield and investment grade. Eric Miller, who heads up BarCap’s global credit research operations, says the expansion was prompted by signs of growth in the market. “We saw tremendous issuance in 2010 in Europe, and we expect that trend to continue,” says Miller, who is based in New York. “Companies and investors are yearning to get more public corporate securities into the market, since it just makes sense to get that out of the hands of the banks.We’ve taken a very direct strategy
to ensure that we have the best credit strategists and analysts on the ground in the region to support this trend.” Morgan Stanley also noted the potential in the market and has been expanding its research operations. “Over the past 12 to 18 months, we’ve made a concerted effort to rebuild the franchise, to bring in key people and key products,” says Gregory Peters, the firm’s NewYork–based global head of fixed-income research. “We don’t want to be all things to all people, but in the spaces that we’re in, we want to be relevant.” Research is now central to the firm’s client-service efforts, and Peters concedes that wasn’t always the case. Morgan Stanley made a decision five years ago to limit what it does in the way of publishing, he says, but has since reconsidered that stance. “You have to have consumable research to reach the clients in a meaningful way,” Peters explains. The bank added ten European publishing analysts last year, for a total of 55; it also has five desk analysts covering distressed debt and eight in high yield and investment grade. Among the recent hires is Marcus Rivaldi, who joined the firm in June 2009 from Royal Bank of Scotland to cover insurance companies as part of Morgan Stanley’s Banking & Financial Services team.That team, captained by Zurich-based Jacqueline Ineke, takes top honors in the sector thanks in part to a bold, contrarian call in November 2009 to overweight tier-1 bonds issued by European banks. The analysts predicted that Basel III, which would not be unveiled for nearly a year, would introduce new rules for tier-1 bonds — namely, that the bonds must be loss-absorbing on a going-concern basis. “Old tier 1s do not have this characteristic, and so under the new Basel III rules, these old tier 1s would not be compliant,” Ineke explains. “In our view banks would want to THE OUTSTANDING ANALYSTS OF THE YEAR redeem them as soon as they could, which means at par HIGH YIELD at the first call date, or would tender or exchange at a premium to market price.This implied very good returns Basic Materials Richard Phelan & team Deutsche Bank on a yield-to-call basis of between 10 and 20 percent.” Manufacturing/General Nitin Dias, Stephanie Renegar J.P. Morgan Other analysts disagreed, believing that Basel III Industrials & team would include a grandfather clause for current tier-1 Retailing/Consumer Products Alketa (Katie) Ruci & team J.P. Morgan bonds that would mean banks would leave them outstanding. When the new standards were announced in Technology, Media David Caldana, J.P. Morgan September, the Morgan Stanley team was proved right. & Telecommunications Andrew Webb & team By then more than 70 bank capital instruments had been INVESTMENT GRADE called at par, including tier-1 bonds issued by Britain’s Standard Chartered, France’s Société Générale and Banking & Financial Services Jacqueline Ineke & team Morgan Stanley Sweden’s Nordea Bank and Swedbank. ECONOMICS & STRATEGY The Basel III requirements are meant to strengthen banks’ capital positions, avoid a recurrence of the events Asset-Backed Securities Gareth Davies & team J.P. Morgan that plunged the world into the worst economic crisis Strategy since the Great Depression and restore investor confiCurrency & Foreign John Normand & team J.P. Morgan dence. That last objective may prove to be a formidable Exchange task, given the ongoing concerns about sovereign-debt Economics Gilles Moec, Mark Wall Deutsche Bank default in Europe. “Investors’ preoccupation with & team extreme events and sudden market declines is going to General Strategy James Reid & team Deutsche Bank persist for quite a while,” says J.P. Morgan’s Normand. High-Yield Strategy Daniel Lamy & team J.P. Morgan But the analysts on the 2011 All-Europe Fixed-Income Interest Rate Strategy Francis Yared & team Deutsche Bank Research Team will be standing by to guide those investors through whatever turbulence lies ahead. Investment-Grade Strategy James Reid & team Deutsche Bank
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Quantitative Analysis
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Saul Doctor & team
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HONG KONG
Playing the China Card Hong Kong’s financial sector is thriving as a gateway to the mainland. The rise of renminbi trading promises to extend the party. By Allen T. Cheng
O
NLY A COUPLE OF YEARS
ago, Hong Kong officials fretted openly that the giant economy across the border on the mainland posed a serious competitive threat to the city’s financial sector.With Chinese banks boasting the world’s biggest balance sheets and market caps, and cities like Shanghai and Shenzhen looking to grow their financial markets, some feared that the writing was on the wall for Hong Kong’s status as a major global financial center. Today those fears seem quaint. Instead of bowing before a mainland onslaught, Hong Kong’s financial sector has ridden the Chinese economy to even greater prominence.The city has extended its lead over rival centers as a location for initial public stock offerings. It has become a hotbed of activity for global investment banks, fund managers and hedge funds looking to exploit the vibrant economies of China and other Asian nations. And in a development with huge potential for the future, local officials working in close cooperation with the authorities in Beijing are laying the groundwork to turn Hong Kong into the
Financial Services Secretary K.C. Chan aims to build on Hong Kong’s status as an IPO center and hub for renminbi trading INSTITUTIONALINVESTOR.COM
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leading center for trading the renminbi and products denominated in the Chinese currency. “I don’t think Hong Kong has to do anything to increase its attractiveness to global financial firms and other global practitioners — it’s all driven by macroeconomics,” says Philip Lynch, Hong Kong–based CEO for Asia ex-Japan and the Middle East at Nomura International. “Take the IPO business: More IPOs are being done in Hong Kong than on any other exchange.Take the internationalization of the Chinese renminbi, a currency that will grow only more important. Hong Kong just has to sit in the middle of those flows and it will be a very attractive place to do business.” As bright as the outlook is, Hong Kong officials aren’t just sitting still.The government has identified three priorities to strengthen the city’s status as a global financial center: promoting capital formation, growing the asset management sector and creating an offshore center for trading the renminbi. K.C. Chan, secretary for Financial Services and theTreasury, talks like a business executive when it comes to the competitiveness of the city’s financial sector.“I think Hong Kong has to be clear about our strategic positioning, who we are competing with, what needs are we serving, who are our customers,” he tells Institutional Investor in an interview. “By fulfilling those, we can be very competitive.” Capital formation is the city’s strong suit. For the past two years, Hong Kong has topped global league tables in IPO volume. Seventyseven companies raised a total of $53 billion with IPOs in Hong Kong in 2010, compared with 82 IPOs and $34.6 billion raised in NewYork and 201 IPOs and $29.8 billion in Shenzhen.The figures include a portion of the record $22 billion IPO of Agricultural Bank of China, which floated its shares jointly on the Hong Kong and Shanghai stock exchanges. To be sure, Hong Kong benefits first and foremost from its proximity to China.There are 265 Chinese companies currently listed on the Hong Kong stock exchange, a total that seems destined to grow rapidly. Last year, Chinese companies raised a combined $104.4 billion through IPOs, or 37.3 percent of the global market, according
“I don’t think Hong Kong has to do anything to increase its attractiveness — it’s all driven by macroeconomics. Hong Kong just has to sit in the middle of those [China] flows.” —Philip Lynch, Nomura International
to data provider Dealogic.With China’s economy expected to grow by more than 9 percent again this year, analysts believe that demand from Chinese corporates to tap the equity markets will remain strong. “The IPO boom will accelerate in Hong Kong in 2011,” says Paul Schulte, chief Asia equity strategist at CCB International in Hong Kong. Hong Kong’s success is more than just a China story, though. Government officials are working with executives of Hong Kong Exchanges and Clearing, operator of the local stock exchange and
futures markets, to attract listings from a wider array of overseas companies. Chan led a team of officials and HKEx executives to London in November to tout the city’s attractiveness at a financial conference. Officials plan to hold a similar event in New York in March. “We will tap into business opportunities in Russia, Central Asia, India, South America and other emerging markets,” Chan says. “We hope to attract more large enterprises with diverse backgrounds to list in Hong Kong and to make use of Hong Kong’s well-established financial and trading platform to expand their international business.” The campaign is already off to a running start. Last year, Russian aluminum producer United Co. Rusal raised $2.2 billion in a secondary listing in Hong Kong, while cosmetics maker L’Occitane International raised $707 million with an IPO, the first by a French company in Hong Kong. To grow asset management, the government’s second priority, the authorities have taken a number of steps in recent years to attract more fund managers to Hong Kong. Since 2006 the government has abolished all estate taxes and exempted offshore funds from the profits tax. Last year the government introduced fresh tax incentives for exchange-traded funds, qualified debt instruments and offshore funds engaged in futures trading. Among the most significant changes, the authorities extended a tax exemption for ETFs to funds that have as much as 40 percent of their holdings in Hong Kong–listed equities. The development of an offshore market for the renminbi, also called the RMB, presents a rich opportunity that Hong Kong officials are only too happy to seize. The Hong Kong Monetary Authority has worked closely with Chinese authorities to promote renminbi trading since 2004, when Beijing made its first tentative steps to free up the currency by allowing Hong Kong residents to open renminbi savings accounts. Last year the HKMA clarified its rules to specify that even non-Chinese banks could develop and sell renminbi-denominated bonds and other investment instruments, an opening that Deutsche Bank, HSBC Holdings and Standard Chartered, among others, have grabbed. HSBC sold its first renminbideliverable swaption in November to France’s BNP Paribas, with a one-year maturity and a strike rate of 3.45 percent. The bank declined to comment on the size of the transaction. The market’s growth has accelerated since July, when the HKMA and the Chinese central bank, the People’s Bank of China, signed an agreement to expand renminbi trade settlement.At the same time, the PBOC and Bank of China (Hong Kong), the official clearing bank for renminbi traders in Hong Kong, signed a revised agreement allowing all types of financial institutions to offer renminbi products and services, and permitting corporations registered in Hong Kong to issue renminbi financial instruments. The agreement also removed restrictions on renminbi interbank transfers between personal and corporate accounts, enabling the industry to launch an array of products, including insurance, bonds, equities and investment funds denominated in the Chinese currency. The market has been quick to respond to those openings. So far, 41 entities — including banks, corporations and China’s Finance Ministry — have raised about 74 billion yuan ($11.2 billion) through INSTITUTIONALINVESTOR.COM
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GALATAS: C32/ZUMA PRESS/NEWSCOM; ARCULLI: JEROME FAVRE/BLOOMBERG NEWS
the sale of renminbi bonds in Hong Kong. Chief among the foreign issuers were McDonald’s Corp., which raised 200 million yuan in September, and Caterpillar, which raised 1 billion yuan in December. The next big step, which is whetting the appetites of bankers and officials in Hong Kong, is expected to be the introduction of renminbi-denominated share issues, a move that could take place
The growth of liquidity hinges on how quickly companies in Hong Kong will accept renminbi instead of dollars for settling sales of global exports. Last year companies accumulated 50 billion yuan as a result of trade settlement. Hu Yifan, the Hong Kong–based global chief economist for Beijing’s Citic Securities Co., estimates that trade settlement could rise to 800 billion yuan a year by 2015. In January, Chinese authorities announced a new liberalization that will allow Chinese enterprises to use renminbi to make overseas deals and acquisitions; this may further deepen liquidity. However, companies may be slow to take advantage of this opening, analysts say.With most forecasters calling for the renminbi to continue to appreciate against the dollar (it has risen by 3.5 percent since Beijing reverted to a carefully controlled float last June), analysts expect many enterprises to keep their currency at home for now.Yet as the renminbi grows in importance as a global currency, so too should Hong Kong’s role as the primary offshore trading center. “China has entered a new phase of development,” says Financial Services secretary Chan. “In the past, it was an importer of capital. In the future, China will be an exporter of capital. That means Hong Kong will have an additional role to play to help Chinese companies invest abroad. We have a role to help China to internationalize the RMB.” That role stops well short of abandoning Hong Manuel Galatas (left) is growing BBVA’s Hong Kong operation; HKEx chairman Kong’s currency peg to the U.S. dollar and linking Ronald Arculli is gearing up for renminbi share offerings to the renminbi, at least for now, the authorities say. The peg “remains appropriate” for Hong Kong’s before the end of this year. According to market sources, Cheung small, externally oriented economy because the dollar is the most Kong (Holdings), the property development flagship of Hong commonly used currency for trade and financial transactions, Eddie Kong’s richest man, Li Ka-shing, is likely to be one of the first com- Yue, deputy chief executive of the HKMA, tells II in an e-mail reply panies to raise renminbi with a secondary share placement. Cheung to questions. “Even when the RMB becomes fully convertible at some stage and free of capital controls, it remains to be seen whether Kong executives declined to comment on the speculation. HKEx is prepared to launch such share offerings on the Hong it would be a good anchor currency for the Hong Kong dollar, which Kong exchange as soon as the authorities give the green light, says would depend on factors such as the stability of the currency, the chairman Ronald Arculli. “We developed our market infrastructure transparency of the monetary framework and the depth of the RMB for trading and clearing in RMB before the end of 2010, including financial markets,” he adds. collection of stamp duties, securities and money settlement and so The boom in equity issuance, the budding development of on,” he says. “We are working with some banks and the Hong Kong renminbi-denominated products and Hong Kong’s status as a Monetary Authority to explore the feasibility of developing an RMB gateway to the wider Asian market are making the city a magnet for liquidity pool as a facility for investors who do not have RMB but are investment banks and fund managers. Major financial institutions interested in investing in RMB-denominated securities.We believe are boosting their head counts in Hong Kong, where financial that for RMB IPOs, the key is liquidity.” services is the second-largest sector of the economy, behind merLiquidity seems to be gaining momentum. Although renminbi- chandise trade, accounting for 16 percent of GDP and 6 percent of denominated deposits were first introduced in Hong Kong in 2004, employment. Many bank executives say they have been inundated growth didn’t really take off until last year, when the volume of depos- with résumés from bankers and traders in London and New York, its surged to 280 billion yuan in November from 62 billion in January. where firms cut back sharply during the financial crisis. A personal “If AIA wanted to raise $20 billion in RMB, that would be a tough income tax rate of no more than 15 percent is an added lure, espetask,” Arculli says, referring to last year’s $20 billion Hong Kong cially for bankers coming from London, where the government has IPO of American International Assurance Co., the Asia subsidiary raised the top tax rate to 50 percent to close a big budget deficit. of American International Group. “Initially, RMB IPOs would be “People are incredibly excited about the opportunities here of modest size, but it will grow in time.We are cautiously optimistic because of the growth,” Nomura’s Lynch says. “It’s not hard to continued on page 83 that this can happen.” INSTITUTIONALINVESTOR.COM
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PRIVATE EQUITY
Brothers in arms: CCMP partners (from left) Timothy Walsh, Christopher Behrens and Richard Zannino
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Back to Business
CCMP Capital Advisors, the former private equity arm of JPMorgan Chase, is hoping that patience, discipline and a focus on old-fashioned turnarounds will set it apart from competitors. By Julie Segal PHOTOGRAPHS BY CHRISTOPHER ANDERSON
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PRIVATE EQUITY CCMP CEO Stephen Murray (right) and partner Jonathan Lynch discuss strategy
On
a chilly afternoon in February 2005, brought in the first of three new operations partners:Greg Brenneman,a Stephen Murray entered the Park sought-after leader who had turned around everything from ContinenAvenue headquarters of JPMorgan talAirlines to restaurant chains Burger King Corp.and Quiznos.Murray Chase & Co. and rode the elevator also made the now 49-year-old Brenneman chairman of CCMP. that would take him to the 48th floor and the office of the bank’s then When asked what differentiates Murray from other private equity president, Jamie Dimon. The famously candid Dimon had joined kingpins, Dimon fires back that Brenneman’s hiring illustrates the bank the previous summer, after the institution he ran, Bank Murray’s discipline and leadership abilities. Murray was able to set One Corp., merged with JPMorgan, and Murray, head of buyout aside his own ego — the same characteristic that kept him out of the and growth equity investments at J.P. Morgan Partners, the bank’s fray at the height of the market — to bring on board an extremely private equity group, wanted to get his new boss’s take on business. charismatic leader as a working chairman who would act almost For months, Murray, Dimon, JPMorgan CIO Ina Drew, the firm’s as a co-CEO. “Look, he was able to attract someone like Greg famous deal maker James (Jimmy) Lee Jr. and J.P. Morgan Partners’ Brenneman to come join him,” Dimon says. “Then he made him longtime CEO, JeffreyWalker, had been hammering out the details chairman.That’s a hard thing for a CEO to do.” of a deal that would spin out the private equity group after more than After Brenneman joined CCMP, it took Murray a year before he two decades within the walls of the bank and its predecessor firms. enlisted another CEO, Richard Zannino, former chief executive of Murray, then 42, was getting the chance to become a partner in the Dow Jones & Co. Zannino, now 52, had transformed Dow Jones into new enterprise. a diversified media company through $2.5 billion in acquisitions and It was the opportunity of a lifetime, but Murray, who had struck restructurings, capturing the attention of Rupert Murdoch’s News deals with CEOs twice his age when he was in his 20s, had some Corp., which bought it in December 2007. In September 2009, Murconcerns. He worried about the surging leveraged-buyout market, ray recruited energy industry veteran Karl Kurz. Although Kurz was which he felt was being fueled by low interest rates and easy access to not a former CEO, he had played a key role in the global expansion of credit. Although few others in the business appeared to give a second Anadarko Petroleum Corp. as that company’s chief operating officer. thought to the then-record $300 billion worth of buyout transactions Murray, who sat on all but $1 billion of the $3.4 billion that that had taken place in 2004 or to the growing size of private equity CCMP raised in 2006, waiting out the boom, has positioned his team funds that were being raised as investors rushed to get a piece of what to take advantage of the changing face of private equity. In this world, seemed to be easy profits, Murray saw the numbers as alarming. success will depend on the ability of firms to dig into the business A fast-talking workaholic who spurns the spotlight as often as his strategies of their portfolio companies and generate gains based on rivals seek it out, Murray had spent the previous year evangelizing to old-fashioned turnarounds rather than financial engineering — the his staff and other investors that private equity’s future would soon process of layering debt on companies and relying on cheap money lie in operational turnarounds — generating profits from revamped to free up cash for shareholders. companies — rather than financial wizardry. It was an approach “To survive by just doing financial engineering is not possible,” JPMorgan’s group had long followed, but Murray felt he was missing says Joshua Lerner, a Harvard Business School professor who has critical expertise at the top to add to the tight-knit group of deal makers written a 25-page case study onYale University CIO David Swensen on whom he relied. Murray planned to hire hands-on operators — ide- and that school’s so-called endowment model, which includes large ally former CEOs — as full partners in the firm.The executives would allocations to private equity and other alternative investments. “The be paired with a financial partner to help identify investments and turn market has gotten more competitive. As a result, old strategies like around businesses in what he confidently believed would be a brave financial engineering have become a commodity.” new world, even as competitors were going in the opposite direction. CCMP has the benefit of a superior long-term track record; a fund In their meeting that February afternoon, Dimon raised by J.P. Morgan Partners in 2002, now part of thought Murray’s strategy of doubling down on the new firm, had delivered a 32 percent annualized operations was a good one. But he sounded a note internal rate of return as of December 31, 2010.The of caution about the enthusiastic executive’s ability firm also showed unusual discipline during a period to get it done. There are few corporate CEOs who when even the most experienced deal makers overare both great operators and great investors, Dimon paid for mediocre properties and lost the trust of many remembers telling Murray. “First, you’re looking at big and influential investors. the top echelon of CEOs,” says Dimon, who became CCMP’s deal makers have a history of investing chief executive of JPMorgan in January 2006. “But in troubled or underexploited small and midsize then you need someone who thinks like an investor. companies. CCMP, whose initials hark back to its You’re shooting at a very small target.” onetime owners Chemical Bank, Chase Bank and Dimon was right, but he underestimated MurManufacturers Hanover Corp. as well as its former ray’s patience, discipline and willingness to go incarnation as J.P. Morgan Partners, takes equity against the herd. stakes of $100 million to $500 million in businesses In 2006 the bank spun off the buyout and growth that have scared away other buyers or in companies equity team of its private equity group into a new firm in need of capital and new ideas to grow. It focuses called CCMP Capital Advisors. But it wasn’t until — Joshua Lerner on enterprises with $500 million to $3 billion in continued on page 84 August 2008, afterWalker retired, that Murray finally Harvard Business School
“
The market has gotten more competitive. To survive by just doing financial engineering is not possible.
