Boutique investment bank StormHarbour was created in 2009 with the intention of reviving a more tailored and less conflicted approach to serving clients. The idea is attracting a growing number of heavy hitters.

It takes strength of character to start from scratch after 20 years at one of the world’s largest banks. But when Antonio Cacorino departed as head of investor clients at Citi in 2008, he knew he wanted to take a different approach. That desire for change was the core mentality behind StormHarbour, which he co-founded in 2009 as a boutique investment bank with a leaning towards the more skill-intensive end of the credit and fixed-income markets.

“We felt that an investment bank that had real content and purpose, rather than just a huge balance sheet, could address issues where larger banks would struggle with conflicts of interest, bureaucracy and the pressure of quarterly earnings reports,” says Mr Cacorino.

He is fairly sure that at least 50% of StormHarbour’s more than 200 staff are quite capable of earning significantly more in the short term in a bulge bracket bank. But they have joined because they were equally disenchanted with large investment banks putting money into play without thinking clearly about business models or long-term client relationships – a boom time approach that no longer works. They also had the confidence to use their experience and skills without the infrastructure of a large bank behind them, and a willingness to subscribe to a performance-based compensation culture that aims to align personal wealth creation more closely with delivering results to clients.

Firmly on board

When Amir Hoveyda joined the firm in September 2011 as a managing principal in the London office, after several months of his own careful due diligence on the partnership he was about to commit to, it was a vote of confidence in StormHarbour’s model. Mr Hoveyda was another exile from a giant institution, after 14 years at Merrill Lynch, culminating in a spell as head of European high-grade and high-yield debt capital markets during which time the bank was acquired by Bank of America.

With a background in the financial institutions group (FIG), he had a good insight into the value of an unconflicted independent advisory firm at a time when the largest banks needed help to restructure their balance sheets. But his desire for a new approach went deeper than that.

“What I felt I was seeing was the industrialisation of a craft that I had taken a long time to learn. I wanted to go somewhere that would allow me to practise that craft unencumbered by the by-products of industrialisation – not only the conflicts of interest, but also a mass production approach to capital markets origination and a move away from tailored solutions that are focused and built entirely around the clients’ needs,” says Mr Hoveyda.

He also liked the fact that StormHarbour’s model rests on a combination of capital markets, brokerage and advisory businesses, whereas most post-crisis start-up boutiques have tended to favour advisory or brokerage in isolation. He feels the balanced approach gives the business viability in the long term, not just in the current deleveraging cycle.

“Half of our headcount is a distribution network intermediating for about 1200 of the largest institutional investors. But even in that regard, we are different from the pure brokers in that we were set up from the get-go as a global rather than a regional practice, and we focus on the complex credit-intensive and illiquid end of the fixed-income spectrum. Most new brokers are set up to handle flow activities where they will thrive only when the big banks have balance sheet challenges that restrict their market-making activities,” says Mr Hoveyda.

Making its mark

On the other side of the coin, Mr Hoveyda feels the distribution network gives StormHarbour’s advisory capabilities an extra dimension – a first-hand understanding of the markets and the ability to execute capital markets-driven transactions that are typically not available to pure merger and acquisition or risk solutions firms. The global network currently includes offices in New York, Singapore, Hong Kong, Geneva and Copenhagen as well as London.

So far, the numbers support Mr Hoveyda’s confidence. A mandate on the $4bn restructuring of CMA CGM, the world’s third largest container shipping company, catapulted StormHarbour into the top 10 financial advisory firms in 2011 by value of debt handled, according to data provider DebtWire. While the partnership chooses to keep its revenues confidential, Mr Hoveyda is willing to say that earnings rose 30% even in the dislocated markets of 2011, and the firm has made profits for two years despite the rapidly multiplying headcount.

“Our strength and our weakness is our relatively short life as a firm. Going to see potential clients, not all of them knew who we were. But once we presented our platform, explained our approach and introduced our experienced team, with partners averaging 20 years in the market, the notion of quality over quantity resonated with clients,” says Mr Hoveyda.

Repairing the damage

While FIG advisory work is an obvious strength, Mr Cacorino says the firm sees potential in a wide range of sectors whose development became intertwined with the excess of cheap bank leverage available during the boom. A by no means exhaustive list includes commercial real estate, infrastructure finance, shipping and aviation finance, mining, energy and renewables, and perhaps even municipal finance.

“These sectors became tainted by lax underwriting standards and high loan-to-value ratios. Across Europe and the world, much of the bank lending to these sectors was long-duration – the exact opposite of what healthy short-term funded banks ought to be involved in. Many trades were low carry, so they were very sensitive to credit spread changes that have now driven them into negative carry. And as yet there has been no broad securitised solution to these problems,” says Mr Cacorino.

For Europe in particular, these problems are acute because financing remained largely a bank-driven business, and some disintermediation is essential to restore economic growth. Mr Hoveyda estimates that bank lending accounts for little more than 25% to 30% of credit in the US, with bond markets picking up the rest. But in Europe, the ratio is at least the inverse.

That means for now, the US is the key market for the firm – for the industry as a whole, daily credit trading volumes and new issuance are about 10 times European levels. But the need to develop an alternative financing model, in Japan as well as Europe, means that these markets should show higher growth for StormHarbour in the medium term.

Mr Cacorino says that the timing of that opportunity will depend partly on when European policy-makers shift their own attention from fixing bank balance sheets to incentivising the creation of alternative buyers of credit. He is also hoping that Asian policy-makers will have learnt the lessons from Europe, to build up alternative credit holders so that lending risks do not become concentrated in the banking sector.

Aiming high

The firm itself also needs to take an extra step to grasp the opportunity, both with the FIG clients and with the largest non-banks. This is the challenge of a boutique firm that does not have ongoing banking flow relationships to reach the decision-makers who can best employ StormHarbour’s services.

“At an operational level, we already have many points of entry, but less so at the C-suite,” says Mr Hoveyda. To address that challenge, the firm recently achieved a notable coup in signing Eric Daniels, the former chief executive of Lloyds, to his first appointment in the investment banking sector since leaving the UK banking group in February 2011.

“Eric understands the problems that bank chief executives face, the investor and political pressures, which is very helpful when we present ourselves to senior decision-makers. He has first-hand knowledge of the bank restructuring process, which is very valuable experience when explaining to people what worked, what didn’t, and why. And like all of us, he has come here out of choice when I am sure he had any number of alternatives,” says Mr Cacorino.

But while StormHarbour’s global reach is a core part of its strategy, the principals are certainly not planning to turn it into the next large investment bank. The firm is 100% owned by its 30 or so partners, and Mr Hoveyda points out that this was the model that worked for Wall Street for about a century. The listed giant model has worked rather less well for little more than 20 years.

“How big is too big? If I knew that for sure, I would have written it into the original partnership contract,” jokes Mr Cacorino. “Of course, success will drive the desire to grow, to seize opportunities. But I think the partners will know if we begin to lose our nimbleness, or to develop the internal politics that are not compatible with a genuine partnership.”

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