Nomura’s head of global finance for the EMEA region talks to Danielle Myles about the return of pure-play investment banking, the restructuring of its equity business, and the headwinds that put Brexit in perspective.

Ken Brown embedded

Outside its home market of Japan, Nomura is on the cusp of becoming a living, breathing example of the next incarnation of investment banking. With minimal commercial lending activities and a recently slimmed down product offering, its European business is nimble and plays to its strengths.

As regulatory reforms continue to bite and tough market conditions limit deal activity, a strategy based on sensible use of capital and delivering in key areas of expertise certainly makes sense. These merits have not been lost on those the bank serves.

Profit pursuit

“Clients increasingly recognise that not all investment banks can be all things to all people. Rather, it’s better to focus on what clients really feel is valuable to them by freeing up capital in unprofitable businesses and using it where it’s profitable,” says Ken Brown, head of global finance, Europe, the Middle East and Africa (EMEA), at Nomura International.

That is exactly what the Japan-based bank did in April, by exiting European equities research, equities underwriting and non-cash equity products, and creating an equity advisory business. The restructuring made headlines because of the 500 or so EMEA staff who were laid off in the process. But the rationale was simple: as a non-lending bank, Nomura must ensure each business line is financially viable in its own right. “Equities was proving to be an incredibly expensive proposition,” says Mr Brown. “Even in a good quarter, it wasn’t accretive to profitability.” That prompted the decision to end certain activities and retain businesses where the bank can add more value.  

While this can be a painful process internally, Mr Brown – who oversees the bank’s EMEA debt capital markets, equity solutions, acquisition leverage finance, risk solutions, insurance solutions and new equity advisory business – believes it has been effectively managed and that the client response has been positive.

Perfect timing

The bank’s refined European product offering is consistent with its solutions-oriented heritage; Nomura acquired Lehman Brothers’ local fixed-income business in 2008, which forms the foundations of the bank’s European operations today. Using skills and capital to solve problems is in its DNA, while providing balance sheet to clients with the expectation of being brought into transactions as a house bank is not. “We are never going to be a pay-to-play bank,” says Mr Brown. “We aren’t league table-driven; we are driven by profitability through serving our clients.”

Nomura’s European shake-up was announced just two-and-a-half months before the UK voted to leave the EU. While Brexit is unpopular with the vast majority of London’s finance profession, its timing could, ironically, prove serendipitous for Nomura’s bid to establish a footprint in European equity advisory.

The differences between equity capital markets (ECM) and other asset classes have been laid bare by Brexit. Despite significant volatility in the days after the referendum, debt capital markets made a strong recovery during July. “The reality is there is still very significant liquidity in the market and risk appetite returned much more quickly than people anticipated given the Brexit vote,” says Mr Brown.

Similarly, mergers and acquisitions did not grind to a complete halt. London-based Melrose’s July 4 announcement of its $2.8bn takeover of US company Nortek – irrespective of the higher price due to sterling’s significant drop – is a case in point. “When people have a transaction which they still believe is a compelling deal in the long run, they aren’t letting short-term market volatility change decision making,” says Mr Brown.

The search for stability

Equity, however, has not rebounded. And for many reasons, its recovery is tipped to be significantly slower. ECM needs stability, and is heavily influenced by macroeconomics and investor confidence. For this reason, new deals were put on hold leading up the June 23 EU referendum, meaning the initial public offering cycle was just beginning when Nomura turned its full attention to advisory.

Moreover, floating a company is an extended process. It is heavily regulated and requires a huge amount of preparation, because often the client is accessing public markets for the first time. These factors slowing ECM’s return could play to Nomura’s advantage. “The delay is actually quite helpful from our perspective,” says Mr Brown. “Having recently moved into the equity advisory model, the more lead time we have to build this business the better.”

Nomura has laid the foundations of this business over the past 12 months, quietly clocking up some impressive mandates. It was the lead financial adviser on a review of the €25bn portfolio held by SFPI, the Belgium sovereign wealth fund, and advised IFM Investors on a €515m voluntary public offer to increase its stake in Vienna airport.

There are other promising signs that Nomura’s equity advisory business could really take off. Having shunned the relationship banking model, financial sponsors (along with financial institutions and supranationals, sub-sovereigns and agencies) rather than corporates feature prominently in its client base. What is more, its EMEA leveraged finance capabilities are highly regarded and in demand, as reflected by the team earning a top-two ranking in Mergermarket’s league tables between 2012 and 2016.

Sponsor strengths

Given Nomura’s history with sponsors – whether through advising on, structuring or funding their acquisitions – it could have an advantage over the more specialist advisers when one is looking to exit. “If you look at the other major players in equity advisory, they don’t really provide that. So there are lots of reasons why we think we can be successful in that business, but it’s still early days,” says Mr Brown.

There are also encouraging signs for Nomura’s European leveraged finance business. US banks’ recent difficulties selling into secondary markets has had a knock-on effect this side of the Atlantic, but Mr Brown expects things to pick up. “After a tough first half of the calendar year, the deal pipeline is strengthening,” he says. “All things being equal, we think that structurally the market will be very attractive in the second half and next year.” Much of that comes down to the private equity cycle. Having sold most of the assets they scooped up between 2006 and 2010, financial sponsors have done some significant fundraising and are now in reinvestment mode. Sterling at a record low has also made some prized UK targets cheaper than ever.

Nomura’s leveraged lending credentials no doubt helped it make inroads last year into the EMEA high-yield market, an area in which the bank is a lesser player. It was a joint bookrunner on Japanese telecommunications company Softbank’s $4.5bn bond deal into Europe, and the funding for African investment firm Brait’s acquisition of UK retailer New Look. To Mr Brown, these transactions that see the bank further penetrate into this asset class are the most satisfying. “To break into that market is a big step forward as it shows the ability to really lead these deals as opposed to being a junior bank in the syndicate. Those are the most satisfying transactions,” he says.

Beyond Brexit

The ex-Lehman banker shrugs off the comparisons being made between Brexit and the US bank’s collapse. First, because Lehman has (somewhat misleadingly) become a symbol of more systemic issues that caused a global financial crisis; and second, because Brexit’s impact will, by and large, be contained within Europe.

A good barometer of the long-term fallout is the markets, which seem to be pricing in a rational outcome for the UK, not least because a huge number of EU entities are highly dependent on a functioning City of London. “The markets seem to believe a pragmatic solution will be found,” says Mr Brown. “The only thing meaningfully hit is sterling, but people aren’t pricing in a catastrophe scenario.”

Misplaced fears over the UK referendum could obscure more pressing issues, such as the seriousness of the slowdown in China and quantitative easing (QE) becoming the new norm in key markets. The European Central Bank, the Bank of Japan and now the Bank of England pushing rates to record lows and expanding asset purchase programmes is spurring bond deals from opportunistic treasurers. But corporates issuing debt is not an end in itself, and there is growing anxiety about the significant structural issues hidden by excessive liquidity and high dealflow.

“There’s a fine balance between supporting the markets and the point at which there’s a major sell-off and the markets capitulate,” says Mr Brown. “And the issue is that the longer QE goes on, the fewer people believe it’s a sustainable solution.”

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