September marks the anniversary of the collapse of Lehman Brothers and BarCap’s swoop on its North American investment banking business. It also marks the shift in the balance of power at the firm in advisory: from European start-up to global operator with a firm foothold in the US, the world’s most liquid capital market.
Until it pounced on Lehman, Barclays had limited its expansion into traditional investment banking to the hiring of a 45-strong team of emerging markets specialists from ABN Amro. Since then, BarCap has built a US-centred investment bank, with a 150-strong M&A execution team, along with 12 global sector heads, in New York.
It has tapped into the record levels of bond issuance and has a pipeline of business to back it up. Add this to a strong performance in trading and it should come as no surprise that the US accounted for 40% of the investment bank’s total revenues in the first half, up from somewhere close to zero a year ago.
For all the talk of emerging markets and European potential, it is clear that it is the US market that matters most.
"If you go back in time to when Barclays sold BZW, it did so because it was a UK business with nothing else," said one BarCap insider. "This time around, we have our US business already built. In Europe, we have the lending relationships and we are now building the advisory and equity capital markets around that."
This is why a steady drip of departures from Merrill Lynch in Europe will be of less concern to Bank of America than top-level defections in New York — such as the six-strong financial institutions team that handed Deutsche Bank a mandate from the FDIC within weeks of arriving.
Over at UBS, the Swiss bank’s European business retains its core of loyal bankers — and its league table rankings — but its American operations are the biggest cause for concern.
Its US investment bank has been suffering from departures for more than two years, ever since Ken Moelis struck out to form his own boutique. The most recent big-name defection was Benjamin Lorello, who took a 50-strong team of fellow healthcare specialists to Jefferies.
UBS is also reeling from the private banking scandal in the US and a business that used to be a non-stop success story is plummeting down the rankings. Meanwhile, the arrival of the US government as a big shareholder in Citi has, as one US headhunter said, "left it dead in the water in terms of hiring and retaining its best people."
It also explains why banks that are no longer recruiting in Europe are pressing ahead in the US. Alongside BarCap and Deutsche, now Nomura is looking for growth in the US, although it admits an acquisition would be preferable.
The bank has hired 167 staff across its US business since January, and is planning to add 200 more by the end of the year. A good proportion of those will be in investment banking — Nomura has hired head-hunters tasked with finding a head of US investment banking and they are confident that houses still stricken by Tarp or undermined by reputational issues are ripe for the taking.
Christian Meissner, deputy global head of investment banking at Nomura, told EuroWeek that whether it can find the right purchase or not, it is still committed to hiring.
"In the US, we’d love to buy something accretive, if the cultural and strategic fit was right," he said.
"At the moment we’re building investment banking organically. We’re independent. The banking sector has become politicised but Nomura is not dependent on any government so we remain innovative, adaptable and can hire the talent we want."
Organic Europe
Barclays in Europe now has a similar problem to Nomura in the US. Once a humble European start-up, BarCap’s investment bank must now play catch-up in Europe with an organic strategy.
John Winter, who runs investment banking in Europe, the Middle East and Africa, is taking a different tack outside the US after passing on the chance to buy Lehman’s European and Asian investment banking businesses last year. Barclays’s board sanctioned a move for Lehman in the US but Winter and BarCap chief executive Bob Diamond wanted to cherry-pick Lehman’s top European talent.
Lehman’s managers in London told BarCap during the negotiations that it would cost $40m to make the redundancies they wanted but keep the business intact. Barclays refused and its plans were given short shrift by key Lehman managers who opted instead to take the deal offered by Nomura — a deal that is already proving a success.
Nomura, which has integrated the Asian and European operations of the former Lehman, said earlier this month its international revenues had outstripped domestic revenues in the three months to June 30 for the first time.
BarCap, however, is still cherry-picking with big name hires in ECM, such as Jim Renwick from UBS and Sam Dean from Deutsche. And it is adding to its M&A team on a monthly basis.
BarCap believes it can proceed more steadily in Europe because the fortunes of banks with ambitious expansion plans will live or die in the US.
"For all the talk of Europe, you need scale in the US to compete globally, and that’s where I fear for some houses. Tarp is not an issue in Europe, but on Wall Street it persists and some firms are dying from the inside," said one BarCap banker, taking a side-swipe at the US home-grown competition.
BarCap says it is two-thirds of the way through a European expansion that it will complete next year. Since the start of the year, the bank has hired 80 people, including 25 managing directors, in its European investment banking division, although this has been offset by 70 departures.
Almost all of these have been in ECM or M&A, where Barclays expects to have a team of around 65 by year end. It has installed European heads in 11 out of the 12 global sector teams, hiring the likes of Julian Vickers, who runs natural resources, and Jim Peterkin, who runs oil and gas, from Citi. It is still looking to hire in France and Germany, after recruiting Philippe Deneux to run France from Credit Suisse last month. While Lehman gave BarCap the immediate scale it craved in the US, it is allowing up to two years before it expects to see a serious return on its investment in Europe.
In the run-up to the anniversary of Lehman’s collapse, some bankers look at the early success Nomura has made of its acquisition and accuse BarCap of a missed
opportunity.
Accepted wisdom holds that top bankers need 18-24 months to bed down at a new firm before their true worth can be calculated, so it will be a year or more before the failure to land Lehman’s European business can be branded a missed opportunity.
The US business on the other hand certainly ranks as a success — not least because of the scale it has given the firm, and through that scale, a shot at building a global business.