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VENTURE CAPITAL
Superange el iinvestors nvestors are Superangel increasingly thatt i i l filling filli the th role l th venture capitalists once dominated, seeding small entrepreneurs who have big ideas. By Udayan Gupta PHOTOGRAPHS BY WESLEY MANN ILLUSTRATIONS BY SEAN MOSHER SMITH
Superangel Kenneth Lerer with his son, Ben, a co-founder of Lerer Ventures
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VENTURE VENTUR RE CA CAPITAL API P TA T L
THE YEAR 2000 WASN’T W GREAT FOR LIBERALS IN AMER-
ica.That was the year, of course, that a bunch of uncounted hanging chads in Florida helped George W. Bush defeat Al Gore in the U.S. presidential election. Even worse was 2004. That year, Bush won again, prompting a wave of right-wing voices to ensconce themselves in the media.The political agenda was dominated by the likes of Rush Limbaugh on the radio, Bill O’Reilly on television and Matt Drudge on the Internet. Suddenly, liberals didn’t have a voice. That’s when angel investor Kenneth Lerer decided to act. A prominent liberal activist and veteran communications professional, Lerer felt there needed to be a response to the conservative voices. Together with California columnist and commentator Arianna Huffington, in 2005 he launched the Huffington Post, a web portal that would aggregate political commentary and news from a liberal point of view. To finance it, Lerer initially put up $1 million of his own money and he and Huffington brought in several other seed investors, including former America Online COO Robert Pittman. A venture of passion and politics, the Huffington Post didn’t have much of a road map at first. Indeed, many media critics mocked the Greek-born Huffington for getting involved in such a seemingly unplanned endeavor. But Lerer and Huffington were able to attract enough journalistic firepower to quickly make the Huffington Post the most influential liberal media platform in the U.S. In 2006, Lerer keyed a second round of financing, raising $5 million for the Huffington Post, bringing in venture capital firms SoftBank Capital and Greycroft Partners. (A year later the Huffington Post raised another $5 million from the same group of investors.) Over the past two years, the Huffington Post has expanded its footprint to cover social and cultural issues. Coverage of media and entertainment has brought criticism — the news web site has been accused of straying from its roots — but also greater visibility and increased traffic. A section on divorce, for example, has generated a wave of new visitors. A third round of financing, in November 2008, this time a $25 million infusion from Westport, Connecticut–based Oak Investment Partners that valued the portal at $125 million, has given the Huffington Post financial staying power and the ability to call its own plays. Last year the Huffington Post significantly added to its NewYork operations and signed on new heavy-hitting contributors. The Huffington Post, which became profitable last year, is a real business, with estimated revenue of more than $30 million in 2010 and $60 million projected for 2011. Online media analysts now value the company at between $300 million and $450 million based on the 26 million unique visitors it receives each month. At a time when the venture capital industry is desperately seeking to right-size itself, established venture funds would have stayed away
from the Huffington Post if not for Lerer, who has invested about $3 million of his own money for a stake that now is valued at more than $60 million.Venture capital veterans still remember ill-fated Friday Holdings, a specialized media venture fund bankrolled by Paramount Communications, QVC andTexas money manager Richard Rainwater and managed by Norman Pearlstine, a former Wall Street Journal managing editor who is now chief content officer at Bloomberg, and John Geddes, now a managing editor at the NewYork Times. Launched in 1993, Friday Holdings — named after Pearlstine’s then-wife Nancy Friday — made some high-powered hires and some flashy investments before suddenly closing shop in 1994. At the time, neither Pearlstine nor Geddes commented on what went wrong, but media experts said content-based businesses simply didn’t lend themselves to venture investing. Lerer is more than just a media-savvy angel. He is part of a group of individual investors who have organized to invest together.These so-called superangels are putting together small pools of capital — typically $30 million to $35 million — from other entrepreneurs, wealthy individuals and small institutions.With this additional capital, superangels can now finance later rounds, in direct competition with venture capital funds. Some of these superangels already have a reputation from previous entrepreneurial lives. Ron Conway, co-founder of Altos Computer Systems, is the best-known superangel. Keith Rabois, Reid Hoffman, Dave McClure and Peter Thiel are alumni of PayPal, the Internet payment company. Aydin Senkut and Chris Sacca are ex-Googlers. Founder Collective’s David Frankel and Eric Paley are successful digital media company founders. And then there are the expats — including Jean-Francois (Jeff) Clavier of SoftTech VC and Jon Callaghan ofTrueVentures — who are reinventing themselves as early-stage investors after careers at large industrial venture capital funds. Others, such as Lerer, Social Leverage’s Howard Lindzon andY Combinator’s Paul Graham, are bringing their own life experiences to bear on building new entrepreneurial businesses and portfolios.The investing style is personal and the choices idiosyncratic, but these superangels are far more entrepreneurial and innovative than traditional venture capitalists. Superangels are helping to reorganize early-stage investing with disciplined capital, uniform investing rules and a sense of community that venture capital hasn’t had for a long time. Lerer says the formation and financing of the Huffington Post is an example of the relationship between superangels and the traditional venture capital community. The superangels, with their own experiences INSTITUTIONALINVESTOR.COM
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Peter Flint oversees incubator Dogpatch Labs in New York for venture capital firm Polaris Venture Partners
and knowledge, are the ones who help test a concept and shape and finance it through the early stages. But it is left to deep-pocketed venture funds to finance the later stages. Superangel funds and venture funds provide complementary roles. “It’s a relay race,” says Lerer, who runs New York–based Lerer Ventures with venture partner Jordan Cooper. The first leg of the race increasingly belongs to superangels such as Lerer Ventures. “We are thinking somewhat differently from any early-stage venture fund that I know of,” says Lerer, whose son, Ben, is a partner in the firm. “We may write similar-sized checks or invest alongside some early-stage venture funds, but when we partner INSTITUTIONALINVESTOR.COM
with a founder, we are not watching our investments from 10,000 feet, waiting to see what happens in 12 months. We are rolling up our sleeves and thinking on the day-to-day execution level that most newly seeded companies are living.What we are bringing to the party is operational expertise, since we have been operators ourselves. We are touching and feeling and using all of our founders’ products, thinking through distribution challenges, helping them solve the most immediate and seemingly minute challenges that emerge when you are turning a vision into reality.” The rise of superangels has major implications for pension funds and other institutional investors, most of which are too large to invest with them.The bifurcation of the capital-raising process — with superangels (and angels) doing more of the early-stage investments in new areas of innovation and the venture capitalists doing the business development once a technology has been proven — reduces the risks for typical venture capital funds but also lessens their expected returns. “Superangels are having a big impact on the venture capital business,” saysWilliam Sahlman, professor of entrepreneurial finance at Harvard Business School. The immediate impact is bringing a level of specialist skill and experience to early-stage investing — a level that has been missing since the original days of venture capital — and a sense of true venture and exploration to a business that has become boring, predictable and top-heavy. But superangels also are having a longer-term impact, demonstrating that the real returns going forward are not in megafunds but in small funds — the smaller and earlier-stage, the better. Some more-enterprising venture capitalists, however, are not content to cede the potential riches from seeding start-ups. They are looking to reinvent themselves, bankrolling incubators, recruiting new, more entrepreneurial partners and downsizing to create smaller, more entrepreneur-friendly funds. “The result is a great one for entrepreneurs,” David Rose of New York Angels and RoseTechVentures recently wrote on the ChubbyBrain web site. “There has been a rapid acceleration in the number of seed deals getting done around the country.” In 2010 entrepreneurial companies received an estimated $18 billion from angels and superangels, according to the Angel Capital Association, a trade group in Overland Park, Kansas, that represents continued on page 88
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Deutsche Bank’s Luis Fañanas Martinez
The 2011 All-Europe Research Team
Sovereign-debt worries have been weighing on investors’ minds, but advice from top analysts is helping them rest easier. Page 66
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ITAL RESEARCH THE 2011 ALL-EUROPE RESEARCH TEAM INEFFICIENT MARKETS UNCONVENTION
G GREECE IS THE WORD, IS THE WORD ...
Greece very narrowly avoided fiscal ruin last spring when euro zone countries and the International Monetary Fund agreed to lend the troubled Mediterranean nation up to Ð110 billion ($146 billion) to meet its short-term obligations and restructure its long-term debt. However, the blow to investor confidence was not so easily remedied. Across the continent and around the world, investors worried and wondered which country would be the “next Greece”: Would it be Italy? Portugal? Spain? They got their answer in November, when Ireland acknowledged that it needed to be rescued. The air of uncertainty that has been permeating Europe over the past year has spurred demand for sellside equity research, and the analysts who provide the best insight and guidance have been inducted onto the 2011 All-Europe Research Team (right). Participation in the survey was the highest it has been in years, with sufficient depth and breadth of voting to allow us to publish results in every sector but one: Greece. — Thomas W. Johnson
Managing Editor Thomas W. Johnson Senior Editors Tucker Ewing Jane B. Kenney Associate Editors Denise Hoguet Fritz Owens
Cover photo by Julian Ward
THE 2011 ALL-EUROPE RESEARCH TEAM
The Best Analysts of the Year INDUSTRY SECTORS
work well for clients; the British airspace gear maker’s shares surged 46.7 percent in 2010, from 252.29p to 370p. Fidler, who joined Deutsche in 2000 from Dresdner Kleinwort Benson, earned a master’s degree in biochemistry at Oxford University’s Exeter College in 1993. “Ben knows his sector better than anyone else in the space,” declares one booster.
be strong despite what the researchers considered “weirdly cautious guidance” from management.Through December 2010 the stock had sped from €33.78 to €50.73, a 50.2 percent gain that eclipsed the sector by 7.4 percentage points.
AUTOS & AUTO PARTS AEROSPACE & DEFENSE
Benjamin Fidler & team Deutsche Bank The buy side says: “They are able to see the forces working in the financial market and how they affect valuation.”
L
eaping two spots to No. 1 is the Deutsche Bank trio headed by Benjamin Fidler, 40. The analysts provide “unique, in-depth research worldwide, and they are the only ones able to give you the cement price in the smallest village in Africa since 1920!” cheers one buy-sider. In January 2010 the team upgraded Safran from hold to buy, at €13.63, on the strength of the French aircraft-engine manufacturer’s margin expansion and a recovery of the aerospace aftermarket. The stock had soared 94.4 percent, to €26.50, by the end of last year and outdistanced the sector by 88.4 percentage points. A valuation-based upgrade from hold to buy on Meggitt in July 2009 continued to
Max Warburton & team Sanford C. Bernstein The buy side says: “I consider Max to be one of the very best analysts in Europe.”
M
ax Warburton led the UBS team to No. 1 in 2007 and 2008; he moved to Sanford C. Bernstein in 2008 and last year captained that firm’s two-member team to second place. (The firm did not rank in 2009;Warburton did not begin publishing until the fall of 2008, after polling for the 2009 survey had begun.) This year,Warburton returns to the winner’s circle. Investors praise the 36-yearold analyst’s willingness “to go against consensus or company management when he has conviction in a call,” as one portfolio manager puts it. Case in point:The team urged clients to buy shares of Daimler, the German auto manufacturer whose brands include the Mercedes-Benz line, in September 2009, on the belief that Mercedes profits would
BANKS
Jonathan Pierce, Guillaume Tiberghien & team Credit Suisse The buy side says: “They are very original and unconsensual thinkers.”
R
ising from second place to finish in first place for the first time is the eight-strong Credit Suisse squad helmed by Jonathan Pierce and Guillaume Tiberghien, who is based in Paris.The team, described by one buy-side loyalist as “the best collection of banking analysts in Europe,” upgraded Lloyds Banking Group from hold to buy in May, when the British firm’s share price dipped to 52p as fears of a spreading sovereign-debt crisis rattled world markets.The stock recovered and by the end of INSTITUTIONALINVESTOR.COM
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NAL WISDOM THE FUTURIST THE CHARTIST CONTENTS INSIDE II TICKER FIVE QUESTIONS PEOPLE T the year had climbed 26.3 percent, to 65.70p. During the same period the sector gained just 4.9 percent. Pierce, 35, who is based in London, earned a master’s degree in mathematics at Cambridge University’s Jesus College in 1996 and worked as a banks analyst at HSBC James Capel before joining Credit Suisse in 2002; he will be leaving the industry later this year to focus on completing his postgraduate certificate of education at Oxford University.Tiberghien, who earned a bachelor’s degree in business and finance at École Supérieure des Sciences Commerciales d’Angers in Paris in 1995, worked as a banks analyst at Fox-Pitt Kelton and Deutsche Bank before moving to Credit Suisse in 2006; he left that firm in November and will join Exane BNP Paribas this month.
percentage points, the team downgraded it to hold, on valuation. By the end of the year, the share price had slipped to Dkr558.50, a 5.2 percent loss that trailed the sector by 7.7 points. “Brilliant pick!” declares one buy-side enthusiast. Stirling, 49, earned a master’s degree in engineering at Cambridge University’s Sidney Sussex College in 1984 and an MBA at Insead in Fontainebleau, France, in 1989. He joined Bernstein in 2004 after working as a marketing strategist at various beverage manufacturers, including the U.K.’s Guinness and Diageo, and establishing his own business, Stirling Wines.
2010, after Genmab’s stock had plummeted 42.2 percent, to Dkr66.20, and lagged the sector by a whopping 31.5 percentage points, they upgraded it to neutral, on valuation. The stock had slipped an additional 1.1 percent by the end of that month, to Dkr65.50, putting it slightly ahead of the sector’s 1.4 percent decline.
BUILDING & CONSTRUCTION
Arnaud Pinatel & team Exane BNP Paribas The buy side says: “They are reliable and credible — and their recommendations have been spot-on.”
H
BIOTECHNOLOGY
Ravi Mehrotra & team Credit Suisse
BEVERAGES
Trevor Stirling & team Sanford C. Bernstein The buy side says: “The depth and accuracy of their research is truly impressive.”
T
he Sanford C. Bernstein trio captained by Trevor Stirling rockets from third place to capture the crown for the first time.The analysts highlighted their buy rating on Carlsberg in January 2010, at 392 Danish kroner, citing strong growth at the Copenhagenbased brewery. In October, after the stock had bubbled up 50.3 percent, to Dkr589, and outperformed the sector by 35
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manager. “That alone is helpful, but what really sets them apart is that they are also able to see the forces working in the financial market and how they affect the valuations of the companies they follow.”
The buy side says: “Ravi is an independent thinker who’s not afraid to challenge the status quo.”
R
avi Mehrotra, 38, leads Credit Suisse to a second consecutive first-place finish. The two-member team downgraded Denmark’s Genmab to underperform in November 2009, at 114.50 Danish kroner, just a few weeks after the company, in a partnership with GlaxoSmithKline, received accelerated approval of Arzerra from the U.S. Food and Drug Administration for use in the treatment of chronic lymphocytic leukemia; the analysts believed it would take a while for the product to gain sales traction. In early December
olding on to the top spot for a third consecutive year is the Exane BNP Paribas trio conducted solely this year by Arnaud Pinatel, 45, following last summer’s departure of Nicolas Godet. In September the team upgraded Rockwool International from neutral to outperform, at 503 Danish kroner, largely on the strength of the Denmarkbased insulation supplier’s sales to Eastern Europe. In November, after the shares had shot up 34 percent, to Dkr674, and trumped the sector by 19.6 percentage points, they downgraded it to hold, on valuation. By the end of December, the share price had climbed 3.1 percent further, to Dkr695, but trailed the sector by 7 points. “The team has a deep understanding of the dynamics of the sector and of the particularities of each company,” explains one portfolio
BUSINESS & EMPLOYMENT SERVICES
Jaime Brandwood, Mark Shepperd & team UBS The buy side says: “They have unrivaled consistency in great stock picks.”
F
or a seventh year running, UBS maintains an iron grip on the pole position. Co-led by Jamie Brandwood, 34, and Mark Shepperd, 54, the four-member team exhibits “very strong sector knowledge, good service with regard to individual requests, and great stock picks,” according to one portfolio manager. The analysts reiterated their buy rating on Ireland’s Experian in December 2009, at 598p, counting on the global credit bureau’s central — and strengthening — position in U.S. lending practices. The call proved prescient: By the end of December 2010, Experian
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ITAL RESEARCH THE 2011 ALL-EUROPE RESEARCH TEAM INEFFICIENT MARKETS UNCONVENTION shares had climbed 33.4 percent, to 798p, and led the sector by 16 percentage points. “Experian was a great call, based on insightful industry and company research,” cheers one grateful supporter.
CAPITAL GOODS
Andreas Willi & team J.P. Morgan Cazenove The buy side says: “They are not afraid of being too tough before company managements.”
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eturning to No. 1 after a year in second place, the J.P. Morgan Cazenove quintet directed by Andreas Willi, 40, is prized for “impeccable stock picking,” as one buysider puts it. In October 2009 the analysts upgraded Stockholm-based truck maker and auto-parts distributor Scania from neutral to overweight, at 89.82 Swedish kronor, on a turnaround in demand for engine parts. By late December 2010 the stock had soared to Skr154.70, a gain of 72.2 percent that bested the sector by 44.4 percentage points. Last March the team launched coverage on the Weir Group with an overweight rating, at 781p, reasoning that capital spending, especially among its mining customers, would pick up. It did — and by the end of the year, shares of the U.K.-based manufacturer of power-station pumps had catapulted a heartstopping 127.9 percent, to 1,780p, compared with a sector gain of 23.6 percent.
CHEMICALS
FOOD PRODUCERS
Timothy Jones & team
Andrew Wood & team
Deutsche Bank
Sanford C. Bernstein
The buy side says: “They have deep industry knowledge, useful models, and their research is always clear.”
The buy side says: “Andrew offers insightful perspectives on the biggest issues a company faces.”
he Deutsche Bank threesome directed by Timothy Jones, 38, climbs one notch to make its first appearance in the winner’s circle since 2006. Investors praise the team’s “firstrate stock calls” and “highquality research and insights.” The researchers initiated coverage on Britain’s Croda International way back in February 2008 with a buy rating, at 534p, on the strength of the diversified consumerchemicals manufacturer’s client base in the largely recession-proof cosmetics industry.They have reiterated their recommendation repeatedly since, and by year-end 2010, Croda’s shares had rocketed a gravity-defying 202.6 percent, to 1,616p, and trounced the sector by 188.3 percentage points; last year alone the stock catapulted 102 percent and blew past the sector by a stunning 78.6 points. Money managers also cheer the team’s July 2009 upgrade on Germany’s Lanxess from hold to buy, at €18.26, on rising tire demand. Shares of the plastics-and-polymer manufacturer catapulted 223.7 percent, to €59.10, through December 2010; last year alone they rocketed 127.8 percent, from €25.94 to €59.10.
he Sanford C. Bernstein trio shepherded by Andrew Wood, 46, finishes in first place for a second consecutive year — and for the seventh time in the past eight years;Wood, who is based in NewYork, also leads the No. 1 team in Household & Personal Care Products. In February 2010 the analysts reiterated their long-standing buy on Nestlé, at Sf48.19, making the case that the Vevey, Switzerland– based confectioner would overcome inflation and recession headwinds and deliver a strong operating performance.Two months later, the company reported first-quarter sales growth of 6.1 percent, a full percentage point above consensus estimates. By the end of the year, Nestlé’s stock had jumped to Sf54.75, a gain of 13.6 percent that beat the sector by 2.8 percentage points.
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HOUSEHOLD & PERSONAL CARE PRODUCTS
Andrew Wood & team Sanford C. Bernstein The buy side says: “They provide a fantastic level of client service.”
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epeating in first place is the Sanford C. Bernstein quartet guided by NewYork–based Andrew Wood; the 46-year-old analyst also captains the top-
ranked team in Food Producers. Portfolio managers say they “very much appreciate” the team’s sector comparisons across countries, “especially between the U.S. and Europe.” In a contrarian call the analysts reiterated their buy rating on Germany’s Henkel in January 2010, at €35.66, on the belief that the beauty- and oral-careproducts manufacturer would continue to see margin growth thanks to restructuring in the wake of its 2008 acquisition of several National Starch subsidiaries. By the end of December the stock had shot up 30.5 percent, to €46.53, and outperformed the sector by 18.4 percentage points. “Super call on Henkel,” cheers one buyside backer.
