Paul Raphael

Global equity capital markets (ECM) volumes of $504.3bn have put the first nine months of 2006 in the record books. US ECM may have taken the crown – rising by 30% to $148.4bn – but European business has not been shoddy either – Europe, Middle East and Africa (EMEA) volume rose by 20% to $181bn. A record 12 European initial public offerings (IPOs) raised more than £1bn ($1.9bn), pushing IPO volumes up a massive 61% to $57.7bn, while rights issues have risen by an even more staggering 151%.

ECMs have been fairly robust for most of 2006, says Paul Raphael, head of European ECM and co-head of the global markets solutions group in Europe for Credit Suisse.

It is easy to see what underpins such buoyant markets. Deep liquidity and investor demand are driving a strong mergers and acquisitions (M&A) market, pushing up volumes of acquisition-led rights issues; the private equity phenomenon keeps on rolling, fuelling the IPO market; and emerging markets’ increasing volumes continue to grow EMEA’s ECM pool.

“Deal volumes from emerging market countries, including new entrants such as Kazakhstan, Bulgaria and even Georgia, have grown to the point that emerging markets now account for approximately 25%–30% of European IPO issuance,” says Mr Raphael.

And there are new sectors emerging, he adds. These include permanent capital vehicles – publicly listed vehicles that enable private equity groups to raise even larger amounts of capital from a single public offering that is immediately available for investment into, and co-investment alongside, the group’s own funds – and closed-end real estate funds.

Every little helps

While permanent capital and real estate funds may not be the largest slice of the market, it all adds up, says Mr Raphael. “Permanent capital vehicles account for approximately $10bn and real estate funds for between $5bn and $10bn, so they represent a material proportion of the IPO market.”

So is this positive environment reflected in Credit Suisse’s bottom line? As ever with lumpy investment banking returns, and perhaps especially with the rather volatile Credit Suisse, quarterly figures can be misleading when weighed against revenue measured over a fiscal year. Comparing the bank’s third quarter ECM revenues with the second quarter in 2006, or with the third quarter in 2005, gives a rather negative view – both are down, by 28% and 15%, respectively. But comparing the first nine months of this year with the same period last year presents a much rosier outlook – a more than healthy rise of 34%.

“[The drop] was partly because of a decline in equity issuance activity across the whole industry in the third quarter,” says Mr Raphael. Then again, Credit Suisse has also seen its market share in the IPO market eroded over the past nine months – moving from first place in Thomson Financial’s league table for 2004 and 2005, to fifth place in the year to date. Mr Raphael (who guardedly estimates that Credit Suisse will end the year ranked in the top three) is relatively sanguine, however, and says it is simply the nature of investment banking.

“Almost by definition, to be in the top three you have to have worked on at least one of the three biggest deals of the year, and we missed out on the three biggest so far this year [Standard Life, Saras and Rosneft].”

Out of the loop

Why did Credit Suisse miss out? “We did not have the opportunity to compete,” he says simply. “All three IPOs were mandated on the basis of long-standing relationships. We did not lose to our competitors in a beauty contest.”

While IPO market share has been lost, Credit Suisse has rocketed up to first (from ninth) in convertibles and has crept up to fifth (from 13th last year) for secondary offerings and to fifth (from ninth place in 2005) in global equity offerings. In any case, league tables can be seen as a blunt, if seductive, instrument to showcase a business.

Mr Raphael considers Credit Suisse’s transaction history to be a far more powerful and accurate reflection of its equity business, and particularly its hitherto top-notch IPO franchise – by far the most profitable segment of the ECM business line. Credit Suisse’s emerging markets heritage has borne fruit, with the bank leading a number of successful IPOs this year, including KazMunaiGaz Exploration and Production, the second largest ever IPO out of emerging Europe and TMK, Russia’s largest steel pipe producer, a deal that was 19 times oversubscribed.

Superlative record

First and foremost, says Mr Raphael, the bank’s execution track record is key. Credit Suisse has only had one deal pulled in the past five years and has achieved top of the range pricing for IPOs, even in less than perfect circumstances. “No other bank on the Street has this record,” adds Mr Raphael.

