Matthew Kirkby

For the first time in six years, there was not a single initial public offering (IPO) in the US in September. Globally, IPO volumes collapsed by 58% in the first nine months of this year, compared to the same period last year. Equity capital market (ECM) activity as a whole looks less catastrophic, but still fell by 19% in the same period.

This bleak backdrop is hardly the ideal environment in which to try to embed an equity culture in a debt-focused bank, particularly one being partially nationalised. But that is just what former ABN AMRO equity bankers must do at their new home within Royal Bank of Scotland’s global banking and markets group. When RBS first won the battle to buy ABN, the fate of the equity and mergers and acquisitions (M&A) parts of the business – areas that RBS has keenly avoided – looked far from secure.

Matthew Kirkby, global head of equity origination at Royal Bank of Scotland (RBS), who previously held senior roles in M&A and ECM at ABN AMRO, says the atmosphere is more welcoming within the firm than some observers and analysts have suggested.

“Any debate about whether RBS should keep the M&A or corporate broking businesses has been well and truly put to bed,” says Mr Kirkby. “RBS found that it had acquired a business which was at the heart of client relationships and was extremely value and relationship additive. We [the equity and M&A businesses] are pushing on an open door.”

Mr Kirkby says that clients, too, seem happy with their ‘new’ bank. “The key is that, individually, RBS and ABN were very client-focused banks and that culture remains paramount. As a value proposition in terms of a number of products – be it equity, foreign exchange, investment grade bonds or emerging market loans and bonds – we are now a much bigger player, and clients are showing us a lot of goodwill and loyalty.”

Helping integration

Ironically, it may be that the bloodiness of an industry restructuring and the scarcity of debt financing prove the very things that help RBS to integrate its new businesses. For one thing, with capital-constrained banks less willing to make new loans, bankers are keener to seek alternatives to debt financing than they would have been before the financial meltdown.

This means that the new RBS story is not such a hard sell internally. The same is true for clients, says Mr Kirkby. “We’re at that stage in the cycle where, as a product, we [the equity business] are incredibly relevant. Bankers are therefore happy to push it and corporates are open to the discussion.”

Many client relationships are up for grabs. With the disappearance or acquisition of firms such as Lehman Brothers, Merrill Lynch and Dresdner Kleinwort, old relationships hang in the balance. In the UK, private equity house 3i, for example, had both Lehman and Dresdner as its corporate brokers; it, and other firms, are now in the market for a new home.

Changing attitude

Others are looking beyond their existing relationships. Two years ago it would have been unthinkable that a UK issuer would have done equity issuance with anyone other than its corporate broker. That is no longer a given, says Mr Kirkby. “Non-broking clients are now happy to have a conversation that acknowledges that if a bank is part of the debt financing piece, as part of the overall financing solution they will consider it for a role in the equity piece too. That is a sea change in [UK] issuers’ attitudes.”

Now is the time to grow market share, and Mr Kirkby believes that 10 to 15 percentage points of equity related market share are there for the taking. “The next couple of years the market will be smaller, but we absolutely want a bigger share of that pie. RBS’s ambition is to build on the ABN platform to create a much larger-scale business. We have already made several hires [such as Klaus Schinkel, hired to head RBS’s German ECM business from Morgan Stanley] that would not have been possible at ABN AMRO.”

He argues that, for several reasons, the equity picture is not as bleak as it may look at first glance. Experience of the Asian crisis in 1997, when he was based in Hong Kong for ABN AMRO, taught him markets return come what may. Issuance and ­structures may be different, but they come back – often faster than many people expect.

The good news for ECM bankers is that they can step in to close the gap in the capital structure that used to be filled by securitisations or high-yield bonds. “With those markets effectively closed, we will see a greater proportion of equity in the capital structure going forward.”

Hybrid instruments

This could mean the return of instruments not seen for a while. “For example, outside of the US, where convertible preference shares are used for tax reasons, we haven’t [seen] many cumulative redeemable and hybrid-type instruments for a long time, but current market conditions make them much more attractive,” says Mr Kirkby.