INSURANCE
Brian Shea, Blair Stewart & team BofA Merrill Lynch Global Research The buy side says: “They don’t change their ratings just to make an impact.”
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he BofA Merrill Lynch Global Research team, which spent last year in second place, reclaims the top spot it INSTITUTIONALINVESTOR.COM
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NAL WISDOM THE FUTURIST THE CHARTIST CONTENTS INSIDE II TICKER FIVE QUESTIONS PEOPLE T held in 2008 and 2009.The four-member squad — now under the direction of Brian Shea, 45, and debuting coleader Blair Stewart, 38 — is “highly accessible and keen to provide support,” declares one buy-side enthusiast. Last February the analysts highlighted their buy rating on U.K.-based Legal & General Group, at 74.35p, citing improving cash flow thanks to strong sales in fourth-quarter 2009. In October, after the stock had jumped 39.5 percent, to 103.70p, and bested the sector by 36.1 percentage points, they downgraded it to hold, on valuation. The shares finished the year at 96.75p. Stewart, who divides his time between Edinburgh and London, earned a bachelor’s degree in actuarial mathematics and statistics at Edinburgh’s Heriot-Watt University in 1994. He worked as an insurance analyst at Deutsche Bank before joining Merrill Lynch in 2002.
vider TUI to top pick back in August 2009, at €5.26, telling clients that the market was understating the impact of planned state-loan guarantees, among other factors.The stock had soared 72.1 percent, to €9.05 — and outpaced the sector by 44.8 percentage points — by late September 2010, when the analysts deemed the shares fully valued and lowered their rating to neutral.The downgrade may have been a bit premature; however. By the end of the year, the stock had climbed 16 percent further, to €10.50.
The buy side says: “Jamie has an amazing capacity to analyze quickly the financial implications of the news flow.”
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t’s six straight years at No. 1 for Jamie Rollo’s fourmember team at Morgan Stanley. Money managers say Rollo, 38, is an “exceptionally strong stock picker” who provides “detailed and thoughtful analysis.”The analysts elevated Hanover, Germany–based travel- and tourist-services proINSTITUTIONALINVESTOR.COM
Morgan Stanley The buy side says: “Michael is an essential guide to areas of lingering weakness in the sector.”
J.P. Morgan Cazenove The buy side says: “The team provides high-quality research and excellent sector knowledge.” LUXURY GOODS
Luca Solca & team
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Morgan Stanley
Michael Jüngling & team
Filippo Lo Franco & team
The buy side says: “Luca is the most plugged-in analyst in the retail industry.”
Jamie Rollo & team
MEDICAL TECHNOLOGIES & SERVICES
MEDIA
Sanford C. Bernstein
LEISURE & HOTELS
sità Degli Studi Di Padova in 1986 and an MBA from Università Bocconi in Milan in 1990. He worked as a retail and consumer goods consultant at Booz Allen Hamilton and Boston Consulting Group before joining Bernstein in 2006.
uca Solca, whose “unique perspective puts him way ahead of the Street,” according to one buy-side supporter, guides the Sanford C. Bernstein trio up a notch to its first appearance in first place.Way back in April 2008 the analysts began urging clients to buy LVMH Moët Hennessy Louis Vuitton, and they have emphasized their view repeatedly since, citing the French conglomerate’s rising dominance in a sector that has seen strong growth.The stock vaulted 59.5 percent last year, from €77.20 to €123.10, and bested the sector by 6.1 percentage points. Solca, 47, who also leads the No. 3 team in Retailing/General, earned a bachelor’s degree in psychology at Italy’s Univer-
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lients say “detailed, accurate reports that border on prescient” reflect Filippo Lo Franco’s “extraordinary ability to see far beyond mere stock calls.” Lo Franco, 41, captains J.P. Morgan Cazenove’s five-member crew to a second straight appearance in first place. In September the analysts upgraded ITV from neutral to buy, at 58.81p, making the case that strong gains in advertising coupled with the British TV network’s costcontrol measures would bolster the company’s bottom line. By the end of December, the stock had risen to 70.05p, tuning in gains of 19.1 percent that bested the sector by 17.4 percentage points. “Great call on ITV,” cheers one grateful client. Notes another: “Filippo’s team showed good timing in their upgrades and recommendations — and they are always a step ahead of the competition in terms of revising the numbers.”
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ichael Jüngling guided the BofA Merrill Lynch Global Research team to the top spot every year from 2004 through 2009; he moved to Morgan Stanley in January 2010 and this year claims the pole position with his new three-member team. Jüngling, 39, reopened his franchise last February with a contrarian underweight rating on Switzerland’s Nobel Biocare Holding, at Sf28.13, arguing that the relatively high-end branded dental implant group would lag more bargain-oriented medical-device companies in a period of economic uncertainty. By the time the team issued a valuation-based upgrade to neutral in May, Nobel Biocare’s shares had plunged 21.1 percent, to Sf22.19, and trailed the sector by 24.6 percentage points. “Prophetic but obvious in hindsight, which is what a good call should be,” observes one buy-side backer. Since the upgrade, Nobel Biocare’s stock has continued to fall, dropping to Sf17.63, through December. The Morgan Stanley analysts are “really very good at teasing out the impact of emerging markets on these companies,” one portfolio manager declares.
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ITAL RESEARCH THE 2011 ALL-EUROPE RESEARCH TEAM INEFFICIENT MARKETS UNCONVENTION by the end of the year, a gain of 42.6 percent that outperformed the sector by 49.6 percentage points. Demichelis, who joined the firm in 2005 from consulting firm Wood Mackenzie, earned an MBA at the University of Edinburgh in 2001. Yazhari is a 1997 graduate of the University of Bristol with a bachelor’s degree in economics and accounting; he joined Merrill Lynch in 2003 from management consulting firm Arthur D. Little.
METALS & MINING
Jason Fairclough & team BofA Merrill Lynch Global Research
percentage points, they downgraded it to equal weight, on valuation. By the end of the year, it had climbed to Nkr90.85, gaining 14.3 percent but lagging the sector by 17.8 percentage points. Rats earned a master’s degree in physics at the Netherlands’ Delft University of Technology in 1996 and a master’s in finance from the London Business School in 2001; he joined Morgan Stanley the following year.
The buy side says: “They have the benefit of being a part of a well-integrated global team with access to all specifics from the different regions.”
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ason Fairclough, 39, steers his five-member BofA Merrill Lynch Global Research team to a second consecutive first-place finish. In August the analysts upgraded BritishAustralian mining conglomerate Rio Tinto from neutral to buy, at 3,223.50p, on rising demand for iron ore. By the end of the year, the stock had surged 39.2 percent, to 4,486.50p, and led the broad market by 29.1 percentage points. In November the team upgraded Swiss small-cap mining outfit Ferrexpo from underperform to buy, at 357.40p, again on increasing demand.The stock climbed 16.4 percent, to 415.90p, through December. “Their strong stock picking added a lot of value,” says one grateful client.
“MYLES ALLSOP IS THE BEST PAPER ANALYST ON THE STREET BY A MILE.”
OIL & GAS EXPLORATION & PRODUCTION
Alejandro Demichelis, Hootan Yazhari & team BofA Merrill Lynch Global Research The buy side says: “The industry experience of this team is exceptional.”
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ofA Merrill Lynch Global Research captured secondplace honors last year in Oil & Gas.The sector was split this year into Oil & Gas Exploration & Production and Oil Services, and new team leaders Alejandro Demichelis, 38, and Hootan Yazhari, 34, pilot the seven-strong BofA team to a first-place finish. (Demichelis and Yazhari replace Mark Iannotti, who was promoted to head of emerging EMEA research in 2009.) The analysts are “moneymakers on midcap U.K. names,” declares one buyside backer. One example: In January 2010 the analysts reiterated their buy rating on Afren, first recommended back in May 2009, citing new oil discoveries in West Africa. Shares of the British exploration company gushed from 103.50p at the time of the upgrade to 147.60p
PAPER & PACKAGING OIL SERVICES
Martinus (Martijn) Rats & team Morgan Stanley The buy side says: “The team has written very timely sector reports with interesting analyses, highlighting important topics ahead of everyone else.”
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artinus (Martijn) Rats, 38, leads the two-member Morgan Stanley duo to a firstplace debut in this new sector. (Oil Services and Oil & Gas Exploration & Production were broken out this year from the former Oil & Gas sector.) The analysts, who win praise from one money manager for being “more insightful and forwardthinking than their competitors,” upgraded Petroleum Geo-Services from underweight to overweight in August 2009, calling shares of the Lysaker, Norway–based seismic-studies provider a bargain at 43.12 Norwegian kroner. In May, after the stock had climbed a whopping 84.3 percent, to Nkr79.45, and bested the sector by 57.7
Myles Allsop UBS The buy side says: “Myles Allsop is the best paper analyst on the Street by a mile.”
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or a fifth year running, solo analyst Myles Allsop of UBS wears the crown. Allsop, 36, earns high marks for last February’s upgrade of midcap British packager D.S. Smith from neutral to buy, as a bargain at 112.90p, on the imminent installation of new CEO Miles Roberts. In early December, after the stock had vaulted 77.8 percent, to 200.70p, and outdistanced the sector by a stunning 64.1 percentage points, he downgraded it to neutral, on valuation. It ended that month at 202.20p. An August upgrade of Norske Skogindustrier from neutral to buy, at 7.66 Norwegian kroner, also pleased clients. Allsop’s expectation that rising newsprint prices would help raise the Lysaker, Norway– based pulp producer’s shares proved right. By the end of the year, they had jumped 80.8 perINSTITUTIONALINVESTOR.COM
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NAL WISDOM THE FUTURIST THE CHARTIST CONTENTS INSIDE II TICKER FIVE QUESTIONS PEOPLE T cent, to Nkr13.85, and were ahead of the sector by a whopping 69.3 points. “Myles is the first to highlight inflection points, and the accuracy of his recommendations makes him the best source on the sector,” declares one backer.
ness to withstand any reasonable downturn. By year-end 2010 the stock had advanced 24.6 percent and outpaced the sector by 8.1 percentage points. Hauber, who earned a master’s degree in pharmacology at Munich’s Ludwig-MaximiliansUniversität and an MBA at Insead in Fontainebleau, France, joined Bear, Stearns International in 2001 from Schroder Salomon Smith Barney, where she covered European pharmaceuticals; Bear Stearns Cos. was acquired by JPMorgan Chase & Co. in 2008.
lysts elevated it to top pick. By the end of the year, it had soared to 150.70p, gaining 46.3 percent since the original buy recommendation and outdistancing the sector by 22.2 percentage points.
PHARMACEUTICALS
Alexandra Hauber & team J.P. Morgan Cazenove
the shares had plunged by 35.9 percent, to €5.51, and trailed the broad market by a whopping 67.6 percentage points. “Following their recommendations, I’ve made money on the short side,” applauds one backer. Gandolfi, 33, earned a master’s degree in econometrics from Italy’s Università Degli Studi Di Pavia in 2001 and worked at Morgan Stanley and J.P. Morgan as a utilities analyst before joining UBS in 2007. Hummel, 32, holds a master’s degree in banking and finance from Germany’s Duale Hochschule Baden-Württemberg, which he received in 2001; he moved to UBS in 2007 from Germany’s Landesbank BadenWürttemberg, where he covered the utilities sector.
The buy side says: “Alexandra’s talents are perfectly matched to the times.”
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s austerity-conscious European governments slashed their health subsidies, pricing became an issue for the continent’s drugmakers for the first time in at least a generation. After three years in the runnerup position, the J.P. Morgan Cazenove quartet led by Alexandra Hauber rockets to the top, thanks in part to giving investors a comprehensive sense of how the changed economic landscape will affect long-term sales and pipeline models. Clients also praise the team’s coverage of Novartis. After the Basel, Switzerland–based drug developer acknowledged in July 2009 that “underlying growth in operating and net income to record levels in 2009 could be more than offset in reported results by currency-related losses,” other analysts grew cautious, but the J.P. Morgan Cazenove team took a contrarian view, reiterating its overweight rating and telling money managers that Novartis had a strong pipeline and a diversified enough busiINSTITUTIONALINVESTOR.COM
PROPERTY
Harm Meijer & team J.P. Morgan Cazenove The buy side says: “Harm outpaces the competition on creativity.”
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arm Meijer, 36, pilots J.P. Morgan Cazenove’s four-member crew to first place for a second straight year — and for the third time in four years. The analysts exhibit a “deep understanding of the European real estate and property equity markets,” asserts one money manager.The team told clients to buy London-based developer Capital & Counties Properties in May, at 103p, following its demerger from Liberty International; they believed that several of the company’s Central London properties, including one in Earls Court near the site of next year’s Olympic Games, were worth far more than their current appraisals suggested.The stock had zipped to 119.90p by early September, and the ana-
RENEWABLE ENERGY
Alberto Gandolfi, Patrick Hummel & team UBS The buy side says: “They offer a powerful combination of global analysis and local content, which is very important for a regulation-driven sector like renewables.”
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ebuting in first place in a sector newly added to the survey is the UBS trio guided by Alberto Gandolfi, who also co-leads the No. 1 team in Utilities, and Zurich-based Patrick Hummel. Soft sales and expansion difficulties prompted the analysts to downgrade Germany’s Nordex from neutral to sell in December 2008, at €8.60.The call was early — the wind turbine producer’s stock continued to rise, reaching €14.58 in May 2009 — but the analysts stood by their recommendation. Good thing, too. By the end of 2010,
RETAILING/FOOD & DRUG CHAINS
Christopher Hogbin & team Sanford C. Bernstein
The buy side says: “The depth of Chris’s knowledge of the industry is exceptional.”
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eaping from third place to first is the trio of Sanford C. Bernstein analysts under the direction of Christopher Hogbin, 36. Clients applaud the team for focusing on “long-term investment success rather than shorter-term trading and newsflow noise,” as one buy-sider puts it.The researchers upgraded Metro from neutral to buy in September, at €42.33, on the belief that the Dusseldorf-based hypermarket operator would benefit from a rise in consumer spending in Germany, Poland
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ITAL RESEARCH THE 2011 ALL-EUROPE RESEARCH TEAM INEFFICIENT MARKETS UNCONVENTION and Russia.The stock had zipped to €58.53 by early December, a gain of 38.3 percent that bested the sector by 37.7 percentage points, and the analysts downgraded it to hold, on valuation. It ended that month at €53.88. Hogbin, who earned a master’s degree in economics at Cambridge University’s Gonville and Caius College in 1996 and an MBA at Harvard Business School in 2000, joined Bernstein in 2005 from Boston Consulting Group, where he worked as a retail strategy consultant.
investors, and guided his team excellently through the downturn in 2007 and 2008 and was early in catching the upturn,” marvels one portfolio manager.
graduate of Universidad Complutense de Madrid with a master’s degree in actuarial science, the 39-year-old Fañanas moved to Deutsche Bank in 2004 from Julius Baer, where he covered small- and midcap stocks.
SMALL- & MIDCAPITALIZATION STOCKS
Luis Fañanas Martinez & team Deutsche Bank The buy side says: “I appreciate the excellent small-cap coverage from the Deutsche Bank research team.”
RETAILING/GENERAL
Rodney Whitehead & team Deutsche Bank The buy side says: “They have excellent conviction stock analysis.”
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efending the crown they won last year is the trio of analysts directed by Deutsche Bank’s RodneyWhitehead, 51. Clients credit the team with offering “good access to management, mastery of the financials and an ability to turn their expertise into winning stock recommendations.” One example: In March the analysts highlighted their long-standing buy on Bermuda-based Signet Jewelers, first recommended back in February 2009, largely on signs of recovery in the U.S. jewelry market. By late December the stock had leapt 31.2 percent since the reiteration, from 2,105p to 2,762p, and outpaced the sector by 28.2 percentage points. Whitehead is “very close to his companies, readily accessible to
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ewcomer Luis Fañanas Martinez pilots the Deutsche Bank team, unranked since 2008, all the way to No. 1. The two-member, Madridbased crew “provides us with a broad-based perspective on all the trends and early indicators, which leads to good investment ideas,” explains one buy-side supporter. Last July the analysts unveiled a model portfolio that included Basel, Switzerland– based Dufry Group, at Sf83.60, on the duty-free retailer’s expanding operations; Croda International, at 1,133p, on the British chemical company’s growing dividends and high reinvestment of capital; and Semperit Holding, at €28.08, citing rigorous cost-control measures and rapid dividend growth at the Vienna-based manufacturer of rubber gloves and hoses. By the end of the year, the shares had jumped 50.5 percent, to Sf125.80; 42.6 percent, to 1,616p; and 41 percent, to €39.59, respectively. During the same period the sector was up 16.3 percent. A 1995
changing value drivers in the sector and retained the courage of their convictions through 2010, which is something some of their competitors fail to do,” observes one longtime client.
TECHNOLOGY/SEMICONDUCTORS SPECIALTY & OTHER FINANCE
Bruce Hamilton & team Morgan Stanley
The buy side says: “I like the team’s competence, the timeliness of its research and the accessibility of its members.”
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olding on to the top spot for a second straight year is Morgan Stanley’s three-analyst team under the leadership of Bruce Hamilton, 37.The trio upgraded Aberdeen Asset Management from hold to buy in July, at 139.60p, citing the U.K.based money management firm’s compelling valuation and the improving investment performance of its fixed-income funds, among other factors.The stock had bolted 45.3 percent, to 202.90p, by the end of December; during the same period the sector tumbled 10.3 percent.The analysts “recognized early on, back in 2009, the
RODNEY WHITEHEAD’S TEAM “WAS EARLY IN CATCHING THE UPTURN.”
Sandeep Deshpande & team J.P. Morgan Cazenove
The buy side says: “Sandeep got us ahead of both the curve and the macro noise.”
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andeep Deshpande, 40, leads the two-member J.P. Morgan Cazenove team to a second consecutive first-place finish; this is the fourth time in the past six years that the firm has landed on top. Clients continue to profit from the pair’s overweight rating on ASML Holding, first recommended back in 2008 and highlighted repeatedly since — most recently in July, at €23.94, on the strength of the Veldhoven, Netherlands–based semiconductor-equipment maker’s continuing growth prospects. By late December the stock had climbed 20.7 percent since the reiteration, to €28.90, and bested the broad market by 10.7 percentage points.The analysts are highly valued for their “relentless reappraisal of the global potential of Europe’s semiconductor names,” declares one money manager. Adds another: “Sandeep’s team has the best fundamentals-based approach of anyone covering the sector, and I appreciate their insight into the trading environment.” INSTITUTIONALINVESTOR.COM
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TECHNOLOGY/SOFTWARE
Michael Briest & team UBS The buy side says: “They watch stocks — not the euro.”
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o. 1 for three years running, the UBS duo led by Michael Briest, 38, is “the best when it comes to keeping us focused on fundamentals,” insists one fan. Clients were impressed with the analysts’ coverage of the valuations of Logica, a Reading, England–based IT outsourcingservices provider.They upgraded it to buy last February, at 116.90p, then downgraded the stock to neutral in April, after it had gained 26.5 percent, rising to 147.90p, and led the sector by 14.6 percentage points.The stock tumbled to 109p in June, prompting the team to upgrade again to buy. By year-end it was back up to 131p.
Pierre Ferragu.The team downgraded the American depositary receipts of Nokia Corp. from neutral to underperform in September, at $10.06, making the case that the Espoo, Finland–based handset maker was not keeping pace with advanced technologies offered by peers. By late December Nokia’s stock had inched up 2.6 percent, to $10.32; during the same period the sector gained 3.2 percent, in dollar terms. Ferragu, 36, earned a doctorate in sociology from the Institut d’Études Politiques de Paris in 2004 while working as a telecommunications consultant for Boston Consulting Group; he joined Bernstein in 2007.
expertise in the sector,” according to one buy-side enthusiast. In May the analysts added Vodafone Group to the firm’s focus list, at 129.50p, making the case that the London-based outfit’s plan to sell noncore assets would help boost its bottom line. Last year,Vodafone announced plans to sell its minority interests in India’s Bharti Airtel, Poland’s Polkomtel and France’s SFR — and in September it sold its stake in China Mobile for £4.3 billion ($6.65 billion). By the end of December, the stock had surged 28 percent, to 165.80p, and led the sector by 11.1 percentage points. Howard, who earned a bachelor’s degree in mathematics at Durham University in 1991, joined Cazenove in 1996 from accounting firm Arthur Andersen. J.P. Morgan acquired Cazenove Group in January 2010.
