There was an article in the news this week that got our IFAP class talking. UBS, a global investment bank that is now a shadow of what it used to be, has decided to go back to the drawing board and do ‘real’ investment Banking. Read the article here Here is an excerpt:
“The goal: Give advice and conduct trades while taking less risk : As head of the investment bank at UBS, Andrea Orcel is trying to revive a lost business model: connecting buyers and sellers of stocks and bonds and advising corporate clients — without borrowing money to boost returns. “What I would very much like to create is a real investment bank,” says Orcel, “the kind that there aren’t anymore.”
This brought us to thinking what is Investment Banking and why did it begin. Investment Banking is not Private Equity nor is it lending corporate loans or funding leveraged buyouts. Investment Bankers were transaction experts that brought people together. You want to sell something; a good banker will sell it for you. You then want to buy something else, that same banker might you buy it. You want to go IPO to raise money to expand, if the banker knows how to underwrite they can take you IPO. They were glamorous brokers that brought people together. And traders were only folks who would help you sell a stock by finding you a buyer and then popping the commission. All was simple. But then the corporate banker said, why don’t you let us help him buy the company. Let’s finance the deal as well. Let’s bundle the products. Bundling creates conflict, which increases risk. Suddenly the bank, which would have only made a small transaction fee on the deal, has exposure. Etc etc…we go beyond the mandate of Investment Banking but more than that, bankers get dependent on securing sell side or buy side mandates on the back of the balance sheet and not their ability to run a transaction which is why you have the boutique banks suddenly scrambling for business. While UBS is no boutique, they fired over 5000 bankers post the crisis and are rebuilding both their team and their balance sheet.
“UBS ranks 12th among advisers on mergers and acquisitions this year, down from seventh in 2007. It’s struggling to win M&A assignments because it no longer routinely offers to finance deals it advises on, according to two former bankers who asked not to be identified discussing their former employer. Orcel says bankers who can’t build a relationship without relying on lending are focussed on either the wrong clients or the wrong way to serve them.”
We have to wait and see how true Investment Banking products will do especially as Private Equity firms, key players in M&A, are able to originate faster and more effectively reducing costs. They can also run their own deals. For now Orcel is taking a gamble and getting ready to play with the big boys, only they might have to draw with a much smaller gun.
- Reshma Krishnan