In terms of what proportion of the capital structure will be equity, he says it will vary industry by industry, but believes that private equity could serve as a useful proxy for what may happen in the real economy. “Over the past few years, buyouts have been done at levels of about 30% equity and six to eight times earnings before interest, tax, depreciation and amortisation ( EBITDA). Going forward, we are more likely to see at least 50% equity and more like three to four times EBITDA.”

Moreover, equity deals are happening. The rest of this year and next year, equity markets will be driven by recapitalisations and refinancing where companies cannot get debt in the size, tenor or pricing that is economic. But there will still be M&A-driven equity deals in the financial institutions sector and elsewhere.

“InBev is currently preparing for a rights issue to fund its Anheuser-Busch acquisition; I don’t think that will be the last big deal. We are entering a period where industry champions will emerge. There will be some once-in-a-cycle opportunities to pick up assets, and a lot of them will be in the financial sector.”

This trend is boosted by the astounding level of financial distress, so that competition authorities are overlooking historic concentration limits. Deals that may previously have been seen as anticompetitive, such as Wells Fargo’s buyout of Wachovia and Lloyds TSB’s acquisition of HBOS in the UK, are now being struck.

Deals of the century

“These are deals of the century and investors have been very supportive. A lot of capital has been raised very quickly. This is just the beginning of a period of industry consolidation. The amount of monthly interest AIG will be paying to the Federal Reserve, for example, means it will be incentivised to divest some of its assets very quickly. Some world-class assets will be coming on to the market.”

With FIG deals representing at least 40% of global ECM volumes so far this year (compared with 8% in the same period last year), a strong FIG business will be crucial to revenues. RBS and ABN have both traditionally done more business with corporates than with financial institutions, but Mr Kirkby says the bank is significantly building its FIG franchise in order to exploit this trend. Earlier this year, Gary Page, who previously led ABN’s global markets business, was named global head of financial institutions and portfolio management.

The ABN acquisition has rapidly propelled RBS up the ECM league tables. According to Dealogic, for critical FIG-related business in the year to date it sits at ninth for ECM globally (but has done no FIG or corporate IPOs) and seventh for global follow-ons (which encompasses rights issues, including RBS’s own deal). In Europe it is fifth for ECM and follow-ons, and ­second for both in the UK.

For all FIG and corporate business, it may languish at 24th place for global IPOs, but stands at 11th in global ECM, eighth in global follow-ons, fifth in European ECM and follow-ons, and in first place for ECM and follow-ons for the UK.

Strong foundations

These are strong foundations, says Mr Kirkby. “Going forward we need to maintain our 30% ECM market share in the Netherlands and to translate our many thousands of UK corporate relationships – including about 80% of the FTSE 100 – into the same kind of market share for ECM and corporate broking. [ABN] already had a good French business but combined, we are very strong; we are already seeing some deal flow, such as the April rights issue for Eurotunnel.”

“In the rest of Europe, we are continuing to build our businesses in Germany, Italy and Spain, for example. We are in a similarly good position to build both primary and secondary market business in Russia and other emerging markets, such as India and China,” adds Mr Kirkby.

He says those who have lived through previous market meltdowns are in no doubt that business will return, and that they know what banks need to do in order to survive or even prosper.

“Following the Asian crisis, we saw bank recapitalisations, non-core disposals from stressed institutions and nationalisations. But those banks that were pragmatic and resourceful were able to come back even stronger. The winners this time around will be those that retool their businesses correctly to fit the new environment.”

 CAREER HISTORY: Matthew Kirkby

• 2008: Appointed global head of equity origination for the enlarged RBS global banking and markets group. In this role he will oversee and control ­corporate broking (Hoare Govett), ECM, corporate equity derivatives and PIPE.
• 2007: Appointed global head of financial sponsors and merchant banking.
• 2005: Promoted to head of M&A and ECM for Asia Pacific region.
• 2000: Joins ABN AMRO as head of South Asia ECM.
• 1996 : Joined CLSA as a ECM banker at CLSA in Hong Kong.
• 1990: Worked as a solicitor in London and Hong Kong.
• 1990: Graduated from Oxford with a law degree.