Late every Monday night Kate Richdale and Andrea Vella dial into a call with Goldman Sachs’ top investment bankers. Over the summer months the mood was sombre as the small group of high financiers discussed falling fees in Asia and how much they would have to shrink headcount.
Richdale and Vella have only been in the job of co-heads of investment banking in the region about 18 months and new management usually means a cool-headed review of business. Goldman Sachs’ top investment bankers in Asia just hit the refresh button.
Richdale and Vella talked to FinanceAsia about their decision to cut the bank’s 300 investment bankers in the region by 15% during October, in their first interview since they took over.
Their mission: staying profitable amid an industry-wide battle for the shrinking rewards on deals. “We’re not afraid to shock. A terrible result would be if we were so rigid that we maintained our old way of doing business in a changing environment,” said Richdale.
Competition has crushed the revenues investment bankers make on staple businesses, such as equity and debt capital raising, compared with when Chinese giants such as ICBC and Bank of China were listing on Hong Kong’s stock market advised by a handful of bankers in 2006.
Chinese securities houses have been muscling their way into deals particularly in Hong Kong. There was an unwieldy collection of 26 bookrunners, mostly from China, on Postal Savings Bank of China’s $7.4 billion IPO in Hong Kong, a global record.
“What we were concerned about looking back was a sustainable core business model given the fee erosion and the emergence of the Chinese banks,” said Richdale.
Goldman worked on China’s first privatisation in 1997 and has been among the top advisers in Hong Kong’s equity offerings since. This year, however, it has dropped to around 13th place, according to the rankings compiled by Dealogic.
For 2017, Goldman is putting more resources into areas such as financing large cornerstone investors in Hong Kong IPOs and cross-border mergers & acquisitions with creative financing structures.
It is also changing the way it is advising clients, streamlining the number of clients, points of contact while cutting a layer of bankers out of deals: sector specialists.
“Gone is the day when the industry expert runs around Asia. That is a waste, as you’ve got flight costs and all sorts of expenses,” said Richdale.
But it is not all doom and gloom. After a record third quarter in terms of new mandates for deals in Asia, Goldman is looking to selectively hire again.
“We wanted to start 2017 with the right resources focused on where the opportunity is, and a lot of dry powder to hire,” said Vella.
Hot areas for 2017
The two top Goldman investment bankers in Asia expect Chinese entrepreneurs’ appetite for overseas assets will be as sharp as ever going into 2017 – but they are cautious about the political backdrop.
President-elect Donald Trump’s policies remain unclear. A panel advised Congress in November that state-owned Chinese should not be allowed to buy US companies.
“One thing to keep an eye on is cross border M&A – will the Chinese be able to buy more or less in the US?” said Vella.
Internally Goldman’s M&A revenues have been ticking up as a result of targeting deals that will attract big Chinese buyers. While slipping down the rankings in bond and equity deals, the firm has held its own in M&A and was named FinanceAsia’s M&A bank of the year.
Goldman is advising Syngenta on its $43.6 billion sale to ChemChina, the largest Chinese outbound acquisition in history. It also helped German robotics maker KUKA on its sale to China’s Midea for $4.5 billion.
“We prefer the certainty that comes with being on the sell-side unless we think the Chinese buyer is going to finance with all sorts of interesting products,” said Richdale, who speaks both Mandarin and Cantonese, and has spent a lot of time in mainland China since joining Goldman Sachs.
This year Goldman also helped Chinese nutrition firm Biostime finance its acquisition of Swisse Wellness with a $450 million senior secured term loan, $395 million bridge loan and finally a $400 million senior notes offer.
In this area at least completion is waning. “The Chinese banks are increasingly constrained to produce cut-throat financing and so M&A financing is becoming interesting to banks like us,” said Richdale.
However Goldman has trailed European rivals, UBS and Credit Suisse, on one one big money-spinner in recent years: financing billionaires and corporates’ investment in Hong Kong IPOs.
After kick-starting the business about three years ago it is catching up fast.
“It’s an important piece of the business and it can really supplement the shrinking of economics of underwriting an IPO,” said Vella who was previously head of credit capital markets and investment banking solutions.
This is despite some stressful days last year in July when China’s stock markets plummeted and the stock collateral for the loans plummeted in value. Some of that stock was sold at a discount in the market.
Vella says he is comfortable with the risk parameters Goldman set. In fact he thinks the strategy has been battle tested and plans to finance more IPO investments in 2017.
To be sure, the wider investment banking solutions business has been eerily quiet since a scandal involving Malaysia’ sovereign wealth fund, 1MDB. Goldman's Asia Pacific Investment Banking Solutions head and partner at the firm, Anthony Miller, is leaving after 15 years with the bank.
