The European sovereign debt crisis provided a sombre backdrop to developments in global investment banking, particularly in the second half of 2011. One firm accelerated and consolidated its truly impressive build-out. For increasing market share, executing more than its fair share of the year’s stand-out business, staying profitable throughout, and transforming itself into an increasingly go-to investment bank, Barclays Capital is IFR’s 2011 Bank of the Year.
The arrival of Barclays Capital as a top-notch full-service global bulge-bracket investment bank is the latest stage of a journey that Bob Diamond, the recently installed group CEO, began some 15 years ago. BarCap today is in full-on build-out mode, having navigated the financial crisis with relative success and made a lot of fundamentally sound decisions about its future.
Against vigorous competition, BarCap maintained its number one spot in global debt underwriting in 2011; it ranks third in combined global debt, equity and equity-related activity in an extremely close-run contest with JP Morgan and Deutsche Bank, and has powered its way to seventh place both in worldwide announced M&A and global syndicated lending. The firm is making serious inroads and aggressively competes for business in a multitude of places in which it did not have a presence until recently.
“There isn’t a single business where we have not gained market share at a time when so many of our competitors have been distracted by levels of capital or levels of regulation,” Diamond said.
And progress is not going to stop here. BarCap has laid some extremely solid foundations; a return of more normalised patterns of market activity is likely to see it become a serial industry outperformer.
“Our clients now recognise that we are a full-service investment bank with an ability to execute advisory, financing and risk management solutions on a global and integrated business,” said Jerry del Missier, who was appointed co-CEO of BarCap with Rich Ricci in October 2010. “This is shown not only by our continued market share gains but also the results we have delivered for our clients in an extremely challenging year.”
Transition and integration
The management transition at BarCap, precipitated by Diamond’s elevation to the group CEO’s office, was a milestone. Diamond was unquestionably BarCap’s chief architect since the mid-1990s, but credit for masterminding the firm’s progress in the past couple of years also goes to del Missier and Ricci, long-serving and close Diamond confidants. Both had worked in the office of the CEO for five years, and as Diamond took control of the BGI and Wealth divisions, and then became president of the group, Ricci and del Missier took on more responsibility.
“Most people from outside questioned whether co-heads would ever work, but Rich and Jerry are very special people. Frankly, I was probably getting more of the credit than I deserved externally for BarCap’s success,” says Diamond.
Of even more importance to BarCap’s success was the successful integration of Lehman Brothers’ US operations, which the firm bought out of bankruptcy in 2008.
“When we came to put the two organisations together, they were very complementary; the overlap was only in fixed-income and DCM. So we said: ‘let’s keep and preserve our tremendous strengths on the fixed-income side, but focus on building out equities and M&A outside the US’,” Ricci said. “We believe the approach we’ve taken to become a leading global investment bank has been extraordinary. Barclays Capital has risen to take its place among the bulge bracket. It’s been nothing short of a transformation.”
One of the things the firm did right up-front was to confront the fact that there were going to be layoffs. Headcount was cut by 4,000 as the two sides came together, but the firm introduced a retention programme for key staff and adopted a rigorous approach to keeping the best people. It ended up being more or less 50–50 from each side. In a clear pointer to the lack of acquirer bias, the bankers reporting to Skip McGee, the (ex-Lehman) global head of investment banking, are all ex-Lehman with one exception, but it is a group that can match the best in the industry: Larry Wieseneck, head of Global Finance and Risk Solutions (ie. DCM, ECM, leveraged finance and loans); Paul Parker, head of M&A; Jeffrey Weiss, head of FIG advisory; and Ros Stephenson, co-head of corporate finance. The only new face is ex-Citigroup rainmaker Tom King, who joined BarCap in October 2009 as co-head of corporate finance.
After making tough choices around headcount and staff selection, quick integration was critical. McGee says the cultural fit was good. “The Barclays Capital approach of no silos and of teamwork fitted nicely with the partnership orientation that Lehman had,” he said. “As a result, we’ve had unbelievable retention. The real reason people are here is they believe in the story and want to be in a place where the best days are ahead of us and where momentum is strongly positive.”
McGee’s comments are echoed by Jerry Donini (another ex-Lehman man), the global head of equities and Americas trading. “It was clear very early on that Barclays knew how to run client-focused businesses. The cultural fit was obvious reasonably quickly and from then on, the combination became transformational. Lehman didn’t really have global reach and it didn’t have lending or risk solutions; these have had huge knock-on effects.”
On the flip side, Barclays’ acquisition of Lehman Brothers’ US operations was incredibly powerful because it finally gave BarCap the US bulge bracket credentials that Bob Diamond had craved for so long. The firm that had previously focused on debt and risk advisory finally got its hands on a full-service M&A practice and a leading equities platform. These additions took the acquisition way beyond the bolt-on of a busted firm.
Building in a hurry
So with del Missier and Ricci installed as new co-CEOs, a solid ExCom in place, headcount issues sorted, and integration complete, the firm could push on with its global growth strategy. That unleashed an exhilarating cycle of hiring playmakers and adding senior firepower across products and regions, particularly in focus areas of international M&A and equities/ECM.