TRANSPORT
Menno Sanderse & team Morgan Stanley The buy side says: “Menno is the most diligent analyst in this sector.”
TOBACCO
David Hayes & team Nomura International TELECOMMUNICATIONS SERVICES
Paul Howard, Hannes Wittig & team J.P. Morgan Cazenove TELECOMMUNICATIONS EQUIPMENT
Pierre Ferragu & team Sanford C. Bernstein The buy side says: “They are better than their peers in looking at the big picture.”
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atapulting from runner-up all the way to No. 1 is the Sanford C. Bernstein trio led by INSTITUTIONALINVESTOR.COM
other factors. By the end of the year, the stock had wafted up to 2,463.50p, a gain of 22 percent that put BAT ahead of the sector by 5.9 percentage points. Hayes, 38, earned a bachelor’s degree in economics from Bristol University in 1993 and an MBA at Cranfield University School of Management in 2001. He worked in the corporate finance department at BT Group before joining Lehman Brothers in 2000 as a beverages and tobacco analyst; Nomura acquired the Asian and European operations of Lehman Brothers Holdings in 2008.
The buy side says: “They are a powerhouse team.”
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fter a year in second place, the J.P. Morgan Cazenove team — jointly led this year by newcomer Paul Howard, 41, Hannes Wittig, 46 — return to the winner’s circle.The seven-member squad represents “the deepest pool of
The buy side says: “David comes up with out-of-thebox insights and ideas.”
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avid Hayes leads the three-analyst Nomura International team up one notch to capture the crown for the first time. Hayes, whom clients describe as a “creative thinker” with “brilliant ideas and solid insights,” and his associates urged investors to buy London-based British American Tobacco in January 2010, at 2,020p, on valuation and improving margins, among
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enno Sanderse, 37, leads his Morgan Stanley trio to repeat at first.The researchers, considered “especially strong on the airlines” by one satisfied customer, earn points for upgrading two carriers from equal weight to overweight, on strong passenger and cargo momentum: Air FranceKLM in June 2009, at €8.77, and Deutsche Lufthansa in January 2010, at €11.69.The French airline’s shares skyrocketed 55.4 percent, to €13.63, and flew past the sector by 7.3 percentage points, through December 2010; its German counterpart soared 39.9 percent, to €16.35, and flew past the sector by 32.1 points.
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ITAL RESEARCH THE 2011 ALL-EUROPE RESEARCH TEAM INEFFICIENT MARKETS UNCONVENTION worked as a utilities analyst at Morgan Stanley and then J.P. Morgan before moving to UBS in 2007.
a nonexpert can understand, without compromising on quality,” marvels one enthusiast.
ECONOMICS & STRATEGY
ECONOMICS
Stéphane Déo & team UBS ACCOUNTING & VALUATION
Sarah Deans Citi UTILITIES
Alberto Gandolfi, Per Lekander & team UBS The buy side says: “I find very useful their very close relationships with the companies they cover.”
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n third place for a third year running is the seven-strong UBS squad, co-led this year by newcomer Alberto Gandolfi, 33, and Paris-based Per Lekander, 48. “They are invariably on top of the news flow, disseminate relevant information quickly, and promptly reply to inquiries and personal requests,” marvels one buy-side backer. Last February the team upgraded Britain’s Pennon Group from neutral to buy, judging the shares underpriced at 501.74p. By late December the waterand-wastewater services provider’s stock had leapt 27.6 percent, to 640p, and sailed past the sector by 30.2 percentage points. Gandolfi, who also co-heads the top-ranked team in Renewable Energy, graduated with a master’s degree from Italy’s Università Degli Studi Di Pavia in 2001. He
The buy side says: “Sarah Deans does a very good job updating investors on key issues.”
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arah Deans, 38, finishes atop the ranking for a third consecutive year — but this time she claims the honor for Citi, which she joined in July from J.P. Morgan. (Citi, which was unranked last year, most recently ranked No. 1 in 2008, under Kenneth Lee; he moved to Barclays Capital in July 2009.) In July, shortly after starting at her new firm, Deans informed clients that the U.K. coalition government’s emergency budget called for changing the metric on which public sector pension payouts are calculated, from the retail prices index to the consumer prices index; because the CPI tends to be, on average, 70 to 80 basis points lower than the RPI, the move would reduce the reported pension liabilities at BT Group and other major companies, she predicted. In November the telecommunications services provider announced that its pension-related deficit had narrowed by nearly £3 billion ($4.9 billion), to £5.2 billion. Deans “produces research even
The buy side says: “Stéphane sees ahead rather than following immediate data.”
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or a third year in a row, the UBS team led by Stéphane Déo, 43, captures the top prize. The quintet “produces insightful pieces putting recent data points into a longer-term and continentwide context,” asserts one fund manager. In December 2009 the UBS economists were among the first to alert clients to a brewing sovereigndebt crisis, noting that “Greece seems to be the most worrying country ... due to its large deficit” and high debt ratio: 127 percent of the nation’s gross domestic product that year. “On Greece our view was that default was a distinct possibility, but we also held the view that if you were brave enough you could take a position on the short part of the curve — don’t buy five- or ten-year bonds, but if you want to buy three- or sixmonth you can do it, because the odds of default on shortterm instruments were very small,” Déo explains. In May the International Monetary Fund and euro zone countries approved a €110 billion ($146 billion) bailout plan for Greece that included disbursement of up to €30 billion last year so the country could meet its short-term obligations.
EQUITY DERIVATIVES
Pamela Finelli, Nicolas Mougeot & team Deutsche Bank The buy side says: “The Deutsche team provides excellent customized research.”
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ewcomers Pamela Finelli and Nicolas Mougeot shepherd Deutsche Bank’s sixmember team to No. 1 in this sector, which hasn’t been published since 2006. (Deutsche claimed the top spot that year too.) Last March the analysts informed long equity investors that, with volatility at an 18-month low, it was an opportune time to buy equity-volatility swaps, as a hedge.The following month, as Greece’s debt crisis heated up and concern over other European sovereign issues grew, volatility spiked. “They were especially helpful in their approach to gauging the appropriate notional value of volatility swaps for every type of equity portfolio,” recalls one grateful client. Finelli, 38, joined Deutsche in 1999 from BankersTrust, armed with a bachelor’s in business administration from Pennsylvania State University’s Smeal INSTITUTIONALINVESTOR.COM
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NAL WISDOM THE FUTURIST THE CHARTIST CONTENTS INSIDE II TICKER FIVE QUESTIONS PEOPLE T College of Business, which she earned in 1994. Mougeot, 36, arrived from BNP Paribas in 2006, after having graduated from Switzerland’s Université de Lausanne with a master’s in banking and finance in 1997 and a Ph.D. in finance in 2001.
EQUITY STRATEGY
Andrew Garthwaite & team
55.5 percentage points. In May the team pounded the table on German equities as less leveraged than their counterparts elsewhere in Europe; by the end of the year, the MSCI Germany index had advanced 14.4 percent and was ahead of the MSCI Europe index by 5.3 percentage points.The 48-year-old Garthwaite, who also leads the No. 3 team in U.K. coverage, is a 1984 graduate of the University of Bristol with a bachelor’s degree in econometrics and economic history; he joined Credit Suisse in 2000 from UBS Warburg, where he led the global assetallocation team.
momentum and price momentum before and after earnings announcements, and the degree of stock price movement in reaction to unexpected earnings results — to improve alpha and decrease volatility. “It’s good science with believable hypothesis-testing,” avows one adherent. At the same time, the quant duo espoused the benefits of selling volatility, particularly for derivatives traders. “The structure of their modeling and their ambition to find new and interesting ideas have proved extremely valuable for our returns,” cheers another devotee.
ing large in investors’ minds in the wake of the BP oil spill, oil and gas exploration and production companies with the most up-to-date equipment would be favored. Among the stocks they recommended was Singapore-based Keppel Corp., which by the end of that month had advanced 4.6 percent and led the broad market by 3.4 percentage points, in Singapore dollar terms. Nahal, who earned a master of law degree from University College London in 1997, joined BofA Merrill Lynch in September from Société Générale, where he coled that firm’s SRI team (which was a runner-up in 2009).
COUNTRY SECTORS
Credit Suisse The buy side says: “They look at all possible angles — and beyond.”
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he Credit Suisse crew of four helmed by Andrew Garthwaite, which rises one rung to finish in first place for the first time, is “on top of absolutely everything that might affect the landscape,” insists one supporter. In December 2009 the strategists recommended overweighting consumer companies with exposure to emerging markets, which they argued were undervalued, especially luxury brands such as Millennium & Copthorne Hotels, then at 364.70p. By late December 2010 the London-based hotel chain’s stock had catapulted 61.9 percent, to 590.50p, and outpaced the broad market by
ANDREW GARTHWAITE “IS ON TOP OF ABSOLUTELY EVERYTHING.” INSTITUTIONALINVESTOR.COM
SOCIALLY RESPONSIBLE INVESTING QUANTITATIVE RESEARCH
Marco Dion & team
Sarbjit Nahal & team
J.P. Morgan Cazenove
BofA Merrill Lynch Global Research
The buy side says: “Marco Dion and his team provide practical and relevant quant research.”
The buy side says: “They push the envelope in terms of putting a financial perspective on extrafinancial issues.”
eturning to the top spot after a year in second place, the J.P. Morgan Cazenove pair under Marco Dion, 34, are unmatched in “mixing recent academic research, which they follow closely, with practical tools designed specifically for portfolio managers,” as one client attests. In June the analysts published a report, “Company Guidance: Can It Add Value to a Quant Process?,” explaining a new way to use company guidance, especially how to filter out irrelevant noise and zero in on the most informative market signals — such as earnings
ebuting in first place in this sector, which did not produce publishable results last year, is the five-strong BofA Merrill Lynch Global Research squad captained by Sarbjit Nahal, 38. “I have been working with Sarbjit for many years and have always found his work very helpful in terms of tackling the always-difficult challenge of how environmental, social and governance issues have a material financial impact,” observes one fund manager. In December the team published “Oil and Gas: Better Safe Than Sorry,” in which the analysts explained that with safety concerns loom-
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BENELUX
David Tailleur & team Rabobank The buy side says: “The team offers great insight into the local market.”
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he Rabobank team under the direction of Utrecht-based DavidTailleur shoots straight in at No. 1 in this sector, which has not been published since 2007. Money managers applaud the 12-member squad’s “outstanding access and close relationships with smaller companies that a lot of other firms tend to overlook,” as one backer puts it.The analysts’ best calls of the past year include a June upgrade from hold to buy on Crucell, at €14.86, on the strength of the Leiden, Netherlands–based biopharmaceuticals company’s
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ITAL RESEARCH THE 2011 ALL-EUROPE RESEARCH TEAM INEFFICIENT MARKETS UNCONVENTION rising market share. By the end of December, the stock had shot up 58.8 percent, to €23.60, and soared past the broad market by 51.3 percentage points.Tailleur, 37, joined Rabobank in 2000 after working as an auditor with international accounting firm KPMG. He graduated from Erasmus University’s Rotterdam School of Management in 1997 with a master’s degree in business administration.
glomerate headquartered in Paris, on the belief that “the market was underestimating the prospects for future aftermarket demand” for aircraft and helicopter engines and parts. By late December the stock had soared 45.7 percent, from €18.19 to €26.50, and soared past France’s broad market by 45.6 percentage points. Laurencin’s team “has a lot of people who are locally based, and they probably do the best overall job covering panEuropean stocks,” declares one satisfied client.
had raced to €121.40, a gain of 49.9 percent that sped past the broad German market by 36.4 percentage points. Another winning recommendation: a March upgrade from hold to buy on Adva Optical Networking, at €2.90, on the belief that the Martinsried-based telecommunications-equipment company was ideally situated to benefit from growth in bandwidth expansion and metro fiber networks spurred by surging mobile data traffic and growing interest in cloud computing. By late December the stock had rocketed 102.1 percent, to €5.86.
pared with the same period one year earlier, and that 67.3 percent of its sales had come from outside Spain. By the end of the year, the stock had surged 40.1 percent, to €22.67. During the same period, Spain’s broad market dropped by 5.7 percent.
IRELAND
Barry Dixon & team Davy The buy side says: “No one has had a better sense of ground-level happenings in the Irish economy.”
FRANCE
Vincent Laurencin & team Exane BNP Paribas The buy side says: “They are very good at delving into the fundamentals on the financial statements.”
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epeating at No. 1 is the Exane BNP Paribas troupe of 40 Paris-based analysts guided by Vincent Laurencin, 34. “They’ve got very good relationships with French companies, so they provide good corporate access,” observes one portfolio manager. Among the team’s most-valued calls of the past year is a March upgrade from neutral to buy on Safran, an aerospace-and-defense con-
MARIANO COLMENAR’S ANALYSTS ARE “VERY SOLID,VERY SEASONED.”
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GERMANY
Andreas Neubauer & team Deutsche Bank The buy side says: “They have real experts, and they know absolutely everyone.”
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eutsche Bank’s Frankfurtbased team takes top honors for a remarkable 15th consecutive year.The 20 analysts, economists and strategists directed by Andreas Neubauer, 46, produce research that is “much more indepth than their peers’ and always back up their statements with statistical data,” according to one buy-side backer.The team upgraded the preferred shares of Volkswagen from hold to buy in July, at €80.99, because “we were impressed by the strong cash generation and saw strategic problems like the [lightcommercial vehicles] business getting fixed,” Neubauer reports. By the end of the year, shares of the Wolfsburg-based automaker
IBERIA
Mariano Colmenar & team Santander Investment Bolsa The buy side says: “They are the premier firm on the Iberian peninsula.”
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ariano Colmenar, 49, and his team of 30 at Santander Investment Bolsa repeat in first place.The Madrid-based analysts are “very solid, very seasoned, and do a good job of framing their overall arguments with an industry view,” observes one longtime client. In February 2010 the analysts highlighted their buy recommendation on Obrascón Huarte Lain, at €16.18, citing strong growth in the Madrid-based construction company’s Latin American operations. In October the company reported that ebitda had surged 34 percent and net profit had risen 19.9 percent in the first nine months of 2010, com-
n first place for a third straight year is the 19-member Davy team captained by Dublin-based Barry Dixon, 43; in fact, the firm has been No. 1 in Ireland coverage eight times in the past decade. The analysts have “a good grasp of both macro and micro drivers — no one else goes more deeply,” marvels one backer. In January 2010 the team reiterated its outperform rating on longtime favorite Paddy Power, one of the world’s largest gaming companies, telling clients that expansion into Australia and increases in business-tobusiness operations in Europe would serve as catalysts for stock upside in 2010. By yearend shares of the Dublin-based concern had surged 20.9 percent, from €25.39 to €30.70, and trumped Ireland’s broad market by 36.3 percentage points.The analysts “are quick to respond — and always worth listening to,” avows one impressed investor. INSTITUTIONALINVESTOR.COM
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NORDIC COUNTRIES
SWITZERLAND
SEB Enskilda
UBS
The buy side says: “They cover more of the market and are more comprehensive than any of the other Nordic brokers.”
The buy side says: “They provide experience, access and depth — and they know everybody in the country.”
Fredrik Carlsson & team
ITALY
Matteo Ghilotti, Stefano Lustig & team Equita S.I.M. The buy side says: “They’re independent-minded — they refuse to follow the herd.”
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t’s another year on top — the second in a row — for the 12-analyst troupe at Equita S.I.M. co-directed by Milanbased Matteo Ghilotti, 46, and Stefano Lustig, 45. “Italy is definitely a market where having local knowledge and being plugged-in count — they have, and they are,” observes one portfolio manager. Citing growth in the defibrillation and U.S. heart-valve markets, the team advised clients to buy shares of Sorin, a biomedical-device manufacturer headquartered in Milan, in December 2009, at €1.21. The stock had enjoyed healthy gains of 42.1 percent, to €1.72, by the end of 2010. During the same period, Italy’s broad market dropped 10.9 percent.The Equita researchers are “very good stock pickers, with strong views that are backed up by good fundamental research,” applauds one investor. INSTITUTIONALINVESTOR.COM
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limbing one rung to finish on top for the first time since 2006 is the Stockholmbased team of analysts at SEB Enskilda. Captained since March by Fredrik Carlsson, who joined the firm as head of Swedish equity research in 2009, the 65-member squadron provides “strong and deep research coverage combined with excellent corporate access and terrific communication,” attests one client. In February 2010 the researchers recommended Helsinki-based Metso Corp., at €24.28, making the case that a spate of recent acquisitions would result in operational efficiencies and help boost the company’s bottom line. By late December, shares of the automation-related technologies supplier had bolted to €41.81, a 72.2 percent advance that shot past Finland’s broad market by a stunning 65.3 percentage points.The Enskilda analysts “know how to create value,” cheers one appreciative investor. Carlsson, 39, who earned an MBA at Nyenrode Business Universiteit in the Netherlands in 1995, had previously been employed as head of equities at Second Swedish National Pension Fund.
Philipp Zieschang & team
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hilipp Zieschang, 40, and his Zurich-based team of 26 analysts at UBS hold on to the crown for a second consecutive win. “They’re global, and at the same time they’re Swiss. So they can leverage their global expertise and follow the big medical technology, pharmaceutical, industrial and capital goods stocks — where they are particularly strong — while giving you a very good understanding of local small caps,” explains one buy-side fan. One example: Throughout last year the team pounded the table on Dufry Group, a small-cap company that operates duty-free shops in airports around the world; the team first recommended the stock in September 2009, at Sf55, citing increased confidence in the Basel-based outfit’s business model and “higher global duty-free spending resulting in higher top-line growth, better gross margins and thus better free-cash-flow generation,” Zieschang says. The stock had catapulted 128.7 percent by the end of last year, to Sf125.80, and trounced Switzerland’s broad market by 123.9 percentage points.The UBS analysts “are independent and willing to buck the conventional wisdom,” avers one fan.
UNITED KINGDOM
Alexander Hugh, Nicholas Nelson & team UBS The buy side says: “Their reports are excellent.”
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ising one rung to claim the top spot for UBS is the 49-analyst troupe co-led by Alexander Hugh, 35, and Nicholas Nelson, 38. “They’re better informed than their peers,” asserts one loyalist.The analysts added Ashtead Group to their list of top picks in April, at 99.10p, on the strength of the London-based industrial-equipment rental concerns’ growth prospects. By year-end the stock had rocketed 74.5 percent, to 172.90p, and outpaced the U.K. broad market by 72.4 points. Hugh earned a degree in law at the University of Leeds in 1998 and worked as an analyst covering small-cap companies at Cazenove before joining UBS in 2005. Nelson, who received a master’s degree in English literature from Cambridge University in 1994, was an equity strategist at Credit Suisse until 2005, when he joined UBS.
