Patrick Frowein - Portrait

Patrick Frowein, Deutsche Bank’s EMEA co-head of investment banking coverage and advisory, outlines to Marie Kemplay how having a focused strategy in areas such as ECM is paying off for a bank that has sometimes struggled in recent years. 

Deutsche Bank is back in the black. Having struggled with its performance for much of the past decade, it has reported its first annual net profit since 2014. Notably, its 2020 performance is largely down to the investment bank, a relatively sharp turnaround for a division that less than two years ago was told to expect a “significant downsize”.

In major restructuring plans for the bank announced in July 2019, chief executive Christian Sewing outlined a vision for a “smaller, but all the more stable and competitive” investment bank, which included it exiting equities trading and cutting its fixed income operations, particularly its rates business. Instead its focus would be on providing clients with strategic advisory and financing, as well as core fixed income, currency and commodities solutions, such as credit and foreign exchange.

For Patrick Frowein, co-head of investment banking coverage and advisory for Europe, the Middle East and Africa (EMEA) at Deutsche Bank, the solid performance of the investment bank validates the changes which have taken place. “The sense of stability and predictability is much higher and our public perception continues to improve. Clients see stability and growing momentum behind the progress we’re making,” he says.

A pan-European bank

Another recent change is that Europe is once again being managed collectively as a single region, in a break from a previous approach where German-speaking countries — Germany, Austria and Switzerland — were looked at separately. Mr Frowein suggests this is a “repositioning” back to a more standard management approach, rather than a larger strategic shift. Nonetheless, he feels it sends out an important message that the region is being served holistically.

This is notable because there had been some speculation that the appointment of Mr Frowein, along with fellow EMEA investment banking coverage co-head, Berthold Fuerst, last year would mark a greater focus on serving the domestic German market and local corporates. Both Mr Frowein and Mr Fuerst previously held senior roles with responsibility for German-speaking economies.

Mr Frowein is happy to dispel this idea. He has moved back to London from Frankfurt (prior to his previous role he had been based in London since the mid-1990s) and the bank, he says, regards the whole of Europe as its “home region”.

“Of course it’s important to us that we do well in Germany,” he says, “but together with my colleagues, who run our countries and sectors within the region, we regard ourselves as one team. The whole region is in focus. And it has to be, because our clients want us to be a strong European bank.”

Investment bank boost

Looking more globally, the investment bank accounted for more than 38% of the core bank’s revenue in 2020, compared to around 30% in 2019 — the only one of four divisions to see a revenue increase. The obvious question now is whether it can maintain this momentum. In 2020 there were significantly elevated levels of trading and capital raising activity as the world grappled with the Covid-19 pandemic, a trend that has delivered impressive profits at other investment banks alongside Deutsche.

However, Mr Frowein points out that Deutsche’s performance is down to more than the overall fee pool growing. He says: “If you look at last year’s investment banking fee pool across products — mergers and acquisitions (M&A), equity capital markets, high yield, high grade bonds and loans — the market was up in Europe 6%. Our league table revenues increased by about twice this rate year on year.”

It is unclear whether 2021 will see the same levels of activity, although there have been some positive signs so far; for instance, in January Deutsche was the leading global arranger of sovereign, supranational and agency debt issuance, according to Bond Radar, acting on deals worth $82bn.

Healthy ECM pipeline

Mr Frowein is also optimistic about the equity capital markets (ECM) pipeline for 2021. This is particularly significant given that when Deutsche Bank announced its restructuring plans, much was made of the fact it was aiming to run an ECM business, focused entirely on delivering initial public offerings (IPOs) and other significant ECM transactions, while no longer engaging in equities trading. The received wisdom previously was that the secondary market intelligence generated by an equities trading business is vital for success in primary ECM.

He continues: “We carefully considered what you need for strategic ECM transactions. Our conclusion was you need quite a lot within your team. You need equity research, you need equity sales, you need a syndicate function and you need bankers who deeply understand IPOs and other equity-raising transactions, and can pitch for them. So we have kept all these things.”

Although it may seem counterintuitive at first glance, Mr Frowein believes that, by stripping away equity trading, it has enabled Deutsche to create a more focused and high-quality proposition. In justification, he says: “It allows us to completely focus on the IPOs, spin-offs and other transactions. Our people are not overwhelmed by looking at daily trading flows, we have that capacity at our disposal for bigger strategic transactions, which we have made our clear priority.”

