Investec CIB head takes a steady approach to growth

Chris Meyer

UK and South Africa-listed Investec has some exciting times ahead in the latter half of 2019. The group is on the verge of unbundling its well-regarded asset management arm from the two remaining pillars, wealth management and the specialist bank, which includes the corporate and investment bank (CIB). Investec has always adhered to an ethos of picking its battles well, rather than spreading itself too thinly across many businesses. “Until now, when we’ve talked about our strategy we’ve talked about capital deployment – how we split allocation between capital-light and capital-heavy businesses – but the new set up gives us a clearer focus on our clients’ needs,” says Chris Meyer, CIB head for Investec's UK business.

Without the asset management arm, Investec counts 8000 employees globally across the private, corporate and investment banking operations. The UK bank has a headcount of 2400, a loan book of about £10.5bn ($13.7bn), 40% of the overall loans, and £37.5bn of assets under management on the wealth management side. It contributed 27% of the group's ongoing profits in the 2018 financial year. Investec has been quietly growing its UK CIB into a powerful business, making up 35% to 40% of the global specialist bank revenues, according to Mr Meyer. “Just the UK side of the business is a FTSE 250 company,” he says.

Mr Meyer originally trained as an accountant, which though unusual in the UK is a common route into banking in his native South Africa and translates into a keen eye for detail and a strong focus on the bank’s balance sheet. “We never reported negative profits during the financial crisis and focused on our liquidity as we never had a big brother looking over our shoulder,” he says. He is confident that a similarly cautious approach will carry the bank through any Brexit fallout.

Companies great and small

Investec has come a long way from its humble beginnings as a Johannesburg-based leasing and financing company in 1974. Mr Meyer joined in 2002, just before it completed a second listing on the London Stock Exchange when it was a much smaller outfit. Starting out in structured credit and securitisation, he moved to lead the treasuries and trading group, before moving to head the UK CIB in 2013.

Since then, Investec has popped up more and more frequently on UK merger and acquisition (M&A) and capital markets deals for increasingly high-profile transactions. In 2018 alone, it advised Melrose on its £8bn takeover of industrials firm GKN, Cineworld on its £2.5bn takeover of US-based Regal Entertainment and on the £7.4bn merger between betting and gaming companies GVC and Ladbrokes. Mr Meyer is happy that 2018 was an exceptionally good year, saying: “Investec had a 30% market share of UK M&A below £10bn.”

Nonetheless, the bread and butter of Investec’s investment banking services is the UK mid-sized market, meaning companies with turnover in the £100m to £1bn range. However, some of the companies that start out small grow into multi-billion-pound businesses. “Investec often gets involved with companies early on when they are at the start of the food chain. We advise them and often stay with them throughout an exit or initial public offering [IPO],” says Mr Meyer.

One such business is industrial turnaround group Melrose. Investec has been involved from the start, playing a role in its 2003 listing, which valued it at £13m. Its current market capitalisation is north of £9bn. Other notable IPOs the bank was involved in include beverage company Fever Tree, worth about £150m when it listed in 2014 compared with £3.35bn now, and robotics software company Blue Prism, which floated in 2016 with a market cap just under £50m and is now worth well over £1bn.

Most of the corporate bank’s clients are small to medium-sized companies in the UK, usually with turnover of £10m to £100m. “What sets us apart is that we offer a full service to clients, combining the best of the hard-touch, bespoke approach common to small boutiques as well as the full-service offering of bigger high street banks,” says Mr Meyer. Boutique firms may tailor services but they are usually only able to offer one or two products. The bigger investment banks offer the full array of products, but often only in a commoditised way for smaller companies. “Flexibility and agility is very important to be able to deliver services that do not necessarily fit a predetermined box,” he adds.

Skin in the game

Investec fills the lucrative gap between specialist boutique firms and “the big guys”, says Mr Meyer. This theme of not compromising on quality, while still driving growth, carries through to the investment banking operations. “We have a different mindset from many other CIBs in that we take on risk in every lending transaction. Having skin in the game leads to a sense of ownership,” he adds.

This applies particularly to early investment in tech companies, even at the pre-venture capital and pre-series A stage. Investec has not only offered advice and support raising capital, but has put its money where its mouth is, investing its own capital at times. Doing business with early-stage tech companies offers crossover with both the investment bank, when the time comes for an exit or IPO, and the private bank. “Many of our private bank clients are growth-orientated individuals who see us as an entrepreneurial bank for entrepreneurs,” says Mr Meyer.

As a result, Investec is not afraid to say when a deal or structure is deemed unfit for such a client. This approach works hand in hand with the bank’s stringent capital requirements and relatively conservative view of deal making. “Distressed markets offer great opportunities for us, but it pays to be careful,” says Mr Meyer. In this late-stage credit cycle environment, there has been a lot of aggressive lending and relaxation of covenants, which has moved to a better balance in recent months. “We would rather be patient and take a long-term view than compromise on pricing. In the credit flow business, it is better to be priced out than priced wrong,” he adds.

This does not mean Investec is staying on the sidelines in tougher times. The UK’s anticipated exit from the EU and the lack of clarity on how this will be achieved in practice has cultivated a climate of uncertainty. “Clients are being careful around putting risk on the balance sheet in this risk-off market. But the transaction pipeline is fairly full, with a lot of overhang waiting to launch. Some transactions need to happen regardless of Brexit.”

In fact, the UK bank is looking to grow its loan book by around 8% per annum. It is well positioned to reach this goal with its focused but cautious approach. “We need to continue to focus on the right quality transactions at the right price in order to reach that sort of growth,” says Mr Meyer. Investec’s diversified business model across various asset classes and services enables it to participate in various growth opportunities, both on the margin and fee side for investment banking advice, as well as putting its lending capital to work.

Diversification through specialisation

The implementation in early 2018 of Markets in Financial Instruments Directive II regulation, better known as MiFID II, which changed the rules around investment research distribution and the relationships between clients and financial services providers, fundamentally reshaped the market in Europe for mid-market companies. Smaller, less well-diversified research houses and corporate brokers have struggled, spurring consolidation in the market. “There is a huge runway to grow our market share as a full-service outfit. Investec may be relatively small, but it is hungry for growth,” says Mr Meyer.

Where the CIB offers a full breadth of services, Investec also has a specialist international franchise, covering four separate niches where it has built global expertise. First, the aviation arm provides leasing, aviation finance and asset management services in the sector, raising £1bn in funds over 2018. Second, it offers specialised financing, lending and advice to the power and infrastructure sector, with a focus on renewables. Furthermore, it has a commodities branch and a fund finance franchise, which supports private equity (PE) funds wanting to lend against assets in their funds.

The latter in particular has grown in recent years, with many PE funds borrowing against commitments from limited partners or assets. “We offer broad services to private equity, from advice on M&A to leveraged acquisition finance and facilities into funds,” says Mr Meyer. Investec mainly services mid-market funds, but has been on big transactions recently. Notably, it acted as an M&A adviser for Clayton, Dubilier & Rice-backed Motor Fuel Group on its £1.2bn takeover of MRH, a UK-based petrol station and convenience store operator.

Though it may venture away from its roots on the smaller end of the food chain, Investec is dedicated to its mid-market client base. Mr Meyer exemplifies the culture the bank fosters: passionate, straightforward and authentic. “Investec encourages an entrepreneurial spirit and a sense of ownership, the feeling that we are building something together,” he says.