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COVER STORY
continued from page 35 the losses would
only deepen, and in early May they pulled the plug on DRCM. (Costas departed shortly thereafter. In August 2009 he co-founded a New York–based investment banking boutique, PrinceRidge Group, with William Hutchins, his former CIO at DRCM.) After shutting down DRCM, UBS integrated its trading book back into the investment bank, but the move only worsened UBS’s problems as the global financial crisis erupted. According to an internal report to shareholders that UBS published last October, several units of the investment bank, led by Costas’ successor Huw Jenkins, had been investing heavily in U.S. mortgage securities in a bid to rebuild fixed-income trading profits after the carve-out of DRCM. There was little coordination among any of
such write-downs. In a desperate bid to recapitalize, the bank placed Sf13 billion in new equity with the Government of Singapore Investment Corp. and an unnamed Middle Eastern investor. In April 2008, Ospel stepped down as chairman and was replaced by the bank’s general counsel, Peter Kurer. At that time, UBS also began a public capital increase that raised an additional Sf15 billion. When the global crisis worsened following the September 2008 collapse of Lehman Brothers Holdings, the Swiss National Bank agreed to create a special-purpose vehicle, the StabFund, that took $39.8 billion of illiquid securities off UBS’s books, and the Swiss government injected Sf6 billion of capital into the bank by buying mandatory convertible bonds. (A year later the Swiss government sold these bonds for a Sf1.2 billion profit, and by the end of June 2010, the central bank had earned Sf1.3 billion on the StabFund, while its exposure had fallen to $19.2 billion). The turmoil in the investment bank was compounded by a U.S. tax evasion scandal at UBS’s wealth management arm. In July 2008 the U.S. Senate accused UBS of helping rich Americans evade billions of dollars in taxes. In February 2009, UBS agreed to pay a $780 million fine to the U.S. government to settle tax fraud charges, and in
Grübel “may miss some moneymaking opportunities, but he will never be responsible for bad surprises.” — Hans-Jörg Rudloff, Barclays Capital
the investment bank units or between those units and the DRCM hedge fund, and no overall assessment of risk positions. The uncontrolled buying spree of fixed-income securities raised UBS’s balance sheet from $1.5 trillion in November 2005 to $2.5 trillion in August 2007. The consequences quickly became apparent. In July the bank announced the abrupt departure of Wuffli as CEO, to be replaced by Rohner, who had been head of wealth management. On October 1, UBS pushed out Jenkins as chief of the investment bank and announced it would take its first quarterly loss in nine years because of multibillion-dollar write-downs on subprime securities — the first of many INSTITUTIONALINVESTOR.COM
August of that year, the bank consented to turn over 4,450 names of suspected U.S. tax evaders — shaking Switzerland’s tradition of banking secrecy. Although many Swiss bankers and politicians decried the breach of banking secrecy, the decision won strong support from Grübel, who was drafted to replace Rohner as CEO in February 2009. In the preceding weeks, Grübel had turned down overtures before Kurer convinced him he was the only banker with the stature and credibility to rally shareholders and save the bank. After two years of retirement, Ossie Grübel was bored with golf, and with being a spectator as the crisis swamped UBS. “I knew all about UBS’s problems from the outside,” he says.
“I even wrote a magazine column saying the problems were worse than they thought.” Grübel, aWorldWar II orphan, was raised by his grandparents in the central German state of Thuringia. Rather than attending university, in 1961, at the age of 18, he took an apprenticeship in banking and securities trading at Deutsche Bank, where over the next nine years he rose to bond trader. In 1970 he joined White Weld Securities (later Credit Suisse White Weld) as a Eurobond trader in Zurich and London for eight years, and served as CEO there until 1985. HansJörg Rudloff, who at the time led Credit Suisse First Boston’s powerful capital markets business, describes Grübel as down-toearth and disciplined. “He may miss some moneymaking opportunities, but he will never be responsible for bad surprises,” says Rudloff, now chairman of Barclays Capital. “And he does not tolerate sloppy or frivolous behavior in any aspect of banking.” Grübel moved to Credit Suisse First Boston in 1985 and held top trading posts in Asia and Europe before rising to head of global trading with a seat on the group executive board in 1997, then moving to head up private banking in 1998. He took early retirement in 2001 after clashing with CEO Lukas Mühlemann, notably over the latter’s highpriced acquisitions of Winterthur Insurance in the late 1990s. But with losses mounting at Winterthur, Mühlemann brought Grübel back several months later to run the bank’s financial services division. When Mühlemann resigned at the end of 2002, Grübel was named co-CEO with John Mack, who had headed CSFB. In 2004, Grübel became sole chief executive after Mack was ousted in a dispute with the Credit Suisse board over his plans to expand the investment bank. Grübel implemented his one-bank strategy, jettisoning the CSFB brand and integrating Credit Suisse’s corporate and investment banking, private banking and asset management divisions. When Grübel retired a second time, in 2007, Credit Suisse had regained momentum and profitability, though it still lagged behind UBS. The two banks’ positions quickly reversed as Credit Suisse adeptly navigated the financial crisis while UBS imploded. “The situation was worse than I expected,” Grübel says of his early days at UBS. Executives were in such shock and disarray that “they did nothing — they just visited clients,” he says. Ulrich
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Körner, who came on board in April 2009 as chief operating officer, says he called urgent meetings with managers to find cost savings of Sf1.7 billion in the corporate center by 2010, but weeks passed and nothing happened.“When I asked why, they said they had to hold further discussions,” says Körner, who eventually managed to implement the cuts. Körner also delivered on an April 2009 promise to slice costs throughout the group by Sf3.5 billion by the end of 2010.The biggest cuts came at the expense of the workforce, whose numbers had fallen to 64,583 by September 2010 from a high of 83,560 three years earlier. During that period the investment bank’s head count fell to 15,666 from 23,739.
Rajeev Misra, former global head of credit trading, securitization and commodities at Deutsche Bank, and Dimitrios Psyllidis, former managing partner of global markets and investment banking at Merrill Lynch International.The two men became co-heads of FICC in January 2010 when Grübel promoted Kengeter to CEO of the investment bank. Last year, Misra and Psyllidis expanded their FICC staff by nearly one quarter, hiring 420 people.The two men have also overseen a sharp improvement in operations, with FICC revenues rebounding to Sf4.7 billion in the first nine months of 2010, compared with a Sf1.0 billion loss a year earlier. Kengeter aims to build FICC revenues to Sf8 billion by 2014.
“UBS has stabilized its investment bank but has to accept that it will not get back to where it was.” — Christopher Wheeler, Mediobanca
Now that UBS is no longer in danger of capsizing, Grübel must demonstrate that he can get the ship back up to speed. The bank has posted four straight quarters of profits since the fourth quarter of 2009. Its Sf5.9 billion of earnings, on Sf24.9 billion in revenues, in the first three quarters of 2010 outstripped Credit Suisse’s Sf4.3 billion in earnings and Sf23.7 billion in revenues and Deutsche Bank’s €4.1 billion and €23.5 billion. The investment bank accounted for two thirds of group revenues but less than half of pretax profits in the first nine months of 2010. By 2014, UBS is targeting investment bank revenues of Sf20 billion, or 45 percent of group revenues, and pretax profits of Sf6 billion, or 40 percent of the group total. Many analysts doubt that Grübel and his team can meet those targets. “UBS has stabilized its investment bank but has to accept that it will not get back to where it was,” says Christopher Wheeler, London-based banking analyst for Mediobanca. The investment bank has been recruiting aggressively to regain lost ground, hiring more than 900 staff in 2010.The top priority has been fixed income, currencies and commodities (FICC), the unit that ran up the bulk of UBS’s massive losses. In 2009, Grübel and Kengeter poached from two key rivals to start the FICC rebuild, hiring
In equities the bank last year hired 320 people, or 11 percent of the unit’s enlarged head count.The key recruit wasYassine Bouhara, former head of global cash equities at Deutsche, whom Grübel and Kengeter lured in September to become co-head of equities alongside UBS veteran François Gouws.The two will have a tough task trying to restore UBS’s precrisis equities franchise, which dominated the investment bank’s revenues before 2008. “Equity trading revenues are currently running at half the level they were before the crisis and well below what they were expected to perform postcrisis,” says Mediobanca’s Wheeler. In the first nine months of 2010, equities generated Sf3.5 billion in revenues, down from Sf4.0 billion for the same period the year before. By 2014, UBS is targeting Sf7 billion in equities revenues. In corporate finance, UBS last year hired 168 bankers, or 8 percent of the division’s enlarged staff. Revenues, including M&A advisory, totaled Sf422 million in the first three quarters of 2010, down from Sf698 million in the same period the year before.The figure is well short of the Sf4 billion that UBS is targeting by 2014. Pressure is building to demonstrate that the hiring binge will deliver the targeted revenues. “We need to arrive at a much better compensation-income ratio,” says Kengeter.
That ratio was a bloated 80 percent for the first nine months of 2010, far above Goldman Sachs’ 39.3 percent last year but not much worse than the 77 percent recorded by Credit Suisse, which also expanded its payroll. “Whenever you hire a lot of people in a short period of time, some mistakes will be made and have to be corrected,” says Kengeter. New hiring, he adds, will focus on more salespeople for FICC and equities.This puts a special onus on two key executives: Neal Shear, global head of securities businesses, and Roberto Hoornweg, global head of securities distribution. Both joined UBS in January 2010 from Morgan Stanley, where Shear was co-head of sales and trading for equities and fixed income and Hoornweg was head of global interest rates, credit and currencies. The investment bank has claimed some wins in its corporate advisory efforts, especially in the second half of 2010. Two of its biggest deals involved emerging-markets companies. “It’s a trend in which we hope to become increasingly involved,” says Alexander Wilmot-Sitwell, who headed corporate advisory and finance as co-CEO of the investment bank before being appointed co-chairman and co-CEO of UBS Group Asia-Pacific in November. UBS advised Kuwaiti telecommunications operator Zain Group on a $12 billion deal announced in September by Etisalat, the United Arab Emirates phone company, which agreed to purchase 46 percent of Zain. And in October, UBS was lead adviser to VimpelCom, Russia’s second-largest mobile operator, on its $6.6 billion acquisition of Weather Investments, an Egyptian company that owns Italian mobile operator Wind Telecomunicazioni and has a controlling share in Middle Eastern telephone company Orascom Telecom Holding. UBS provided some of the financing in both deals. Notwithstanding those signs of recovery, UBS has a long road ahead as it seeks to regain its precrisis status and profitabilty. Last year it ranked eighth in overall investment banking revenues, with $2.76 billion, half of market leader JPMorgan Chase & Co.’s $5.34 billion, according to Dealogic. In debt capital markets, UBS ranked fifth, acting as book runner on $301.4 billion worth of deals, according to Dealogic. That was slightly ahead of sixth-ranked Credit Suisse’s $299.7 billion but far behind market leader Barclays Capital’s $461.2 billion. UBS also ranked fifth in INSTITUTIONALINVESTOR.COM
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equity capital markets, handling deals worth $51.2 billion, two notches above Credit Suisse’s $45.7 billion but well below topranked Morgan Stanley’s $78.2 billion. Only in the booming Asia-Pacific market has UBS been able to retain its standing. In 2010, for the eighth consecutive year, it was the top-earning investment bank in the region, with an estimated $547 million in revenues, ahead of JPMorgan ($532 million) and Credit Suisse ($515 million), according to Dealogic. But executives acknowledge that the bank’s lead is eroding as competition stiffens. “Everybody is pursuing the same strategy, and margins are compressing,” says Wilmot-Sitwell. A costly bidding war is under way for experienced bankers and financial advisers. Some key UBS personnel losses to rivals last year included Steven Barg, head of global capital markets for Asia, who joined Goldman Sachs as its co-head of equity capital markets for Asia ex-Japan; MarkWilliams, head of equity capital markets for Asia, who moved to the same post at Nomura Holdings; and Henry Cai, chairman of Asia investment banking and head of China investment banking, who became Deutsche Bank’s chairman of corporate finance for Asia and head of Deutsche’s corporate and investment bank in China.To replace these losses, UBS turned to its own
agement division recorded net client inflows in Asia throughout the recent crisis. Asian clients are critical to Grübel’s onebank strategy. “In this region probably more than anywhere else in the world, we see great overlaps between private ownership and corporate activity and between the private wealth business and the investment bank,” says Wilmot-Sitwell. In Japan, for example, wealth management clients have access to capital-protected structured products based on a currency strategy index devised by the investment bank that hedges ten major currencies worldwide. The integration of the investment banking and wealth management research departments also puts a greater accent on Asia. The combined research staff of about 900 is down from almost 1,200 before the crisis, “but we have increased our emphasis on Asia,” says Mark Steinert, the London-based global head of research. In China alone the bank will have 100 researchers by early next year, five times as many as in 2007. The Asia-Pacific region has also given a much-needed boost to UBS’s offshore banking business, which has been damaged by the scandal in the U.S. and is under assault in Europe. Switzerland accounts for more than a third of the world’s estimated $6 trillion of unreported offshore banking assets. Neither
In Asia, “we see great overlaps between private ownership and corporate activity and between the private wealth business and the investment bank.” — Alexander Wilmot-Sitwell, co-CEO for Asia-Pacific
roster of experienced Asian hands, some of whom had moved to Europe but were brought back to the region.They include Peter Burnett, who was named chairman of global capital markets for Asia, and Sam Kendall, appointed head of equity syndicate for Asia. UBS views Asia as its fastest-growing market and has set a 2014 revenue target for the region of Sf8.5 billion, or 25 percent of total group revenues, up from 17 percent currently.According to consulting firm Booz & Co., by the end of this year, one third of the world’s high-net-worth individuals will live in Asia, 2 percent more than reside in the U.S. and 6 percent more than in Europe. Crucially for UBS, the bank’s wealth manINSTITUTIONALINVESTOR.COM
UBS nor Credit Suisse discloses offshore figures, but according to Mediobanca analyst Wheeler, offshore accounts make up about 15 percent of assets under management at each bank.“Offshore banking remains a core business of wealth management,” says UBS division chief Zeltner. That business is under threat in Europe, however. New tax agreements on the horizon between the Swiss government and the U.K. and Germany would allow British and German citizens to retain undisclosed bank accounts in Switzerland but would require the bank to pay taxes on those accounts to the clients’ home countries. Once the agreements go into effect, they will almost cer-
tainly be extended to other European Union countries. UBS expects foreign clients to withdraw as much as Sf40 billion because of these tax deals, but some fund managers believe the total could be far higher. Any shrinkage in European offshore accounts would hit UBS’s bottom line hard, says Oliver Flade, Frankfurt-based financial sector analyst for Allianz Global Investors. The Swiss banks “are able to charge clients very high prices on these undeclared assets, and the clients haven’t demanded much service,” he says. “But when they become onshore accounts that compete with banks elsewhere in Europe, the Swiss bank fees will have to come down from 140 to 150 basis points to 70 or 80 basis points, and the banks will have to service these accounts more.” Although he doesn’t dispute this analysis, Zeltner insists that offshore banking continues to appeal to clients in high-growth emerging markets in Asia for reasons other than tax evasion. He cites the example of an Indonesian industrialist who opted for offshore accounts in Singapore and Hong Kong to get around local laws that limit investments to domestic securities and mutual funds. Moreover, according to Zeltner, there is a growing synergy between offshore and onshore banking, especially in Asia. Offshore banking hubs in Singapore and Hong Kong are booking centers for clients in China, Taiwan, Japan, Australia and other nations where UBS is in the lengthy and expensive process of building up its onshore presence. That’s why it is important, says Zeltner,“that clients can book wherever they want and we can service them offshore or onshore.” As the investment bank struggles to regain its once-lofty global standing, wealth management has stepped into the limelight. At this point, says Citigroup analyst Lakhani, “the UBS story is more about wealth management than investment banking.” Wealth management finally showed net new inflows in the third quarter of 2010, though they were a measly Sf1.2 billion — “nothing to write home about,” says Zeltner. Still, during the first nine months of last year, wealth management had pretax profits of Sf1.85 billion, close on the heels of the investment bank’s Sf2.1 billion. By 2014 the wealth management and asset management units are projected to generate Sf7 billion in pretax profits. In contrast to investment banking, wealth management stands to profit from Swit-
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zerland’s more stringent capital requirements. “If our investment bank has to hold more capital than our competitors, then our pricing may be less competitive in capitalintensive trading areas,” says chief financial officer John Cryan. Wealth management, however, “benefits from us being viewed as supersafe,” he contends. Although regulators have not finalized their so-called Swiss finish of additional capital requirements, UBS has promised to raise its core tier-1 capital ratio — now an industry-leading 14.2 percent — to nearly 16 percent by 2014, even if that means continuing a no-dividend policy dating back to the crisis.
Global Wealth and Investment Management unit. Despite the heralded appointment of Robert McCann as chief executive in 2009, WMA’s pretax profit margin of 3 percent in the first nine months of 2010 was far behind the industry norm of 20 percent during the previous ten years. The biggest problem is WMA’s high compensation ratio — 79 percent of revenues for the first nine months of 2009, compared with Morgan Stanley GWMG’s 61.5 percent. Despite the unit’s pretax loss of Sf99 million in the first nine months of 2010, Grübel insists that “WMA qualifies as a core business.” And he has set a 2014 pretax profit
“Clients still have scars from the crisis. We need to work the book and bring them back to the equity markets.” — Jürg Zeltner, head of wealth management
But a high capital ratio won’t be enough to generate the client fees and profit margins of the precrisis glory days. “Clients still have scars from the crisis, so their asset allocation is mainly bonds and cash,” says Zeltner. “We need to work the book and bring them back to the equity markets.” UBS also has to persuade clients who lost confidence in the group in recent years to again give the wealth management unit full discretion in managing their money. Then there is the question of pricing.The $200 billion-plus outflows during the crisis prompted UBS to slash fees and commissions in a bid to slow the stampede. Now that UBS is no longer endangered and is delivering solid investment returns for wealth management clients, says Zeltner, it can demand higher fees. If all four of these drivers are in place, says Zeltner, the gross margin at UBS Wealth Management will increase from an estimated 93 basis points in 2010 to a target of 100 basis points by 2012. But that will still leave UBS trailing Credit Suisse, which had a gross margin of more than 110 basis points in 2010. The picture in the U.S. is more challenging still. Wealth Management Americas, run as a separate unit, had $673 billion in invested assets in the third quarter of 2010, compared with $1.6 trillion at Morgan Stanley Global Wealth Management Group and $1.5 trillion at Merrill Lynch & Co.’s
target of Sf1 billion for the unit. “Our aim in the U.S. is to focus on the more affluent client segments — people who, on average, have a million dollars or more in financial assets,” says Grübel. As a measure of his seriousness about the U.S. market, Grübel reassigned his chief risk officer, Philip Lofts, to become CEO of UBS Americas in January. UBS is also attempting to repair its reputation in Switzerland. Swiss banking operations are targeted to provide annual pretax profits of Sf1.9 billion by 2014, compared with Sf6 billion for wealth management and Sf6 billion for the investment bank. But that doesn’t begin to convey the political importance of the home market, where the financial sector employs 5.8 percent of the workforce and accounts for 12 percent of national income. UBS’s mishandling of the financial crisis has revived a long-running debate in Switzerland about the dangers of megabanks in such a small country. “The big Swiss banks have a long history of changing the financial landscape because of their involvement in huge scandals,” says Hans Geiger, a banking scholar at the University of Zurich. He cites the so-called Chiasso affair in 1977, when Credit Suisse lost some Sf3 billion — equivalent to most of its capital at the time — in a case involving fraud by one of its bankers. That led to higher due-diligence requirements and more-stringent know-your-client rules for Swiss banking.
The UBS fiasco and resulting bailout could prompt more dramatic regulatory reforms. Early this year the Swiss Parliament will consider a government commission’s recommendation that Switzerland rescue only the domestic banking operations of the two big banks if there is another crisis. While popular among substantial numbers of voters, the proposal arouses skepticism among banking experts. “I don’t see how one part of a bank can be rescued and the other allowed to fail,” says Manuel Ammann, director of the Swiss Institute of Banking and Finance at the University of St. Gallen. “When confidence evaporates, usually the whole bank goes down.” In the meantime, UBS is pursuing a whirlwind courtship of its Swiss base. In the midst of its cost-cutting campaign, UBS announced a $300 million renovation of its 300 Swiss branches — largely ignored during its global push — over the next three years.With 1.3 million clients nationwide, or one out of every third household, UBS has a large-enough domestic presence. “We aren’t trying to attract more clients, but to sell more products to the ones we have,” says spokesman Peter Hartmeier. Every year Sf4 billion to Sf5 billion of retail assets migrate to wealth management. “The retail bank has become a feeder business to wealth management,” says COO Körner. By last summer, UBS felt it had achieved enough of a turnaround to launch its first global branding campaign since the crisis began, under the slogan “We will not rest.” According to Grübel, the slogan is meant to convey “that we know what we are doing and that we are looking after our clients.” Grübel himself promises not to rest, either, until his job is done. “Do I look like I am about to retire?” he says in response to the inevitable question about his advancing years. “From the beginning, I said I wanted to stay long enough to get UBS back to sustainable profitability.We are profitable again, but it isn’t yet as sustainable as I want it to be.” According to his goals, that point should come in 2014, when he will be 71. Grübel points out that there is no retirement age at UBS. “A chief executive can stay until he drops dead,” he says, but adds, “I hope the board will replace me before then.”
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continued from page 55 recruit people here.