Furthermore, the picture is more complicated than simply looking to see which bank is ranked first for overall ECM; what is also important is the percentage that relates to the IPO business. On that basis Credit Suisse is chalking up better scores. According to data from Dealogic, Goldman Sachs’ IPO proceeds, for example, only constitute 13.87% of overall revenue, while Morgan Stanley’s account for 55.17% and Credit Suisse’s IPO business represents a respectable 33.30%. “IPOs represent the most attractive segment,” says Mr Raphael.

Although globally, sponsor-related business was pretty flat during the first nine months of the year – ECM volume grew only 2% over the same period last year, IPO volume fell by 2% and IPO revenue fell by 15% – sponsors continue to be a major source of business at investment banks. Credit Suisse participated in many key transactions from sponsors, including IPOs of QinetiQ, Debenhams, Neuf Cegetel and RHM.

Mr Raphael says he is very bullish about sponsor-related IPO business in Europe, notwithstanding increased competition from strategic buyers, as well as the growing number of secondary buyouts. “There are always cyclical trends that affect deal flow, but I think it’s possible that sponsor-backed IPO volumes could still double.”

In the wake of Credit Suisse’s high profile reorganisation, Mr Raphael believes that the investment bank has gone a long way to achieving the various goals it set itself two years ago. It was decided that the bank would not try to be all things to all men and, for the ECM business, that meant placing particular emphasis on three key areas: IPOs, convertibles and equity derivatives.

It is clear that Credit Suisse’s IPO business has pretty strong momentum – it executed five out of the 15 biggest deals in the year to July, five of the 10 largest IPOs in the US and five of the 20 largest in the world – and the convertibles franchise is competing keenly against Citigroup’s powerful platform.

Credit Suisse has grown and invested in its European equity-linked group (this is separate from its equity derivatives group, which reports into equity, whereas the equity-linked solutions group reports into ECM).

In Europe, several key hires were made last year – with Thibaut De Gaudemar joining as head of the European equity-linked solutions group and Jerome Heilmann joining as managing director, reporting to Mr De Gaudemar. Both came from Deutsche Bank. In July this year, they were joined by another erstwhile colleague, Remi Mennesson, who was appointed managing director with primary responsibility for Italy and the emerging markets.

Mr Raphael says that Credit Suisse’s business will not try to replicate that of the industry’s top equity derivatives franchise, Société Générale, which has an impressive flow products business and a dominant distribution platform. He says Credit Suisse business’s will be more issuer-focused.

“We use corporate equity derivatives to address corporate and bank equity risk. We are targeting the very high-end, value-added business; creating bespoke solutions for particular clients. [They] enable us to provide more creative financing solutions and equity risk management tools,” says Mr Raphael.

Integrated offerings

The creation of the global markets solutions group in early 2005 – which Mr Raphael co-heads with Jim Amine, who is also co-head of global leveraged finance – brings together ECM, debt capital markets, equity derivatives, fixed income derivatives and leveraged finance origination, and Mr Raphael’s argument that this is already paying dividends is persuasive. Established in early 2005, only a year later two-thirds of the group’s European revenues now come from clients who have transacted with the bank across more than one product.

“It has really enabled us to integrate our offering,” he says. “It’s not only about cross-selling. Getting together around a table truly allows us to develop more innovative and holistic solutions for the client.”

CAREER HISTORY:

2004 Joined Credit Suisse as head of European ECM

2002 Moved to Paris to become director general and co-head of French investment banking for MLI

2001 Became co-head of the European technology, media and telecom group

1994 Joined Merrill Lynch International (based in London) as chairman of central Europe, Middle East and Africa, and head of investment banking and capital markets for emerging markets

1990 Promoted to head of investment banking and capital markets for Latin America

1986 Joined Salomon Brothers as a generalist in corporate finance

1986 Graduated with Master of Science in Management from MIT/Sloan School of Management

1983 Graduated from the University of Maryland with a Bachelor’s degree in Economics