UBS undertook one of the more radical post-crisis changes of strategy in 2012, and its head of European advisory, James Hartop, explains how the new structure enables his team to move beyond pure merger and acquisition work.

UBS has been through multiple mergers in the past two decades and several strategic shifts since the 2008 financial crisis, but James Hartop is the personification of stability. He joined SG Warburg as a mergers and acquisitions (M&A) banker in 1995 after a summer internship there, and has been through all the various ownership and name changes to become in 2011 UBS’s co-head for Europe, the Middle East and Africa (EMEA) of what was then called investment banking.

Following the latest changes announced in October 2012, UBS investment bank has been divided between investor client services and corporate client services (CCS). The CCS division includes equity and debt capital markets (ECM and DCM), financing solutions, and what has now been renamed advisory – Mr Hartop’s area of responsibility. That domain includes sector and country coverage banker teams, plus the traditional M&A advisory work, but CCS as a whole is intended to be a close-knit unit.

“The idea is to have all these capabilities for corporate clients under one umbrella, making us closer to the capital markets teams. That relationship was always there, but it is already proving helpful to make sure that we are now clearly one team,” says Mr Hartop.

The broader changes across the investment bank were driven by a number of internal and external pressures, including calls for a lower-risk, better-capitalised model from shareholders and regulators. Mr Hartop says that the changes have also made the UBS offering more straightforward for those outside the bank, unambiguously focused on clients and reinforcing what he calls a “product-agnostic” approach to meeting client needs. In that context, he sees his own team’s role as more than just providing advice – it should also navigate clients to the right part of the business to serve them.

“The nature of client needs has moved around significantly in the past few years in line with the world we live in. We need to make sure we are able to focus on what clients want, not necessarily what we may want to talk about. The reality is that plain vanilla M&A advice is often not top of the agenda anymore. Clients are looking to address other issues, such as risk management, cost-effective capital raising and creative ways to structure and fund the transactions that they want to do. Bringing all the business units closer together allows us to respond to this revised and constantly evolving client agenda more effectively,” says Mr Hartop.

Getting in shape

One of the most significant changes made at the Swiss bank was the heavy cut-back to its fixed-income trading desks. Mr Hartop says that the bank has already shown a strong enough track record in DCM since October 2012 to convince clients that its distribution capabilities are undiminished. In particular, UBS’s ability to source leveraged finance for financial sponsors has grown significantly over the past three years.

He adds that UBS can send a clearer signal to clients because it has accepted the changed nature of the market and adapted to it, at a time when some competitors are maintaining the “business as usual” mantra. While he is satisfied with the shape of CCS across segments, he points out that from a practical viewpoint, managing an EMEA division will always be more complicated than a US business because of the complex matrix of country and regional coverage alongside the sectoral coverage.

“It inflates the cost base, but all of this coverage capability matters – we need to have the flexibility to deliver to clients and divert expertise to the right area at the right time,” says Mr Hartop.

What changed with the creation of CCS was the adoption of a more centralised resource allocation model, so the division can respond quickly to trends in the market and make sure people are spending time in the right places. Recent investment decisions are evident from new hires across established and emerging markets in EMEA where UBS is seeing or anticipating good business flows, including Russia, Kazakhstan, Germany and the UK.

Mr Hartop points out that emerging markets are traditionally higher beta, so investment banking activity is likely to rebound very quickly in those areas and UBS must be ready to take advantage. And while the bank is not necessarily building capacity in southern Europe, he notes that the business volumes from Spain and Italy in recent years might surprise a casual observer considering the headline economic conditions.

Waiting for the upturn

Like everyone else in the market, Mr Hartop is seeking to gauge how far business flows will improve with a cyclical upturn, and what aspects of the market have changed structurally. He says it is too soon to judge the “end-state” of post-crisis investment banking, but he feels there is a baseline being established in terms of run rates for advisory business and the level of gross debt refinancing needed.

After the balance sheet repair and distressed M&A scenarios that dominated 2009 to 2010, DCM issuance took off during 2012, especially after the European Central Bank reassured the markets over the eurozone sovereign debt crisis.

“Vivid memories of how the crisis shut debt markets in 2008 prompted a massive wave of refinancing to strengthen and lengthen debt maturity profiles, and DCM issuance remained robust going into 2013. There has been some equity raising as well, but much more muted, and the market for initial public offerings is far from as vibrant as it was before the crisis,” says Mr Hartop.

What has been moving in the equity markets is block trades and equity offerings for clients that needed to sell down stakes or raise finance for parents via subsidiaries. UBS was a joint global coordinator on Spanish firm Telefonica’s offering of €1.5bn of its German subsidiary in October 2012, and Swedish TeliaSonera’s $525m offering of shares in its Kazakh unit KCell.

The long view

UBS also executed a successful €635m block trade for private equity firms owning Danish telecoms company TDC in February 2013, a year after a previous block trade managed by different banks had left the underwriters holding unsold stock. And UBS is apparently managing a block sale of shares in Poland’s Alior Bank for its owner Italian industrial firm Carlo Tassara, following on from Alior’s listing in December 2012 to raise funds for Tassara’s domestic operations.

According to data from Dealogic, UBS was second only to Goldman Sachs for block trade volumes executed in the first quarter of 2013. By contrast, M&A activity remains muted in the EMEA region, even though it is beginning to pick up sharply in the US.

“Portfolio investors can exit quickly from equity positions if indicators start to worsen again, but corporates making strategic buys have to take the long view, and there is still too much uncertainty about growth in Europe at the moment. Good opportunities are out there given low valuations, and we could see more M&A activity in the second half of 2013 if sentiment continues to improve. But in the first quarter the fee flow for the market was off about 7% or 8% year on year and quarter on quarter,” says Mr Hartop.

The strength of DCM relative to ECM and M&A activity is clear from the fee pool evolution, with DCM and global syndicated finance (including leveraged finance and corporate loans) accounting for about two-thirds of the total in the first quarter of 2013. Mr Hartop says the conversations now taking place with clients lead him to expect ECM and M&A to gradually increase their share during 2013 to well beyond the current level of one-third of fees, which is much lower than historical norms.

New developments

To understand the business mix at UBS, Mr Hartop says it is increasingly necessary to look beyond the league table data. The bank has built up a strategic equity solutions team over the past two years that uses corporate equity derivatives as a source of non-vanilla financing in even the most difficult markets. These trades are not public, and are therefore not captured in traditional external estimates of the bank’s transaction volumes. The team’s EMEA head, Chicco di Stasi, became head of EMEA ECM in September 2012.

“UBS is not and does not aim to be first choice for corporates looking for plain vanilla lending such as a revolving credit facility, but the strategic equity solutions business can provide financing alternatives that solve client needs in creative ways while also really playing to our strengths, and clients are now quick to call on us,” says Mr Hartop.

Another important new team created within CCS in 2012 has been set the task of tightening the links between the division and UBS’s other central pillar, its wealth management business. High-net-worth clients are frequent participants in capital markets offerings as investors, and as the owners of family businesses they also need financing and M&A advice. Mr Hartop says the new team is designed to make the aspiration of developing dedicated two-way flows between CCS and wealth management into a reality.

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