I’ve never had a problem recruiting people.” Nomura, which took over Lehman Brothers Holdings’ non-U.S. operations in late 2008, has made Hong Kong the base for its Asia ex-Japan operations. The firm employs 1,200 people in the city; the team includes Jasjit (Jesse) Bhattal, head of global wholesale banking, and Rachid Bouzouba, global co-head of equities. The firm continues to hire “selectively” in Hong Kong, Lynch says. “After the financial tsunami that came after the collapse of Lehman Brothers, we have seen the economic gravity shift to Asia,” says Edward Leung, chief economist for the Hong Kong Trade Development Council, the government agency that oversees global trade and marketing. “We see many financial institutions expanding here and more hedge funds coming here to look for opportunities.” Big regional players that avoided big
So is Morgan Stanley. So Asian banks now face intense pressure fromWestern banks.” Citigroup, which last year repaid its U.S. government bailout funds, is selectively hiring across the board, executives say. The bank is one of the largest financial employers in the city, with more than 4,000 staff, and was lead coordinator of AIA’s IPO last year. “Hong Kong is one of Citi’s most important markets globally, and we are investing more into Hong Kong than at any point in our history to support our clients,” says Stephen Bird, the Hong Kong–based CEO for AsiaPacific, adding that Citi expanded its Hong Kong branch network from 25 to 43 last year. “Hong Kong is also now clearly a major global listing hub, and with our global franchise we are also seeing increased interest from our global clients to raise capital from Hong Kong.” Tokyo-based Daiwa Securities Group, which spent $1.2 billion last year to acquire the global convertible bond and Hong Kong–based Asia equity derivatives businesses of Belgium’s KBC Group, invested an additional $1 billion in global expansion in 2010, much of it centered on Hong Kong. The firm now employs 530 bankers and support staff in the city, more than twice as many as it did in 2009, according to Kozue Niida, head of corporate planning. Hong Kong is also benefiting from an expansion of Chinese institutions, which regard the city as their doorstep to the global
“China will be an exporter of capital. That means Hong Kong will have a role to play to help Chinese companies invest abroad.” —K.C. Chan, Financial Services and the Treasury
losses during the financial crisis have been the most aggressive in expanding in Hong Kong, but even Western banks that suffered large losses have been hiring in the city recently, seeing Asia as one of the most promising growth markets. “The banks that were not damaged by the financial meltdown of 2008 were Standard Chartered and Asian banks, and they were in constant hiring mode,” says CCB International’s Schulte. “Their businesses blossomed while the other Western banks were in survival mode. Now banks like Citi and HSBC are roaring back. JPMorgan is stabilizing. INSTITUTIONALINVESTOR.COM
markets. Citic Securities, China’s largest brokerage house by market capitalization, has hired more than 150 bankers and support staff in Hong Kong since the outbreak of the financial crisis, bringing its total head count in the city to 350. Even smaller players are keen on expanding in Hong Kong. RBC Capital Markets, a subsidiary of Royal Bank of Canada, last year moved Mark Lowings, head of treasury for Europe and Asia, to Hong Kong from London. “It is part of our view and commitment to this part of the world,” says Andrew Turczyniak, CEO of RBC Capital Markets
Asia. “We had a treasury team of two and now have a team of six. Liquidity is rising, and there is rising demand among Asian clients for treasury management.” The firm has also tripled its Hong Kong currency and fixed-income trading desk, to 104 staff from 35 in 2007. Banco BilbaoVizcaya Argentaria, Spain’s second-largest bank by assets, has seen the share of its profits generated in Asia rise from next to nothing four years ago to 5.8 percent in the first nine months of 2010, largely because of earnings from its investment in China Citic Bank Corp. In the past few years, BBVA has invested a total of $5 billion for a 15 percent stake in China Citic Bank and a 30 percent stake in its Hong Kong subsidiary, Citic International Financial Holdings. China Citic Bank, like Citic Securities, is a subsidiary of Citic Group, a leading Chinese financial and industrial holding company. BBVA is also building up its own presence in Hong Kong. The bank has expanded its staff in the city from 20 to 200 in the past four years, with more than half of those employees working in investment and corporate banking. “In the next two years, we plan to hire at least 100 people,” says Manuel Galatas, the bank’s head of Asia operations. The growth will focus on servicing Asian customers investing in Latin America, where BBVA has a major presence, and helping Latin American companies raise capital in Hong Kong. “When I came to Asia, my superiors told me to pick between Beijing, Shanghai and Hong Kong,” Galatas says. “The decision was easy. In terms of corporate and wholesale banking and trade finance, and in terms of finding human resources to service these key businesses, Hong Kong is the best place to have regional responsibilities. Most of the people we have been hiring have some sort of China experience, given our relationship with Citic.” Thanks to Hong Kong’s strong fundamentals, Galatas, like most bankers in the city, is bullish on the outlook for growth. “Hong Kong today has become as important as NewYork for BBVA’s treasury business, and we have been in New York for 50 years,” he says.
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continued from page 59 enterprise value,
where it can have the most direct influence on strategy, targeting, among others, corporate spin-outs and companies owned by their founders, with all their quirks. The companies in which CCMP invests are hardly household names — Crosstown Traders, a direct marketer of women’s clothing based inTucson,Arizona, orTennis Channel in Santa Monica, California. CCMP’s partners roll up their sleeves and reorganize, restructure and restrategize to generate big profits from their holdings. Before going independent, CCMP, which oversees $7.4 billion in private equity assets, invested around the globe, including in Asia and Latin America, in mezzanine debt, real estate, venture capital and other areas. It has since narrowed its scope to buyout and growth equity in North America and Europe, where it had the best track record, focusing on only a handful of sectors: consumer/retail and media, energy, health care and industrial. Murray recently hired Robert McGuire, 46, former vice chairman of JPMorgan Cazenove, in London to expand the firm’s European operation. “CCMP has the right recipe,” says André Bourbonnais, who oversees private equity investments for the Canada Pension Plan Investment Board, one of CCMP’s biggest investors, with a $368 million investment. “They’re not trying to be everything to everyone. They really focus on four or five core sectors, and they have people with operational expertise in each. If you can deliver operational results, you’ll really be able to distinguish yourself.” CCMP’s own operation is a meritocracy by design. Brenneman and Murray lead a 12-person investment committee that must approve every deal, but most of the firm’s 69 other employees, including 15 analysts, get involved in the investment process at some stage.
Now, after a period of abstinence, Murray and his team are leveraging their two decades of experience turning around companies. Last year, CCMP did three deals: It bought controlling stakes in Francesca’s Collections, a family-owned retailer that wanted liquidity, and Infogroup, a troubled information company with significant upside; and it became the single largest shareholder in Chaparral Energy, an independent oil and gas company with too much debt and underexploited assets.These investments came on top of four in its first fund, CCMP Capital Investors II: a $128 million investment in Plano, Texas–based LHP Hospital Group; a $160 million acquisition of Edwards Limited, a U.K. technology company that makes industrial vacuums; a $212 million stake in Aramark Corp., a Philadelphia-based food service and facilities management provider; and a $433 million investment in Generac Power Systems, a Waukesha, Wisconsin, company that manufactures generators. CCMP’s focus on operations isn’t unique. Eric Dobkin, the founder of equity capital markets at Goldman, Sachs & Co. who led the underwriting of such titans as Microsoft Corp., says every private equity firm these days will boast that it has the capability to manage these businesses, but few have a track record that can support that claim. “There are lots of financiers, but not as many owner-managers,” says Dobkin, who retired as a general partner in 1999 but still serves as an advisory director to Goldman Sachs Group and a member of the firm’s commitments and capital committees. Dobkin, like Dimon, says Murray is different from other leaders in that he is very open to new ideas and will implement advice. It was Dobkin who recently advised CCMP to hire someone in London to gain critical mass overseas. Murray’s firm has done what everybody is now trying to do: a back-to-the-future approach to private equity in a postbubble environment for deal making. With many investors skeptical of private equity since liquidity dried up in 2008 — that fall, managers kept calling capital in the face of their own funding problems as the value of portfolio companies cratered — private equity firms realize that operations experience is essential. “It’s patience and discipline,” Murray says. “The industry expertise that everybody preaches, we’ve been doing for 25 years.” Jonathan Lynch, 43, a partner whose easy
smile balances the CCMP CEO’s rougher edges and who has worked with Murray since the early 1990s, adds that the firm’s discipline prevents financial catastrophes and offers downside protection for shareholders. “The difference between us and competitors is that we’ll wait for a better entry point — price — for a company,” he explains. “We’re not going to jump at a deal just because it’s actionable.We know the cycles.” MOST OF THE MEMBERS OF CCMP’S
leadership team began honing their operations skills and instincts for deal making in the 1980s, as the modern private equity industry was taking shape. In 1983, seven years before Barbarians at the Gate would immortalize Kohlberg Kravis Roberts & Co.’s then-record $25 billion leveraged buyout of RJR Nabisco, a young Jeffrey Walker, a few years out of Harvard Business School, made a proposal to Chemical Bank’s board to set up a venture capital operation. (The term “private equity” wasn’t yet in use.)The board made a $200 million commitment to the group, which would be called Chemical Venture Partners, the first private equity partnership within a bank. A year later, Manufacturers Hanover hired recent Boston College graduate Murray into its credit training program. He became a vice president in the middle-market lending division in 1989, and although rival banks tried to recruit him, he showed early signs of the patience that would later define his career. “I thought it was too easy to jump from job to job,” says Murray, who went on to get his MBA from Columbia University while working at the bank. “I recognized I was around smart people who could teach me a lot.” In 1989, Murray, who grew up about 30 miles north of Manhattan in North Tarrytown, New York, joined newly reorganized MH Equity Corp., which combined Manufacturers Hanover’s private equity group with its leveraged finance unit. MH Equity began doing midmarket leveraged buyouts of traditional manufacturing and retail companies — part of the focus CCMP has today — as well as some co-investments with bank clients. Murray, who can accurately recall the details of deals he worked on 20 years ago, was successful, making four times the group’s money on Minneapolis supermarket chain Byerly’s and seven times its money on an investment in Deltak, a Plymouth, Minnesota–based INSTITUTIONALINVESTOR.COM
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engineering and manufacturing company. Colleagues say he expects the same cold command of details from staffers. In 1991, Chemical Bank bought Manny Hanny, as its rival was popularly known.The merger united MH Equity’s four investment professionals with a half dozen partners from ChemicalVenture Partners, including Lynch, who today heads up investor relations for CCMP and is a deal partner and a member of its investment committee.Walker, who took over the combined group and would be Murray’s boss for the next decade and a half, created an entrepreneurial environment where everybody did their own deals and got their hands dirty fixing what wasn’t working in their companies — an experience crucial to CCMP’s current success. Walker was known as a brilliant investor who didn’t think there was anything his group couldn’t do, pushing into mezzanine debt, real estate and global investing. In 1996, Chemical Bank merged with Chase Manhattan Corp. and Chemical Venture Partners was renamed Chase Capital Partners. Walker remained at the helm. Chase Capital had a reputation as a venture firm, largely because that was Walker’s passion, even though 35 percent of its deals were LBOs. Murray oversaw the best and biggest buyouts and was the group’s star deal maker. In 2000, JPMorgan and Chase merged, bringing the group its first significant outside money.Two years later the group, which had changed its name to J.P. Morgan Partners, raised an institutional fund that CCMP still manages today. The Global Investors Fund was made up mostly of money from the bank, but it also had limited partners such as Canada Pension Plan and the State of Michigan, as well as JPMorgan’s wealthy private clients. Outside JPMorgan, private equity was changing fast. Funding was now coming primarily from huge institutions such as pension plans rather than from high-net-worth investors.The nature of the investors would ultimately affect the size of the funds raised and the types of companies that private equity firms pursued. Blackstone Group, KKR,Texas Pacific Group and others were launching megafunds that would invest in larger companies in a broad range of industries anywhere in the world. In July 2004, JPMorgan bought Bank One, setting the stage for Dimon to run the merged bank and for J.P. Morgan Partners INSTITUTIONALINVESTOR.COM
ultimately to be spun off. Dimon wanted to reduce the bank’s exposure to private equity. He also believed that there could be conflicts in managing the bank’s money alongside client money. “I wanted to make sure that we didn’t get in a position where JPMorgan’s needs as a bank prevented us from doing something for a client somewhere,” Dimon says. In the mid- to late 2000s, private equity firms relied on balance-sheet maneuvers to eke out value from the companies they were buying. That meant better management of working capital — taking out cash, for example, by reducing inventories — and layering debt on a company to pay dividends to shareholders.The recipe was simple:Take a company private, clean up its balance sheet, and quickly take it public again. Private equity firms even started selling companies to one another, with the new buyer hoping there would still be value to be squeezed out. At J.P. Morgan Partners’ 2005 annual investor meeting, Murray raised concerns
retired in January 2008 to a full calendar of philanthropic ventures. (He had been intimately involved in the nonprofit world during his long career.) Murray in fact had been playing a major management role well beforeWalker’s retirement. It was his idea to elevate longtime members of the team like Lynch, Christopher Behrens and Timothy Walsh — all now part of the investment committee — to lead their industry sectors. Murray also squashed what he calls CCMP’s “pumpkin-shaped” organizational structure.The problem, he says, is that CCMP had too many midlevel managers who didn’t have enough experience to truly make a difference but had too much experience to check their egos at the door. Murray — who Walsh humorously says has a “managed ego” — is careful to point out that he has picked people whose egos won’t get in the way of working closely with companies well outside the financial hubs of Chicago and NewYork. “I don’t believe that the world wants another 31- to 36-year-old with a high opin-
“I don’t believe the world wants another 31- to 36-year-old with a high opinion of himself and a NewYork worldview.” — Stephen Murray, CCMP Capital Advisors
about ever-higher deal prices, growing leverage and narrowing credit spreads. “Murray doesn’t sugarcoat tough news,” says Simon Guenzl, partner at $7.3 billion Paul Capital, a pioneer in the business of buying existing private equity interests from institutional investors. “He’ll give you a straight answer, and he focuses on doing the best thing by his investors rather than on his ego.” To help formulate CCMP’s strategy following the spin-off, Murray asked Lynch to analyze the performance of all the group’s deals. Lynch, a Chicago native with an MBA from Harvard, found that the group had been most successful in growth equity and buyouts in North America and Europe. Murray, who believed that investors would increasingly allocate money to specialized private equity firms, pushed CCMP to cut back on its less successful specialties.The firm shed its Asia, Latin America, mezzanine finance and real estate teams, among other areas. As his role within CCMP grew, Murray was the natural successor to Walker, who
ion of himself and a New York investment worldview,” Murray adds. “That doesn’t play in Albuquerque.” Murray replaced the pumpkin with an hourglass in which very senior operatinglevel people are supported by scores of junior analysts. Indeed, the firm now has only three titles: associate, principal and partner. Murray kept the Monday morning meetings Walker had instituted, a forum for ideas and for younger members of the firm to interact with the investment committee. At the meetings everybody is included and no one is too junior to offer up an investment thesis. However,“he hates when people make general statements,” Walker notes. “He says, ‘Prove it.’” Analysts and partners first identify industry trends, including disruptions in industries, and valuation anomalies among companies.They then discuss specific investments and offer actionable ideas to target them.The operating team uses its extended networks and other contacts to execute those ideas. In the health care sector, for example,
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current themes include home health care, which should benefit as the U.S. government looks to reduce rising costs in a country with a rapidly aging population and generic pharmaceuticals. FOR MURRAY, ONE OF THE KEYS TO
CCMP’s ultimate success was attracting experienced operators, starting with Brenneman. Murray saw his skills firsthand when CCMP invested in Quiznos for J.P. Morgan Partners Global Investors Fund in 2006. After Brenneman talked to his longtime friend Dimon about investing in Quiznos, Murray persuaded Brenneman to become CEO of the sandwich chain that year; the new chief executive spent the next 18 months recalibrating its strategy.That was enough time to convince Murray he wanted Brenneman permanently on his team. Murray tapped Brenneman in September 2008 as working chairman and a member of the investment committee, which must unanimously approve all investments. Brenneman, a deeply religious man who grew up Mennonite in Kansas and who with his wife mentors young couples in their church, says that although other private equity firms recognize that CCMP’s model
ers wanting to take a stake in the rapidly growing retail chain. Instead, he made a phone call to Brenneman to arrange a meeting. His old buddy, though, was hopping a plane from Houston to Seattle. “I can’t wait until he comes back,” De Meritt told Brenneman’s assistant. “Let me fly with him.” Brenneman agreed. During the flight, De Meritt told him that he knew CCMP wasn’t going to come in with the highest bid but that Francesca’s wanted the firm’s operational expertise and financial discipline. CCMP has a long history with idiosyncratic familyand founder-owned companies, of which Francesca’s was one. It also has a strong track record with retailers, including Cabela’s, 1-800-Flowers andVitamin Shoppe. “We figured out the max you’re going to be willing to pay,” De Meritt recalls telling Brenneman. “And it’s not the max we could get. But we want to get Francesca’s into the right hands with people we trust and close it quickly.” In February 2010, CCMP won Francesca’s without a formal auction process, paying $209 million in an all-equity financed transaction for an 81.5 percent stake in the retailer; this was 8 times estimated earnings before interest, taxes, depreciation
“We want to get Francesca into the right hands with people we could trust.” — John De Meritt, Francesca’s Collections
is successful, they are unlikely to copy it because of the partnership dilution. “They’re short-term greedy,” says Brenneman, who works out of an office in Houston and has an 11-year-old Wheaten terrier named Texas. He quips, “We’re longterm greedy.” Brenneman is upbeat and always has a funny story to tell, whether it’s about negotiations with union pilots when he was president of Continental from 1994 to 2001 or about negotiating with his son Andrew when it came to financing his college education. He also inspires loyalty. John De Meritt, CEO of Francesca’s, is an old friend of Brenneman’s from their days at Continental. By December 2009, De Meritt was unsatisfied with the promises and strategy ideas he was hearing from private equity firms eager to do deals again and from bigger retail-
and amortization, according to bankers. A Korean family founded Francesca’s as a discount alternative to the upscale and popular Anthropologie and similar boutiques.What made it attractive to investors was its formula of creating a treasure hunt for consumers in odd — read inexpensive — real estate. Almost all of its 208 stores open for at least one year are profitable. Brenneman characterizes the process of working with Francesca’s as collaborative. In this case, the family didn’t need equity to fuel growth — the business generated plenty of cash for that — but it did want liquidity. CCMP tapped its network to help De Meritt build his team, hiring a chief financial officer, chief information officer and chief marketing officer, and put in place a strategic plan to grow the company. It also helped Francesca’s take advantage of the weak real estate market
and add 50 stores last year.The retailer is on pace to open 300 new stores by the middle of this decade. In 2010, Francesca’s outperformed its plan, with sales up 71 percent and ebitda up 72 percent from the previous year. In November, Francesca’s completed a recapitalization and funded a $100 million dividend to shareholders, and it’s readying the company to go public next year, according to bankers. Former Dow Jones CEO Zannino joined CCMP as a managing director, member of the investment committee and co-head of the consumer/retail and media team with Kevin O’Brien. It’s not surprising that Zannino, a quietly confident but warm and fresh-faced executive, was interested in Infogroup, a company well known in database marketing and one of a handful of dominant businesses collecting crucial information on consumers in the Internet age. When Zannino was at Dow Jones, he came face-toface with the power of database and direct marketing and the precipitous decline in traditional advertising models. After transforming that company from a business that derived 70 percent of its revenue from newspapers into an online juggernaut, Zannino saw the potential of Infogroup. He also knew Infogroup’s banker, Evercore Partners, from his days at Dow Jones. Infogroup — founder-owned and a unique business with few competitors and a lot of upside potential because its stock price was so beaten down — was a perfect fit for CCMP. That was, of course, if Infogroup survived shareholder litigation and an ongoing investigation by the Securities and Exchange Commission into potential securities fraud by former executives. Zannino and O’Brien, who has been with CCMP and its predecessor companies since 2000, studied Infogroup to identify any possible surprises. They quickly determined that the $500 million-in-revenue, Omahabased company with $90 million in ebitda was essentially a loose confederation of 25 separate $20 million businesses that had been acquired over the years. “They had 25 different businesses with 25 different sets of competitors and customer bases, and a management team we wouldn’t be able to rely on,” says Zannino. “It scared quite a few buyers away.There were just too many moving parts, and they didn’t have the stamina.” INSTITUTIONALINVESTOR.COM
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CCMP had its work cut out for it. Infogroup’s founder had never done compensation or long-term strategic planning. There were huge disparities in what executives were earning, despite their track records. Zannino, O’Brien and their team determined that the separate businesses could be consolidated into four or five groups that would have leverage with customers and could cross-sell products. CCMP also concluded that the SEC investigation and shareholder lawsuits wouldn’t create residual liability. In the end, only a handful of firms came in with final bids. The take-private transaction closed in July 2010 with a $338 million investment by CCMP at $8 a share. On day one, CCMP installed a new management team, including Clare Hart as CEO. Hart, a colleague of Zannino’s at Dow Jones, had been president of Dow Jones Enterprise Media Group, a $700 million entity made up of Factiva and Dow Jones indexes, newswires and licensing and financial information services units. CCMP also hired a new CFO, new heads of human resources and the research group, and a general counsel. It created a new board with many outsiders, including Michael Iaccarino, former CEO of Epsilon Data Management, an Infogroup competitor. Hart is now putting in place new incentive plans and has evaluated the rest of the management team. Zannino says the idea is to transform Infogroup into an end-to-end marketer of data, from campaign development to strategic and financial planning. “We want to become an indispensable partner, not just a clearinghouse of data,” he adds. For CCMP’s energy team, the firm’s April 2010 investment in Chaparral, an independent, Oklahoma City–based oil and gas production and exploration company, was all about rolling up their sleeves and getting dirty. Kurz, 49, who had lived through the Texas oil crisis of the 1980s, and others at CCMP had heard that Chaparral co-founder Mark Fischer was interested in some kind of deal after running into problems when his company was caught in the downdraft of falling commodity prices during the financial crisis. Fischer had built a successful company since 1988 by increasing reserves and production through acquisitions and by enhancing properties in Oklahoma, North Texas and the Permian Basin ofWest Texas INSTITUTIONALINVESTOR.COM
— piling on debt in the process. By the beginning of last year, he needed money to strengthen Chaparral’s balance sheet and continue to grow. Behrens, who focuses on making investments in the energy, distribution and industrial sectors, and Kurz, a petroleum engineer from Texas A&M University with a thick Texas accent, got to work. Behrens handled the financial aspect, leveraging his experience at Chase working out loans for steel, aluminum and basic manufacturing companies in the late 1980s, when those industries were flat on their backs. Kurz, who was responsible for $36 billion worth of oil and gas deals during his nine years at Anadarko, provided technical expertise. Kurz and Behrens came up with a plan that involved developing core assets, including drilling or participating in 300 wells
since he began his career, according to peers, liked the sector and that Generac was owned by an entrepreneur, Robert Kern. Murray says CCMP reasoned that the U.S. had not made the necessary investments in energy infrastructure and that power outages would continue to increase, growing the overall market for generators. Kern had managed Generac well but had not made full use of opportunities such as third-party distribution arrangements. “We like taking an entrepreneurial environment and making it more professional,” says Murray, who led the deal withWalsh. Generac performed well its first year. But then came the recession, and sales of consumer durables such as generators, which can cost upward of $20,000, were hit hard. Murray and Walsh spent 2008 and part of 2009 deleveraging the company by buying
“Steve is never defensive. He’s the first to say you’re right about something.” — Jamie Dimon, JPMorgan Chase & Co.
