Independent investment banking is undergoing a renaissance in Australia.
After a hiatus in the 1990s when the lumbering giants of America and Europe emerged dominant in the Australian landscape, the business of independent advice is back - and it's booming.
Investec Wentworth, Caliburn Partnership, Carnegie Wylie & Co and Gresham Partners are popping up behind many of the largest and most complex transactions. They represent a new wave of independent firms after the demise of hallowed names such as Centaurus, Schroders, and Lloyds Corporate Finance.
After the recent scandals of Wall Street, boardrooms are more suspicious of the motives of the big banks and are disenchanted that their operatives often seem fixated on fee generation rather than sustaining relationships based on trust over the long haul.
In the early 1990s, says Caliburn joint chief executive Simon Mordant, it all came down to chasing deals rather than standing back and considering if it made sense for shareholders. The spotlight was on integrated banks that could quickly provide debt and equity funding with "a little bit of advice on the side".
"The star of integrated banks shone in that period when funding was more important than critical evaluation of transactions. The market today is much more cynical about the deals that are being done," Mordant says.
"There is far more scrutiny and pressure on boards to review, alongside management, the risks associated with implementing acquisitions. That has led to the emergence of independent advice not associated with the product and which is clearly and completely impartial."
Independents offer only advice rather than equity and debt underwriting.
Proponents of the model argue that as associated capital market products are more lucrative than M&A advice, there is a pressure within integrated banks to encourage a client to do a deal - even if it doesn't stack up.
"I think we have a very clear and differentiated proposition for clients. Our only interest is those of our clients, and giving the best advice to achieve their objectives. The ability to have that clarity of thought and focus is liberating," says Caliburn principal Ron Malek.
Investec Wentworth chief Geoff Levy bemoans there being not a lot of "old-fashioned relationship bankers left".
"Reputation for being an honest adviser is critical. We have been known to give advice which actually means the transaction doesn't proceed and that usually means we earn a lesser fee. But it's important for the relationship to be a lasting one."
Levy joined Wentworth Associates in 1993 from Freehills, where he was a corporate lawyer. He joined the firm founded by friends and former colleagues Richard Longes and David Gonski.
Many see Wall Street firms as being too focused on booking a fee to boost short-term financial returns and sate the relentless appetite of head office in New York.
"It's hard not be coloured when an adviser's bonus cheque that year is going to depend on how much revenue he or she has raised for the firm. A lot of advisers may be focused on deals specifically in a year rather than long-term relationships."
Levy also decries the obsession with league tables which rank advisers by the number and value of deals within a specific period. Investec Wentworth refuses to take part.
"We don't think we're the stars. Our clients are," he says. "We just facilitate and help it to happen. We're not the guys creating the wealth at the end of the day in terms of the business despite a lot of my fellow practitioners thinking otherwise."
Still, the independents are holding their own against banks with far larger headcounts and balance sheets.
Caliburn was ranked the second most active adviser by Thomson Financial for the first half of 2003 with 17 deals worth $US2.2 billion ($3.24 billion). On the basis of completed deals Gresham was fifth with $US3.1 billion off transactions.
According to the published annual report of Investec's South African parent, in the 12 months to March 31, Investec Wentworth advised on 20 deals worth $2.5 billion in Australia.
"There is clear momentum. Compare the head counts of the leading independents which are much smaller than the 60 to 80 people that are in the corporate finance divisions of the larger global firms," says Gresham Partners managing director David Feetham.
One of the reasons for the rise of boutiques is that the big global banks tend to only focus on the top 50 listed Australian companies as they're looking for the "big hit" fee which would be the equivalent of doing three medium-size deals. Many smaller companies want old-fashioned hand-holding which develops into a long-term and personal relationship.
"I see a very distinct role between the independent model and that of the fully integrated international model," says David Gonski, chairman of Investec Wentworth.
"The top 50 companies have sophisticated corporate in-house finance capabilities. The complexity and size of their transactions require muscle, scale and the reach of the international fully serviced investment banks.
"The mid-to-small caps on the other hand do not have a constant ongoing need for an internal corporate finance-type department and, for them, the role of the independent adviser provides that skill base in a cost-effective manner."
Of course the boutique model is not without its flaws. Detractors say that without a strong equities distribution capability, they are unable to understand a client or target the institutional shareholder base.
An increasingly prominent theme is double-teaming between independents and integrated banks. Caliburn paired with UBS to advise AMP on its demerger, Gresham with Merrill Lynch on the MIM Holdings defence, while Investec Wentworth worked with Deutsche Bank in advising Westfield Trust on its acquisition of AMP Shopping Centres Trust.
"In many transactions, the muscle and firepower of a large bank is critical if the client needs to raise a huge amount of money. The problem comes not when the stockmarket's running at 100 miles an hour; the problem comes when the market is soft because the underwriter needs to raise the funds and a lower price will make its job easier," Levy says.
It's very difficult for the investment bank to sit on the same side of the table at that point in time - when a deal is reached and the funds have to be raised.
"The client wants to get the highest price possible per share and the underwriter wants to get the deal away as easily and quickly as possible. He doesn't want to push the market. We call it the moment when the client and underwriter look at each other and it's the first one to blink who loses."
An independent adviser comes into play in those situations, especially if a client is not sophisticated in capital markets. "Often they really don't have any objective view on whether they're being pushed or if that price is in their best interests."
Mordant believes that not having underwriting capabilities is not a competitive disadvantage, becausethose functions have become commoditised. "I remember when I started out people took underwriting risk. There was no concept of bookbuilds and pre-selling issues. These days no one takes risk."
In the old days of the 1980s, the JBWere and Potter Warburgs of the world would act as a genuine underwriter, taking on the risk of large licks of stock on the balance sheet because they knew they could sell it on through powerful private client networks. Since then, the weight of retail money has shifted to managed funds and to more sophisticated institutional investors.
In response, equity raisings have shifted to US-style bookbuilds and pre-market soundings, with banks moving away from renting out their balance sheets. "They will talk about the merits of bookbuilds till they're blue in the face because they never take market risk on being caught with stock," says one adviser.