Investment bankers at UBS have much to smile about, but there is still room for growth, particularly in European M&A and private equity-related business. Robert Gillespie talks to Geraldine Lambe.
Exuberance is a common commodity at UBS. At the investment bank, high spirits reflect the fact that mandates that would have been unthinkable only three or four years ago are no longer surprising.
This year the firm has already clinched an advisory role to Gillette alongside Goldman Sachs in the $57bn sale to Proctor & Gamble, and is sole adviser to Vodafone in its $4.4bn acquisition of Romania’s MobiFon and the Czech Republic’s Oskar Mobil. According to Dealogic’s fee-based league tables, UBS has elevated itself to fifth in global M&A – making it the highest ranking European bank.
Just as this year has started well, so 2004 was a very happy year for the group. Annual figures released in February showed that pre-tax profits were up 28%. They also revealed that the investment bank’s revenues were up 18% year-on-year at SFr4.54bn (€2.923bn) and contributed the lion’s share (40%) to overall group revenues of SFr10.674bn.
It was a record year for the global advisory business, with double-digit growth in Europe, the US and Asia. Robert Gillespie, joint global head of investment banking alongside Ken Moelis (who was appointed in February 2001 and, unusually, is based in Los Angeles), clearly then has reason to look relaxed. He was also appointed to the newly created role of CEO of UBS Investment Bank, Europe, Middle East and Africa (EMEA), in December 2004.
If the bank is doing so well, why change the structure? Mr Gillespie says simply that the move was necessary in order to reflect the way that banks are regulated regionally, rather than along functional lines.
“We do not want to create layers of bureaucracy that may impede the development of the business, but at the moment, this role is needed to represent the firm to our three principal regulators [the Swiss Federal Banking Commission, the UK’s Financial Services Authority and the US Securities and Exchange Commission]. It will also ensure that we have a structure in place to monitor the business on a regional basis and to ensure we have regional leadership that does not hinder functional management,” he says.
M&A volume
With UBS posting such good results, the only real concern to be expressed by analysts since they were announced is whether this sort of growth momentum can be maintained, and where it will come from. Disappointingly, just as UBS starts to really hold its own with the M&A big boys, overall M&A volumes have dropped back, with a more subdued start to the year – especially in Europe – after the big deal announcements of Q4 2004.
But Mr Gillespie remains buoyant, and argues that there is plenty of room for the investment banking division (IBD) to grow revenues, particularly in continental Europe. “For example, we see significant opportunity for revenue growth from European M&A. We will build on our existing strength. According to fee pool compilers, in revenue terms, we are one of the top five firms in Europe. We aim to be clearly number one.”
Some analysts believe Mr Gillespie’s confidence may be justified, citing the strength in first-class and business-class air travel passenger numbers in January and February 2005. Historically, these have correlated with M&A volumes as well as stock market indices.
Private equity opportunities
Another area where UBS sees potential is around private equity firms. “There is a great deal of demand for both advisory and financing services from private equity houses,” says Mr Gillespie.
In fact, he identifies the burgeoning community of private equity firms as one of the two key trends in investment banking over the past five years – the rise of hedge fund-related business being the second. Just as hedge funds constitute around 30%-40% of securities trading revenues, Mr Gillespie says financial sponsors now account for about 30% of the total investment banking fee pool. And, he says, with evidence pointing to the continued growth of private equity firms, their appetite for leveraged finance products will increase too.
The challenge for European players, says Mr Gillespie, is to build a profitable business within the “firm” underwriting model that characterises European leveraged finance deals. “There is less freedom of movement in Europe than is usually the case in the US, where leveraged buyout facilities traditionally include material adverse change clauses to reflect developments in the business concerned and in the market.”
Naturally, he says, the financial risk of underwriting less flexible deals is therefore significantly greater in Europe than in the US, which has a material impact on the profitability of deals.
Drag on deals
The financial sponsor community in Europe has got used to getting unconditional funding – and continues to demand tighter and tighter terms. Industry commentators have voiced worries over the leverage ratios at which some banks are prepared to do some deals – with debt and enterprise value to earnings before interest, taxes, depreciation, and amortisation (EBITDA) at levels that would not have been contemplated a few years ago.
Some argue that the laws of financial gravity will drag many of these deals down. Analysts say that, at UBS, the relatively conservative risk appetite plays a large part in ensuring that access to its balance sheet will only be granted on an extremely prudent basis. Mr Gillespie declines to comment.
But few banks can afford to ignore the private equity space, he says – particularly as it continues to command deal flow and investment banking revenues. “If you take yourself out of the private equity world, you are not just risking the loss of that leveraged finance deal – it is about the refinancing, IPOs and further acquisitions that may be down the line. Being involved at a fundamental level in the private equity space is about a future pipeline of business as much as it is about today’s deal.”
European figures rocket
The figures certainly seem to support Mr Gillespie’s argument. According to data provider Initiative Europe, the value of European private equity deals has risen from just over €8.5bn in 1995, to €44.8bn in 2004 – and is still rising. In the same time period, secondary buyouts have risen from €97m to more than €20bn – perhaps a more potent illustration of the importance of private equity relationships. In 1995, secondary buyouts accounted for a paltry 1.1% of total buyout volume. By 2004 their share accounted for 31% of the total.
In the corporate sector too, there is a lot of room for growth, which, in one sense, could simply be achieved by the market’s return to historic levels, says Mr Gillespie. The EMEA fee pool, measured in euros, has shrunk every year since 2000 to the point that it is now about 50% of that year’s level.
European corporates continue to be inactive relative to the late 1990s or to their US counterparts. European bankers look wistfully towards continental Europe where many countries still have structural issues crying out for reform. And few of the central or eastern European countries currently perform at optimal levels. Clearly, there is plenty of opportunity for investment bankers. What will be the tipping point? “The return of corporate confidence will be driven as much by politics as it is by economics,” says Mr Gillespie.
Career history:
Member of the UBS Group Managing Board and of the UBS Investment Bank Executive Committee, Investment Banking, London
2004: appointed CEO of UBS Limited (Europe, Middle East & Africa)
1999: became joint global head of investment banking
1997: Promoted to head of European Corporate Finance
1995: Appointed head of UK corporate finance
1993: Returned to London
1989: Moved to New York as head of the advisory business
1987: Promoted to director
1981: Joined SG Warburg in the investment banking division
1977 began his career with Price Waterhouse to train as a chartered accountant. Qualified in 1980