last year. Kurz wanted to use a technique involving the injection of carbon dioxide to force additional oil out of older, depleted reservoirs. The process would more than double Chaparral’s existing reserves. Behrens and Kurz also laid out plans to add a chief operating officer and a new head of the carbon initiative, and to push decision making down to the field level. “Mark had a lot of inventory of assets to go after, but he had to add human capital to the organization,” Behrens says. Behrens emphasizes that Fischer started with just $5,000 and a secretary. “He’s an entrepreneur, so he made decisions himself,” he says. “Most of those were the right ones, but you can only do that for so long.” Adds Kurz, “Mark had looked at initiatives like these over the years, but hiring people from the outside allows him to take the company to the next level.” Not all of CCMP’s investments have been so well timed, of course.The firm invested in Generac, a North American manufacturer of standby power generators for residential and commercial use, in November 2006, not far from the peak of the private equity market. Murray, whose style, personality and approach to deal making have not changed
back some of its debt at steep discounts. By the end of 2009, the company had recovered, and CCMP had helped it enter new markets such as portable standby generators. CCMP decided to take Generac public when the IPO window opened up early last year. On February 11, Generac began trading at $13 a share. (After falling last spring, it has since risen to more than $16 a share.) “We’re very proud,” Murray says. “A lot of deals of that genre didn’t do well.” Private equity is at a turning point. Although some froth has returned to the market — credit is more widely available than some would have thought in the depths of 2008 — the brash deal making of the last decade will not return any time soon. In this environment, Murray is confident that his firm’s discipline and operations experience will give CCMP an edge. A little humility helps too. “Steve is never defensive,” Dimon says. “He’s the first to say you’re right about something.” In the new world of private equity, that kind of attitude is going to be sorely needed.
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and 6,500 registered angels across the nation. Although that is less than the $22 billion invested by venture capital for the 12 months ended September 30, 2010, the capital will reach ten times as many companies as the venture capital money, says Marianne Hudson, executive director of the group. ANGELS ARE NOTHING NEW TO VEN-
ture capital. As early as the 1930s, Laurance Rockefeller was investing his family money in ideas that he personally liked. One was an investment in a little-known St. Louis engineer named James McDonnell that would turn into aerospace and aircraft manufacturing giant McDonnell Douglas Corp. Even afterWorldWar II, Rockefeller continued to invest as an angel until the formation in 1960 of Venrock, the family venture fund. Mitchell Kapor, who founded software maker Lotus Development Corp. and spent a brief sojourn as an institutional venture capitalist with Accel Partners, now is one of the most influential investors in the digital space. Some university professors also have turned out to be unusual angels: California Institute ofTechnology’s Carver Mead, one of the earliest employees at chip maker Intel Corp.; Massachusetts Institute of Technology’s Robert Langer Jr., a life sciences specialist; and Harvard’s Sahlman. Perhaps the most ubiquitous of all angels is Ron Conway. The 59-year-old National Semiconductor Corp. alum and co-founder of PC maker Altos Computer (acquired by Taiwanese computer maker Acer in 1990) started investing on his own in the early ’90s. By 1994 he had decided to do it full-time. “I liked being around entrepreneurs who are inventing things,” Conway explains.“I like the feeling of accomplishment by giving advice.” Since then he has been an investor in the early rounds of almost every major Inter-
net company, including Facebook, Google, PayPal and Twitter. “I am now investing in the fourth generation of Internet entrepreneurs,” says Conway, who runs Silicon Valley–based angel fund SV Angel. He likes to invest at a start-up’s inflection points — to help when it is needed most. Usually, that means investing in the seed round; helping companies build out their management teams and plan their expansion and development strategies; and introducing them to partners and customers. Conway usually invests as much as $200,000 in a million-dollar round for about a 5 percent stake and stays involved for as long as 18 months, until venture capital funds step in to invest. Still, most angels bring little to the table except capital. And many entrepreneurs say a lack of uniformity of practice and involvement has hurt them more than helped them. “When we really needed help, our angels disappeared,” says the founder of a digital start-up in New York. “We took the money because it gave us a quick start. But when we ran into problems, our investors were clueless.”The young Bangladeshi entrepreneur’s advice: Stay away from angels who don’t bring some skills or resources other than money. For some angel investors, the game has been simply to provide enough money to start a company that they then can mark up for a subsequent round of financing. The fast-buck mentality has been harmful to the entrepreneur and the entrepreneurial process. More than half of the ventures seeded by angels have never been able to secure a subsequent round of financing, says the Angel Capital Association’s Hudson. The superangels, through organization and organized capital, are bringing order to this world. More importantly, they have unleashed a level of creativity that traditional venture capitalists have been sorely missing. And in the process they’ve also helped revive America’s technology community. Venture capital has long dominated the technology landscape, going back to 1946, when the transistor was patented and the first institutional venture fund was formed. Since that time, venture capital funds have been at the center of innovation, financing companies ranging from computer makers Hewlett-Packard Co. and Apple to biotechnology pioneers Genentech and
Human Genome Sciences to Internet giants Amazon.com and Google. Although venture capital funds continue to be the money behind the Internet’s most recent rising stars — Facebook,Twitter and Groupon — it’s the superangels who own what has come to be known as Web 2.0., the applications and technology that enable users to interact and collaborate over the Internet. Although mainstream venture capitalists can invest here, and do, what entrepreneurs need most is the wisdom of entrepreneur-investors who’ve cut their teeth in the web 2.0 world, as well as small amounts of capital to help test concepts, investor networks to help develop ideas and complementary technologies to build out businesses. Not surprisingly, for many superangels the initial investments are never large and the expectations are modest: Get a company off the ground, and find an investor or buyer willing to pay a higher price. Palo Alto, California–based Clavier has been one of the more successful exponents of this strategy. Between 2004 and 2007 he invested in more than 20 companies, seven of which were acquired for a total of $350 million and 14 of which have raised north of $200 million in follow-on financing, Clavier notes on his web site. In 2007 he decided to create a formal early-stage fund, SoftTech, and raised $15 million. In a recent regulatory filing, SoftTech said it is planning to raise $35 million for a new early-stage fund.The additional capital would allow it to invest in more companies and take larger stakes. The relationship between angels and venture capitalists has never been an easy one. “Funds that attempt to focus principally on early-stage investment rounds generally haven’t worked,” says Robert Raucci, who used to invest in venture funds for Alliance Capital Management Corp. and now is a general partner with Jericho, New York– based Newlight Management, a growth equity manager that invests in both private and public emerging growth stocks. The lion’s share of the capital that a company needs tends to come from later rounds of financing, meaning that the follow-on capital is going to be largely provided by other investors.“To the extent that most early-stage funds have smaller pools of capital, they will not be in a major position of influence on the future rounds’ valuations,” explains Raucci. “So the early-stage fund is at the mercy of INSTITUTIONALINVESTOR.COM
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later-stage investors to offer valuations that are not very dilutive to its ownership. Basically, other investors get the benefit of the early-stage investor’s hard work.” But superangels have learned from the failures of previous early-stage investors. They are concentrating on a smaller number of deals and working them more intensively. They have feeder relationships with larger funds that will pay a higher price given the superangel’s imprimatur. They are focusing on businesses where they can maximize their expertise and contacts.They are making investments that are not initially highly capital-intensive, and they strike better valuations than traditional venture capitalists because managements view them as early members of the management teams. The first and second waves of technology entrepreneurs in the 1970s and ’80s mostly came out of universities, research labs and tech-intensive companies such as Intel and HP. The newest wave of entrepreneurs in digital media — even Facebook’s Mark Zuckerberg — has had neither the university experience nor the corporate background. So, many superangels have become the new universities and corporate training grounds, and the mentors, for young entrepreneurs. They are providing a level of preparedness and development to early-stage companies that is encouraging many venture capital funds to participate earlier in digital media’s life cycle. Greycroft recently raised $130 million for a projected $200 million fund that 75-yearold founding partner Alan Patricof, one of the deans of venture capital, told institutional investors would co-invest with experienced early-stage investors. In May 2010, Menlo Park, California–based Sequoia Capital was the lead investor in Y Combinator’s $8.25 million superangel fund. And Kleiner Perkins Caufield & Byers, based just up the street from Sequoia on Sand Hill Road, is reportedly planning to launch a fund for start-ups building Facebook applications and integrating with the social network behemoth in other ways. In many respects, superangels are taking venture capital back to its roots by demonstrating that early-stage investments can be successful and profitable, and by creating models to routinely invest in and nurture digital start-ups. Still, most venture capitalists say they are not worried. When asked what impact the INSTITUTIONALINVESTOR.COM
superangels have had on venture capital, Yatin Mundkur of ArtimanVentures in East Palo Alto, California, says:“To state the obvious, none — on nonweb sectors.Their focus has been solely in the web 2.0 arena.” “The difference between superangels and classicVCs is pretty marginal in certain respects,” says C. Richard Kramlich, a longtime venture capitalist and a Menlo Park, California–based founding partner of New Enterprise Associates. “It comes down to whom you are working with and how much mind share you have and what resources are brought to bear in order to add value.” ON FEBRUARY 25, 2009, HOWARD LIND-
zon, a stock trader and hedge fund manager, wrote on his blog: “I truly believe that the growth of the web will return soon and accelerate once again. Those with cash will not sit on it forever and I want to be a part of the next boom even if that means starting Social Leverage during the ‘depression’ of 2009.” Lindzon has been a firm believer in the connectivity between social media and the
shareholders, StockTwits contributors and Wall Street regulars. The event was more of a mingle than an actual interaction. No one at Dewey’s had name tags, and many of the people were previously unknown to one another. But the conversation quickly turned to trading, and by the end of the evening, everyone was talking.The dialogue wasn’t just about publicly traded stocks but also about private companies like Facebook and social game developer Zynga, and it included discussions of contracts and outsourcing. To avoid many of the pitfalls that traditional venture funds face, Lindzon has structured his superangel fund as an operating company, not as a fund. “Social Leverage will invest, help syndicate and also incubate and help businesses grow,” he explains. “We are focused on shareholder value and work off a budget.That said, only if we make good investments can we make returns.” Key to Phoenix-based Social Leverage is having its own investors take ownership of the ideas in which it invests. “The real
“We are focused on shareholder value and work off a budget. Only if we make good investments can we make returns.” — Howard Lindzon, Social Leverage
financial markets.Yes, markets are all about high frequency trading and speed of execution, he says, but there’s also a viral quality to investing — a quality he contends can be harvested only through social networking. Hence his decision in 2008 to start an online community called StockTwits, “where market participants share their very best ideas in a continuous real time and open conversation,” according to its web site. StockTwits aims to follow not stocks but the conversation around them. Day traders and electronic traders, even regular traders, seek to be part of the gossip and banter that exist on most trading floors and brokerage desks, Lindzon and StockTwits co-founder Soren Macbeth believe. But Lindzon, who is CEO of the Phoenix-based enterprise, also believes that physical networking complements the community that digital interaction creates. So in late October he paid a visit to Dewey’s Flatiron, a bar and restaurant in New York, mingling with Social Leverage
question is, how did the investment get sold to investors?” says Lindzon. It is important to let investors understand the huge risk they are taking. “If we communicate that to our partners and work as hard as we can toward our goals, then worrying about what others do is silly,” he says. It would be easy to minimize the overall impact of the superangels by categorizing their investments as a slightly more organized form of angel activity. But some superangels are working at creating a more systematic form of funding, as well as ways to train and educate entrepreneurs and to reduce the risk in the venture business.The most visible of these groups is Y Combinator, a new model of start-up funding founded in 2005 by Paul Graham, Robert Morris, Trevor Blackwell and Jessica Livingston. In the five years of its existence,Y Combinator has started and funded 208 companies. In its first batch, in the summer of 2005, there were eight companies. In the
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summer of 2010, there were 36. Y Combinator companies include Hipmunk, an airline-flight search engine; Loopt, a mobile social-mapping service that lets users see what their friends are doing; and Weebly, a web-site-building toolmaker.When this year began, 143 of the 208 companies were still operating and 16 had been acquired. “We work with start-ups on their ideas,” says Graham, who helped come up with the idea for Y Combinator a few years after Yahoo acquired his software company, Viaweb, in 1998 for $49 million. The partners at Y Combinator, all hackers at some point in their careers, say they’ve spent a lot of time figuring out how to make things people want. So they can usually see fairly quickly the direction in which a small idea should be expanded or the point at which to begin attacking a large but vague one.The questions at this stage range from apparently minor (what to call the company) to extremely ambitious (a long-term plan for world domination).“Over the course of three months, we usually manage to help founders come up with initial answers to all of them,” Graham says. Y Combinator uses what one venture capitalist calls a “spray and pray” strategy. Twice a year the firm invests a small amount of capital ($18,000, on average) in a large number of start-ups and has them move to its offices in Mountain View, California, where for three months it works with them to refine their ideas. At the end of the period, Y Combinator holds a Demo Day during which the companies make their pitches to a large audience of start-up investors. The firm’s visibility and success have led to similar endeavors elsewhere. In 2007 entrepreneurs David Cohen and Brad Feld createdTechStars, a mentorship-driven seed accelerator based in Boulder, Colorado, that has expanded to Boston, NewYork and Seattle. In Providence, Rhode Island, Allan Tear, Owen Johnson and JackTemplin have launched Betaspring. Chicago has given birth to Excelerate Labs. BoomStartup has launched an incubator in Orem, Utah. The value of a firm like Y Combinator isn’t simply in the companies it funds but also in its alumni, the companies that have graduated. It was important to Graham and the other founders to create a supportive community — one that shared knowledge, experience and capital. Not only are the alumni potential partners and technology
sources, they are also important sounding boards and reality checks. “The alumni community is becoming an increasingly large part of the value of Y Combinator — partly because it keeps growing as we fund more start-ups and partly because the members are becoming more successful as they continue working on their start-ups,” Graham says. “But I’d never want people to start applying to YC just to become part of the alumni community, so we’re in a race to increase the value of YC proper as fast as the value of being an alum is increasing.” To be sure, capital and advice come with a price.Y Combinator often receives as much as 10 percent of a start-up. In return, founders typically feel empowered to seek higher valuations and raise capital using individual convertible notes instead of old-style fixedsize equity rounds — notes that enable them to raise the price to reflect demand. “Historically, the very best start-ups often have high valuations,” Graham says. “It’s not necessarily a winning strategy to look for bargains.” Cohen’s approach in building TechStars was somewhat different. The founder and chief technology officer of software company PinpointTechnologies, which ZOLL Medical Corp. acquired in 1998, Cohen had been investing on his own since the early 2000s. It gave him an opportunity to get to know other angels and form the rudiments of an angel network, but Cohen wasn’t fully satisfied. “I liked the idea of angel investing,” he says. “I just didn’t like the execution.” A longtime resident of Boulder, Cohen became aware that there were plenty of entrepreneurial opportunities in the city itself. But the entrepreneurs lacked capital to get organized and, more importantly, lacked mentorship. Cohen wanted to create a system of mentorship that didn’t simply help hatch a handful of companies but also built a lasting entrepreneurial community. To make sure that the launch was smooth, Cohen partnered with Feld, a successful entrepreneur and venture capitalist. (“Brad is one of the most recognizable names in the Rocky Mountain entrepreneurial community,” Cohen says.)Their combined network was enough to start TechStars. The fund’s overall structure is similar to that of Y Combinator. “TechStars fills the start-up funding gap by providing just enough capital to get your idea off the ground. Your new company receives up to
$18,000 in seed funding,” the fund tells visitors to its web site. Companies that are accepted receive extensive mentorship during the summer as well as a chance to present to angel investors, venture capitalists and top media at Investor and Demo Day. In return, TechStars receives 6 percent of their equity. But getting equity and getting rich is not the primary motivation behind TechStars, Cohen says:“I am an investor. I live in Boulder. I want to create a start-up ecosystem that will get everyone here involved.” Certainly, the results have been encouraging. Of the 20 Boulder TechStar alumni, seven have been acquired. For Cohen and TechStars, Boulder was just the beginning. “We are in four of the five most important start-up markets in the country,” Cohen says. VENTURE CAPITALISTS HAVE LONG
recognized the problem of institutionally funding start-ups (too small, too laborintensive). Now they are working on solutions. Sequoia, for example, has invested $2 million in Y Combinator’s latest fund. Other venture capitalists are aligning themselves with superangels such as Ron Conway and Dave McClure for the right to co-invest in postseed rounds. But perhaps the most innovative solution comes from Polaris Venture Partners, which is funding its own incubator, Dogpatch Labs. Jonathan Flint, a founding partner of Waltham, Massachusetts–based Polaris, says venture capital funds have to fundamentally change the way they do business.They’ve not paid much attention to the price at which they buy into a deal because there was always a higher-priced IPO or acquisition to bail them out. But now, with IPOs scarce and the M&A market much more selective, they have to pay attention to the prices at which they invest in a deal. Says Flint, “The way out of the dilemma is to return to venture capital’s roots: source deals early at a natural valuation, a valuation that reflects worth, not market hype; work closely with a start-up in partnerships, not competition; and use the fund’s network of fellow investors, portfolio companies and entrepreneurs to help reach the start-ups’ goals.” The idea is to lower the cost of an investment so that the exit — typically an initial public offering or an acquisition — can be profitable even at lower margins. “You have to change the arithmetic,” Flint says. INSTITUTIONALINVESTOR.COM
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For Polaris, the change agent was Dogpatch Labs, where aspiring entrepreneurs get a desk, Internet connection, coffee and lunch. “Our locations are wide-open, fun spaces that we respectively share with local start-ups,” boasts the Dogpatch web site. “They are sorta like frat houses for geeks.” In 2009, after successfully launching Dogpatches in San Francisco’s Embarcadero Center and in close proximity to MIT in Cambridge, Polaris decided to open one in New York. “We all recognized that there was a significant amount of early-stage activity in New York,” says Peter Flint, the Polaris general partner in charge of the New York Dogpatch, and Jonathan’s brother. “What we were not clear on was the scale of the activity and if this was a flash in the pan.” After spending a few months in NewYork talking with entrepreneurs and other venture capitalists, Peter Flint realized that a new breed of entrepreneur existed and that New York clearly was experiencing organic growth. Although the city boasted many incubators and entrepreneurial work spaces, they were ill equipped to provide the environment that contemporary digital start-ups needed.“We then decided to open Dogpatch Labs, and I raised my hand,” says Flint, a former cable television network executive and professional recruiter. Billy Chasen decided to use Dogpatch to develop Stickybits, an application provider that attaches digital content to physical objects, because by setting up shop there he established regular clear contact with Polaris, one of the lead investors in Stickybits, as well as with New York’s entrepreneurial community. “Dogpatch is a great start-up-friendly space in New York City,” says Chasen. “There aren’t too many of those around.” Chasen, who as a founding member of digital incubator Betaworks himself helped launch a number of applications, enjoys the campuslike environment at Dogpatch. “There’s a lot of help and interaction between companies,” he says. “Everyone wants to help everyone else out because we’re all in the same boat — trying to make something superuseful for people and starting from scratch.” For many entrepreneurs, the community of peers is the real attraction of incubators likeY Combinator and Dogpatch. It’s a way to keep abreast of changes in technology, INSTITUTIONALINVESTOR.COM
get feedback and even find new partners and collaborators. “What we are really benefiting from is being in an entrepreneurial community,” says NewYork Dogpatch resident Joe Essenfeld, co-founder and CEO of Jibe. “There’s a lot of exchange of ideas that wouldn’t happen if you were by yourself.” Essenfeld, a Cornell University graduate and serial entrepreneur, has been involved in start-up projects since high school, each one progressively more ambitious and complex than the last. Jibe is a digital job board that integrates social networks such as Facebook and LinkedIn to enable employers and applicants to leverage the overlap of their social graphs. From previous co-workers to friends who work with a specific company, Jibe recognizes matches among different networks as they apply to job opportunities. In March 2010, Jibe raised $875,000 in seed funding from superangels including Lerer Ventures and established venture capitalists such as Polaris.