He admits there were some initial client questions about the new model, but he believes it has now more than demonstrated its viability and they have received positive feedback. “I think clients have started to see the potential advantages,” he says. “There is a clear differentiation and they may want someone with that different aspect in a consortium.”

The true proof, perhaps, will come if other banks begin replicating the approach — something that Mr Frowein believes is being weighed up. “A lot of banks have looked at this. Some still believe in a more traditional model, but others believe it’s a great idea,” he says.

SPAC boom

Mr Frowein believes that the global demand for special purpose acquisition company (SPAC) transactions will continue to drive activity within both the IPO and M&A markets. SPACs, also known as blank-cheque companies, are formed to raise capital via an IPO, and are typically associated with a high-profile sponsor, with the capital then used to acquire an existing company. High-growth sectors, such as tech and healthcare, have been major areas of SPAC activity.

So far, the market has predominantly been a US-led phenomenon, at least as far as the IPO listings side is concerned. To date, regardless of where the company being acquired has been based, the vast majority of SPACs have listed in New York. Deutsche has been involved in several SPAC listings on European exchanges, such as 2MX Organic’s Paris listing in December 2020, and Mr Frowein believes the European SPAC market will grow in 2021. “I expect this year in Europe we will see more SPACs than in any of the previous 10 years, both in terms of US-listed SPACs for European acquisitions, as well as European listings.”

He acknowledges that questions are still asked about whether the European investor pool is deep enough to support an active European SPAC market. For him the answer, “absolutely”, is yes: “When we did the 2MX deal in Paris, for instance, we upsized that transaction.” For him, investor education will be a key element, as well as recognising that some institutional investors will first need to get approvals in place to engage in this kind of investment.

“This is such a broad trend, I believe many already have ensured, or are in the process of ensuring, they have those approvals in place,” he says. “For us too, enabling these transactions really matters. We don’t rely on large flow business, we rely on being able to help our corporate clients do the best deals they can. So that gives us a big impetus to work hard on the education of institutional investors.”

In order to maintain investor confidence, ensuring the quality of both the initial SPAC and its sponsor team, as well the company being acquired, is essential. A situation where there is ill-directed capital chasing target companies with uncertain long-term prospects could quickly dent market optimism.

Deutsche is sensitive to issues around the “quality” of the transactions it gets involved in. When looking at the so-called de-SPACing side of the transaction, it closely monitors not only the volume of deals it is executing, but also the share price performance of companies after they have merged with the SPAC, as a proxy for how the capital markets rate the quality of the transaction. Mr Frowein says: “We have a better price performance, on average, for our dispatching transactions than anyone else in the market.”

New ESG team

At a more sectoral level, the bank has also made several strategic hires to support increased activity in growth areas such as healthcare, where a whole team has been hired as well as within technology, media and telecoms with the appointment of a new managing director.

But perhaps the most significant is the creation of its environmental, social and governance (ESG) team in April last year, an area where Mr Frowein admits the bank needed to boost its ambitions. The creation of the team has placed ESG issues at the heart of its capital markets strategy and it has wasted no time in accelerating its activity. For example, when the team was formed, Deutsche was in 13th place for sustainable bond issuance; just over half a year later it had moved up to sixth position, according to Dealogic.

“Being number 13, we said this is just the wrong place for us to be,” Mr Frowein says. “We’ve invested heavily into having the right team, as well ensuring there is a wider dialogue within the bank about the importance of ESG, because it’s not only about what that immediate team is doing. We have many different people who speak to clients, so making sure all bankers on the platform are focused on sustainable financing and ESG advisory has been really important.”

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2020: Co-head investment banking coverage and advisory, EMEA, Deutsche Bank

2019: Head investment bank, Germany, Austria, Switzerland, Deutsche Bank

2016: Co-head corporate finance, Germany, Austria, Switzerland, Deutsche Bank

2014: Global co-head industrials, investment banking coverage, Deutsche Bank

2006: EMEA head diversified industrials, investment banking coverage, Deutsche Bank

1996: Analyst to EMEA head automotive, investment banking coverage, Warburg/UBS

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