Equity bankers go bespoke

In banking, as in fashion, bespoke tailoring commands a premium. As investment banks see their income fall from traditional sales of shares, their dealmakers are putting increasing importance on the higher revenues from stitching together more complex mechanisms for those seeking financing.
Just $84 billion has been raised from share issues in Europe this year as the euro zone crisis made for rocky markets - down 37 percent on the same period in 2011 and annual totals of more than $150 billion in nine of the last 10 years. In contrast, bankers involved in what they call "strategic equity solutions" say their value has grown from almost nothing two to three years ago to the equivalent of half some banks' Equity Capital Markets (ECM) business in terms of revenue.
---- Money raised from traditional share sales tumbles
With most of the deals not being made public, even indicative figures for the size of the business are hard to come by. None of the banks Reuters spoke to would give figures for the amount they themselves earned. Anything involving greater complexity and banks taking more risk onto balance sheets could raise questions after the global financial crisis. But the ability of banks to hedge against losses and the large amount of security they demand meant such deals did not pose an added regulatory worry, bankers said.
Traditionally, a bank's ECM business involved the relatively straightforward sale of new or existing shares on public exchanges and of bonds convertible into stock. Strategic equity solutions can involve anything from a company borrowing against its investments to more complex equity derivatives helping a firm preserve the value of its assets.
Benefits for those raising funds include greater certainty over the amount to be brought in than is possible when depending on open markets. Such deals can also be the answer for those without access to public markets or wanting to keep below the radar. "Many want to avoid relying upon the public markets if they can come up with a private solution," Craig Coben, head of ECM for Europe, Middle East and Africa at Bank of America Merrill Lynch, told Reuters.
Fees vary, but the nature of the deals, compared by bankers to 'couture' rather than 'off-the-peg' fashion, means banks often charge more than for run-of-the-mill equity raising - where fees can be as low as 0.5 to 1 percent of the amount raised in an offering.
Few deals are made public, but filings reveal Qatar used equity solutions to build its stake in miner Xstrata in the face of a take-over bid by Glencore. The commodity firm itself raised funding last year against its Xstrata shares - just the kind of deal the equity solutions bankers are keen to put together. Among this year's other deals are two run by Nomura: one to raise 137 million euros for French advertising agency Publicis and the other to help Spanish airline Iberia protect the value of its stake in travel business Amadeus.
As well as a broad range of companies, users of such equity solutions include sovereign wealth funds, holding companies and rich individuals. Banks needing to raise cash have also used the derivatives market a lot, bankers said. Many of the customers are based in emerging markets. "There are all kinds of bells and whistles you can put on these things in terms of retaining voting rights or retaining dividends so they can be quite flexible," one banker said.
Swiss bank UBS demonstrated the growing importance it puts on such deals this year by appointing its global head of strategic equity solutions, Chicco di Stasi, as joint head of Equity Capital Markets for Europe, the Middle East and Africa. Equity solutions can allow companies to raise financing without having to sell shareholdings they want to keep long term or pay higher costs to raise debt in the public markets, di Stasi said.
While most investment banks have been cutting jobs, the number in equity solutions has held steady or risen. Bank of America Merrill Lynch, for example, added three jobs in equity solutions this year to take its team to 11 in the Europe, Middle East and Africa region. Although equity solutions deals do not lift a bank's position in closely watched league tables of deal volumes, the revenues they bring in mean banks can afford to take on more of the less lucrative secondary share sales which do help their rankings.