When asked how the US government’s investigation into the New York bank’s work on bond sales for 1MDB has impacted business in Malaysia, Richdale pointed to the fact the firm advised Ananda Krishnan on the merger of Maxis Communications’ unit Aircel with India’s Reliance Communications. Goldman again won FinanceAsia's Best Global Private bank in Asia.
“Our client base continues to be bespoke and loyal,” said Richdale. “The government ones tend to be sensitive.”
The New York State Department of Financial Services' investigation into alleged corruption surrounding 1MDB’s use of proceeds from the bond sales has not yet concluded.
Another area that Vella thinks will keep the wolves from the door in 2017 is not a skill-set immediately associated with the high-finance crowd: FX hedging.
“It’s difficult to get a meeting to talk about currency and derivatives. Everyone will take a meeting to talk about capital markets and financing, but at the end they often say we’d really better do some FX hedging,” said Vella, who worked at JP Morgan between 1998 and 2007.
Collapsing the matrix
To make the most of these opportunities in 2017 Goldman has had to position its chess pieces carefully.
In the heyday of Asian investment banking in mid-2000s and then for a brief spell in 2010, investment banks deployed what is known in the industry as concierge coverage; each big clients had a relationship banker, industry expert and a sub-sector specialist, product specialist as well as a country banker at his beck and call.
“We’ve collapsed everything. The clients these days are very sophisticated and they want their relationship bankers to be able to advise them across the board,” said Richdale, one of FinanceAsia’s regular top “Women in Finance”. “We want super bankers.”
Richdale used Raghav Maliah as an example of a banker who can multi-task. He runs Asia ex-China investment banking, Korea, India, Southeast Asia and is a specialist in the telecoms, media and technology industries.
Vella argues it is hard to hold so many different cooks accountable. The layer they have chosen to thin out is the industry sector specialist.
Michael Smith, a Goldman partner and head of the regional real estate investment banking team based in Singapore has left the firm.
To be sure, some other investment banks are going the other way – Morgan Stanley is leaning towards sector specialisation in Asia, creating point people to bring industry knowledge from other parts of the world to Asian clients.
Likewise UBS is also redeploying China-focused junior bankers into sector teams to help compensate for falling fees on equity sales in Hong Kong.
Goldman is also picking its battles in terms of the number of clients it serves, focusing on those who need with multiple, complex needs with cross-border operations.
“We’ve got to budget our business off a client base where we don’t serve thousands of clients … There is also an opportunistic tail of young clients bubbling up,” said Richdale who joined Goldman Sachs from Morgan Stanley as a partner in 2013 and thrived as a lateral hire, which is no easy task given the close-knit culture of the firm.
Goldman’s penchant for metrics and profitability has been highlighted by ruffled feathers at HSBC after the arrival of a former Goldman banker.
Matthew Westerman has enforced accountability in terms of time spent with clients among his new reports, a yardstick that had largely fallen into abeyance at the British bank.
“We know the profitability of every client and every banker,” said Richdale who succeeded Westerman.
Tipping point
Investment banks started 2016 looking at a very thin pipeline of deals and the realisation nobody was going to make a lot of money.
Goldman had already cut hard in Southeast Asia back in 2015, taking headcount down from around 45 bankers to nearer 25.
Global bulge bracket banks in Asia Pacific ex-Japan accounted for 21% of investment banking revenue this year up to August, the lowest year-to-date share on record. On the other hand, Chinese banks secured 54% of revenue in the region with $4.1 billion of the total $7.6 billion revenue in the region, according to analysis by data provider Dealogic.
“It became pretty apparent at the start of the summer that we had to spend some time thinking about what should the team look like at year end,” said Vella.
Goldman ranked tenth in terms of investment banking core revenues from advising on public deals. Of the higher-ranking banks and brokers, six were headquartered in mainland China.
Vella and Richadle had been working on their plans for a revamp of the Asian team for about three months before their ideas leaked on September 26. At that stage one scenario was to cut up to 30% of staff.
What was decided in the end was to make 15% of staff redundant by the year-end, including two managing directors. Vella and Richdale completed the cuts within 10 days and then held a town hall to lay out their strategy at the end of October.
Vella and Richdale have flown to New York for the annual Goldman bun fight over compensation. In long debates they will help decide the bonuses of every investment banker globally, while pushing for recognition for their guys who they think deserve it.
“If you don’t have your costs under control then your credibility to continue to invest in the business where it matters is diminished,” said Vella.