ing a business trip, he was frustrated that he was having a hard time keeping up with his friends, and he decided to do something about it. Together with pal Steve Martocci, Hecht created a texting-based application and distributed the program to friends. That app turned into GroupMe, which currently has ten employees and says it now handles millions of text messages by allowing users to create messaging groups and set up conference calls. The response from potential investors was so positive that Hecht and Martocci left their jobs to launch GroupMe on July 1, 2010. For seed capital, Hecht persuaded his family to put up $20,000. By the end of August, GroupMe had raised $850,000 from superangels, with Lerer Ventures being the lead investor. Ken Lerer, who also sits on GroupMe’s board, is the “consigliere, the man,” says Hecht. “He has been tireless in providing
“What we are really benefiting from is being in an entrepreneurial community. There’s a lot of exchange of ideas.” — Joe Essenfeld, Jibe
Currently, there are 14 start-ups at the New York Dogpatch. They range from Stickybits and Jibe to Food52, a cooking web site, and StellaService, which measures online customer service. Jibe, says Essenfeld, is ready to move to a larger space. A slew of other aspiring entrepreneurs are ready to take its place. Success for Polaris is being at the start of the entrepreneurial food chain. “I would like Polaris to establish closer relationships with entrepreneurs and investors,” says Peter Flint. “I would like to find a few deals a year for seed investments and relationships with companies that graduate out of Dogpatch who would be interested in Polaris participating in their Series A financing.We would like Dogpatch to be considered one of the centers of early-stage activity in NewYork.” Jared Hecht, 23, feels that New York already has become a center for early-stage entrepreneurial activity. In May 2009, following his graduation from Columbia University, Hecht began working as business development manager at Tumblr, a New York–based blogging site. One night dur-
introductions, being the voice of reason and in helping the business along.” The interest that GroupMe has generated (anotherTwitter?) created a bidding war for the company’s second round of funding, in December 2010. More than half a dozen venture capital groups made their interest known, including KhoslaVentures and General Catalyst Partners. Less than six months after its first round of financing, GroupMe has raised $10.6 million at a valuation of more than $35 million. The presence of angels such as Lerer, along with their diverse community of businesspeople, media, ad people and techies, makes New York “a blossoming, breathing entrepreneurial community, a developing ecosystem,” says Hecht. Maybe it’s just the time for web 2.0, or simply the gathering of like-minded angels, entrepreneurs and appropriate technologies, but such ecosystems are changing venture capital and the face of innovation in America.
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Comment? Click on Hedge Funds/ A Alternatives at institutionalinvestor.com.
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INEFFICIENT MARKETS UNCONVENTIONAL WISDOM THE FUT
Quality Is Job One
been accustomed to, as consumer For investors, the best way deleveraging will be to navigate global economic followed eventually uncertainty is to stick to the by government highest-quality stocks. deleveraging, BY VITALIY KATSENELSON which comes with higher taxation. There is no place to hide.With every shelter you seek, you assume a different risk. Bonds will do great if we have deflation but will be decimated if we get inflation.There is gold, of course, but IN MY COLUMNS it is not a cash-generating asset, over the past six thus nobody really knows what months, I’ve discussed it is worth.There are industrial many risks that the commodities, but China is the global economy faces. incremental buyer, so even if China, the world’s we have inflation, prices may second-largest economy, is in still decline with plummeting the midst of an enormous over- demand. If you have plenty of capacity bubble in commercial, exposure through bonds or industrial and residential real equities to the countries that estate. Japan, the third-largest have fared the best so far — the and second-most-indebted likes of Australia, Brazil and nation, is in a debt bubble, Canada — don’t expect them addicted to unsustainably low to be spared, as they have been interest rates. Last, the U.S. is the primary beneficiaries of the unlikely to maintain its recent Chinese bubble. rate of growth because it is Okay, before I depress you being propelled by government further: You don’t need to intervention (QE2 comes to reserve a space in a cave stocked mind here). with canned food and ammo. Yes, I’ve been very skeptical But this is definitely the time about the health of the global to own the highest-quality companies.They need to have economy. I don’t know if we’ll strong balance sheets so higher have inflation, deflation or interest rates will not dent their both. It appears that problems profitability.Their businesses in China and Japan will lead to higher global interest rates; need to have a competitive after all, they are the largest advantage so they can raise foreign holders of U.S. debt, prices for their goods or serand as their respective bubbles vices in case inflation hits or burst, they’ll be forced to maintain their prices in case of become net sellers. Over the deflation. And, of paramount next few years, global GDP importance, they need to be growth will be lower than we’ve noncyclical businesses.
For a company to be truly high quality, its business has to be insensitive to the health of the global economy. Interestingly, there is usually a premium that is built into high-quality companies’ valuations, as investors are willing to pay more for lower risk and the certainty of cash flows. Deeply cyclical stocks have traditionally traded at a discount to the market.That’s not the case today: Low quality is expensive, and high quality is dirt cheap. So here are a few companies that we consider to be high quality — companies we own in our accounts.The first two are in health care.Though the passage of Obamacare is behind us and its impact has been relatively low on the industry, stocks did not get the message. Pfizer, the largest drug company in the world, is trading at less than 8 times earnings. It generates enormous cash flows, pays a 4.5 percent dividend (which it just raised) and will be debt-free in the not-so-distant future. But the market puts zero value on Pfizer’s enormous pipeline of drugs and the $10 billion it spends annually on research and development. Medtronic, which makes pacemakers, is trading at 10 times 2011 earnings. If you looked at its stock chart for the past decade, you’d think Medtronic’s business has stagnated. It hasn’t.The company has grown sales and earnings, on average, 14 percent a year over the past ten years. Both Medtronic and Pfizer have a huge tailwind behind them: Baby boomers around the world will be consuming more, not fewer, drugs and medical devices five years
from now, no matter what happens in China or Japan. Cisco Systems and Computer Sciences Corp. Cisco — the maker of Internet plumbing — disappointed Wall Street last fall, and the stock was taken out back and shot. Today it is trading at about 11 times next-year earnings, or less than 9 times if we adjust the price for the $25 billion of net cash it has on the balance
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Medtronic and Pfizer have a huge tailwind behind them. sheet. As we consume more and more data and video over the Internet, the demand for Cisco’s products will only increase, regardless of what happens to the global economy. The most boring of this bunch is CSC, an outsourcing company for large corporations and the U.S. government. It is trading at 9 times next year’s earnings and has announced a stock buyback of close to 12 percent of its shares. CSC has a very stable and growing business as the trend of outsourcing continues.
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Vitaliy Katsenelson (vk@ imausa.com) is CIO at Investment Management Associates in Denver and author of The Little Book of Sideways Markets. Comment? Click on Global Markets at institutionalinvestor.com. INSTITUTIONALINVESTOR.COM
LINA CHEN
EUROPE RESEARCH TEAM
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INEFFICIENT MARKETS
UNCONVENTIONAL WISDOM THE FUTURIST THE CHARTIST C
LINA CHEN
Still Made in America
many and China, as a manufacturing Reports of the demise exporter, with an of once-mighty U.S. 8.5 percent share. manufacturing prowess have One reason the been greatly exaggerated. myth of waning BY ROBERT TURNER U.S. manufacturing prowess seems plausible is that the sector has lost jobs, partly because of technological advances. According to a University of Michigan-Flint study, technology has enabled manufacturers to make YOU’RE UNDOUBTmore with fewer people. In the edly familiar with the past 37 years, U.S. manufacturcommon refrain that ing output in inflation-adjusted nothing is made in dollars more than doubled, America anymore. while manufacturing employThis is part of the ment dropped by more than fashionable lament that the 26 percent. Overall, about U.S. is in decline.There’s only 12.7 million Americans, or one thing wrong with this asser- 8 percent of the workforce, tion: It’s at odds with the facts. currently hold manufacturing Yes, we know the stories about jobs; 50 years ago 14.6 million the deterioration of the oncepeople, or 28 percent of workmighty manufacturing bases ers, were in manufacturing. of cities like Buffalo, Cleveland Manufacturing isn’t so and Flint, Michigan. And yes, much dead or dying in the we’ve heard all about how an U.S. as it is changing. U.S. affluent America can’t compete manufacturing is moving up with low-wage nations like the value chain, making moreChina and India.There’s some sophisticated products less truth to all that, but it’s hardly subject to foreign competition. the whole truth. In a survival-of-the-mostActually, there’s a lot competitive world, it makes being made in the U.S. today. sense to manufacture products America remains the world’s where they can be produced at leading manufacturer by far. the lowest cost. So inevitably, In fact, if U.S. manufacturing some low-value-added comwere a national economy, it modity products like textiles, would be the eighth largest in toys andTVs are now being the world, worth $1.6 trillion made in countries where worka year, according to Bank of ers earn a fraction of what their America Merrill Lynch.The American counterparts do. U.S. contributes 18 percent of Today the U.S. specializes in global manufacturing output making products that require a and ranks third, behind Gerhigh degree of innovation and INSTITUTIONALINVESTOR.COM
technological content. Savvy U.S. manufacturers that are widely regarded as possessing the right stuff include A123 Systems in lithium-ion batteries; First Solar in thin-film solar modules; Johnson Controls in office-climate and automotiveelectronic systems; Plexus Corp. in outsourced manufacturing of proprietary products in the defense and wireless communications industries; Stryker Corp. in orthopedic products, such as artificial hips and knees; andVarian Semiconductor Equipment Associates in ion implanters used to fabricate semiconductors. In a novel counter-trend, foreign manufacturers are increasingly making things in the U.S, which accounts for 40 percent of global demand. Foreign
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The state of manufacturing in the U.S. is quite healthy.
manufacturers find it advantageous to establish plants in the U.S. for various reasons, such as gaining marketing opportunities, earning tax credits and — brace yourself — exploiting cost advantages. For instance, a Chinese company in Spartanburg, South Carolina, pays just 4 cents per kilowatt-hour for electricity to power its plants, compared with up to 14 cents in China. Small companies are what’s big in U.S. manufacturing today.The financial problems
and massive job losses of former manufacturing titans like Bethlehem Steel Corp. have been chronicled exhaustively.What hasn’t been reported as widely is that many more young, small manufacturers are flourishing. According to the Cato Institute, for every U.S. manufacturing industry suffering a decline in revenue and profits, two U.S. industries are growing. Small manufacturers like Bien Hecho, of Brooklyn, New York, tend to have the most successful business models today. Bien Hecho (Spanish for “well made”) makes $3,000 pine-beam tables for offices, restaurants and consumers. Bien Hecho and 200 other small manufacturers, most with fewer than six employees, do business in the old Brooklyn Navy Yard. Demand for work space is so heavy that the Navy Yard is adding 1.5 million square feet, the largest expansion there sinceWorldWar II. The state of manufacturing in the U.S. is quite healthy and is likely to remain so for a long time.That’s good for national security, because the U.S. needs a solid manufacturing base in a world that can be a cauldron of shifting political interests. That’s also good for the U.S. economy, as manufacturing produces more economic activity per dollar of production than any other industry; about one in six U.S. private sector jobs depends on it.
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RobertTurner is chairman and CIO of Turner Investment Partners in Berwyn, Pennsylvania. Comment? Click on Global Markets at institutionalinvestor.com.
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THE FUTURIST THE CHARTIST CONTENTS INSIDE II TICKER FIV
The Bigger They Are…
roughly 60 percent of gross domestic Although lawmakers may product; Hoenig not have the appetite for it, a would be more debate on financial industry comfortable with structure is overdue. the 15 percent ratio BY JEFFREY KUTLER that prevailed in the early 1990s. According to Federal Deposit Insurance Corp. data for 2009, Bank of America Corp. andWells Fargo & Co., after completing opportunistic takeovers during the crisis EMERGENCY INTER- period, each had exceeded ventions in 2008 prethe 10 percent statutory limit vented the financial on domestic deposits. Jamie crisis from escalating Dimon, CEO of JPMorgan to Depression-like Chase, which held to just under proportions. But one 10 percent, has emerged as an consequence of those actions, unabashed champion of bigeither unintended or brushed ness. He argues that a bank like aside by policymakers at the his can offer a breadth of sertime, spells trouble for the U.S. vices and achieve economies of banking system and its ability scale that smaller firms cannot to fuel economic growth. rival. A NewYork Times article The biggest banks have gotin December quoted Dimon as ten bigger, controlling market saying a 30 percent share would shares well beyond modern be workable, though he also norms.This happened despite much discussion and concern about banks that are too big to fail, implicitly assured that the government stands ready to bail them out.The potential — Jamie Dimon impact of a big bank collapse comes on top of a 20-year trend JPMorgan Chase CEO in which the share of deposits held by the top five U.S. banks has climbed from about 10 percent to nearly 50 percent. asserted, “No one should be Federal Reserve Bank of too big to fail.” Kansas City presidentThomas Double-digit market shares Hoenig points out that the may not cause alarm in Austrafive biggest institutions have lia, Canada, France and other increased their assets by 20 countries that have long had percent since before the crisis, high concentrations of assets in to $8.6 trillion.That’s equal to a handful of institutions, in some
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No one should be too big to fail.
cases by encouraging “national champions” to carry their flags on the world financial stage. Indeed, Dimon sees JPMorgan competing in that league against the likes of BNP Paribas and Deutsche Bank. But bigness, while not inherently a bad thing in an international context, goes against the grain of historical U.S. populism.This wariness of concentrated economic power is evident in the decentralized Federal Reserve System with its 12 regional banks, one of which gives Hoenig his platform to make the case for the Main Street banks in his district versus the Wall Street behemoths he says have been “inadvertently granted implied guarantees and favors, and we have suffered the consequences.” Introducing the first draft of last year’s reform legislation, President Obama struck a similar populist pose, saying of the “army of lobbyists” opposing reforms, “If these folks want a fight, it’s a fight I’m ready to have.” Tensions in banking between big and small have been a constant for decades, and at least arguably constructive. A few recessionary glitches and lesser crises aside, the relatively unconcentrated U.S. banking system and the economy it financed led the world for well over half a century, until the wake-up calls of 2007–’08 and the ensuing contraction in loan demand.The frequency of crises and volatility has increased as the biggest banks have grown. Amid the rush to implement theTroubled Asset Relief Program and related measures, and subsequently Congress’s heavy lifting to pass the DoddFrankWall Street Reform and
Consumer Protection Act, the accelerated stratification of the industry was “a key macro point that went missing,” says Paul Merski, senior vice president and chief economist of the Independent Community Bankers of America. “There needs to be an ongoing policy debate,” says the small-bank advocate. He expects no “break up the banks” movement, as some suggested earlier last year — a movement that might be revived in the U.K. pending a commission study later this year. But he is hopeful that actions of the Financial Stability Oversight Council, the new U.S. systemic risk watchdog, will effectively rein in the biggest institutions. Former regulator Eugene Ludwig, CEO of Washingtonbased consulting firm Promontory Financial Group, says the FSOC is still in its infancy and “deep into the regulationwriting process,” so it may take time to get around to morevisionary and more-macro concerns. But, he adds, “there has not been enough granular focus on how to protect and encourage a robust community banking sector.” As it stands, says Ludwig, all banks face higher regulatory and capital costs, cutting into profits. “Banks react to these kinds of things by shrinking, which means less loan availability,” he warns. “That affects the real economy materially.”
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Jeffrey Kutler is editor-in-chief of Risk Professional magazine, published by the Global Association of Risk Professionals. Comment? Click on Risk/ Tech/Regulation at institutionalinvestor.com. INSTITUTIONALINVESTOR.COM
LINA CHEN
UNCONVENTIONAL WISDOM
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ISDOM THE FUTURIST THE CHARTIST CONTENTS INSIDE II TICKER FIVE QUESTIONS PEOPLE THIS
INDEX OF ADVERTISERS Barclays Capital . . . . . . . . 15
Hong Kong . . . . . . . . Cover 4
Tokyo Stock Exchange . . . . 7
CA Cheuvreux . . . . . . . . . . 36
QFC . . . . . . . . . . . . . . . Cover 2
FOCUS SERIES
Daiwa . . . . . . . . . . . . . . . . . . . 3
RBS. . . . . . . . . . . . . . . . . . . . . 11
Deutsche Bank. . . . . . . . . . 25
Santander . . . . . . . . . . . . . . . 9
Benchmark Borrowers . .27-31 AFT ICO
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VENTIONAL WISDOM THE FUTURIST
THE CHARTIST
CONTENTS INSIDE II TICKER FIVE Q
STANDARD & POOR’S 500 INDEX
Bull Run?
1000
Weak productivity hampers stock performance. 500
U.S. EQUITIES APPEAR POISED
to experience a bull market in 2011; however, analysts believe there will be no sustained market drive, known as a secular bull market, until one key indicator markedly improves.That indicator is productivity. Strong bull markets are propelled by long-term productivity growth, as a comparison of the accompanying Standard & Poor’s 500 index and U.S. worker-productivity charts shows. S&P performance was sustained during the bullish 1960s and 1990s in part because of solid productivity gains. Despite labor efficiencies of the past decade, American productivity has been in general decline. Moreover, other factors — including currency wars, bank reform and what analysts call “policy error” (read: politicians trying to improve markets) — will limit the potential for a strong run of the bulls anytime soon. —The Editors
200
1960
1980
2000
50 3
PRODUCTIVITY Annual % change (Shown as a ten-year moving average)
2
1960 Source: BCA Research (www.BCAresearch.com).
1980
2000 INSTITUTIONALINVESTOR.COM
NIGEL HOLMES
1
RESEARCH
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