“We have a proven track record of building businesses so that’s what we decided to do,” Diamond said. “By not buying Lehman outside the US, we felt we would be able to hand-pick the best individuals, people who were culture-carriers within their organisations and integrate them into our culture. Having so much incredible world-class talent – people in the primes of their careers – is incredible.”
The list of big-league hires is a long one; as well as King, highlights include Matthew Ponsonby (co-head of M&A) from Citigroup; Mark Warham (co-head of M&A), Matthew Ginsberg (head of Asia investment banking), Ed King (head of Asia M&A), and Alisdair Gayne (head of corporate broking) from Morgan Stanley; Sam Dean (co-head of ECM) and Adam Welham (head of equity syndicate) from Deutsche Bank; Jim Renwick (head of UK ECM and corporate broking) from UBS; and Stefano Marsaglia (chairman of FIG) and Ben Davey (co-head of European FIG) from Rothschild.
That roster should mean that once confidence returns to the markets, BarCap will be among the best-placed investment banks to capitalise on new opportunities and put to work the organisation it has so impatiently and aggressively been building.
“The slowdown in market activity can in many ways be beneficial to us. Although conditions are more challenging for generating revenue, we have been able to attract talent, which means that when the markets turn we [will be] well positioned to participate in the recovery,” said Donini.
He added: “We’ve been able to build out content, distribution and banking, and concurrently grow market share and develop our credentials. So right now, we stand ready to take advantage of opportunities that present themselves in 2012.”
BarCap’s story in 2011 was by no means just about building for the future; it was also a year of execution. The firm’s financing businesses fired on all cylinders in 2011. Wieseneck puts the success down to what he considers to be the unique structure of his Global Finance & Risk Solutions group. “Silos don’t exist here. Our goal is to deliver the best ideas to clients, agnostic of product type. The transactions we executed in 2011 illustrate our ability to deliver market expertise, intellectual capital and risk management, which provides deep insight to clients and fosters a stimulating, team-oriented environment for our professionals – it’s a win-win.”
And 2011 was indeed a win-win year for BarCap and its clients. Time and time again, the firm did a ton of strategic business – and repeat business – for major clients across products where delivery was key. And BarCap consistently delivered. “Our continued success can be credited to our integrated client coverage. We approach each client with the same philosophy: bringing the best solutions to the table, regardless of product type. That is a huge differentiator,” del Missier said.
Thought-leading firepower
To that point, BarCap burst on to the big-ticket acquisition financing scene with self-assured aplomb and stunning success in 2011. The bank executed some of the year’s biggest deals, invariably involving multi-product skills and cross-border collaboration. On the lending side, the bank distinguished itself by growing its franchise in difficult and volatile markets. And it repositioned itself from a balance-sheet lender into a thought-leader.
Melding advisory, financing, and a large balance sheet with a disciplined approach to risk was a winning combination. While BarCap sole underwrote a massive US$24.6bn of jumbo US M&A loans, it never just threw capital at situations to win business. “We use our balance sheet but we have a lot of discipline around it and there’s a rigorous process,” Ricci explained. “When we make commitments, we have a good idea how we’re going to manage the risk and how we plan to leverage ancillary business Where we have expertise and knowledge, we bring in the balance sheet for the benefit of our clients.”
Among its landmark acquisition financings of 2011, Kinder Morgan’s US$37.8bn acquisition of El Paso was a stand-out. The deal was the third-largest M&A deal of 2011 and the largest energy sector deal since 2009. “On the US$13.3bn cash piece of that deal, we spoke for the entire amount, which was very important to our client. Since we didn’t have to go out to the Street, not a word leaked out. There was no movement in the share price and it all hung together,” McGee said.
And to Ricci’s point about risk discipline, the bank completed syndication of the bridge and took its risk down to US$700m. A major part of the ongoing deleveraging story was the sale of the oil and gas properties and the BarCap team handling that has a plausible claim to be the best in the industry. “For the firm to do something super-sized like this, everything had to line up – a long-time trusted client, industry expertise and great management team/execution skills. The Kinder deal was so energising for the entire firm,” McGee said.
BarCap had acted earlier in the year as joint bookrunner on Kinder Morgan’s US$3.3bn IPO, which was the largest US energy IPO since 1998. It was also the largest private equity-backed IPO at pricing and the second-largest US IPO of the year.
The US$11.7bn takeover of Autonomy by long-time Lehman client Hewlett-Packard – the largest ever cross-border software M&A deal – also exemplified the firm’s prowess. “We spoke for the entire £5bn cash piece,” McGee said. “The rich technology sector expertise was there and the UK M&A team also was actively involved. This was a funds-certain trade, so there was a big FX piece to get the dollars to sterling, which we handled.”
“Additionally, we were lead-left active bookrunner on US$4.6bn of senior notes which significantly reduced the bridge (which has now been completely repaid). The transaction underscores our ability to co-ordinate seamlessly across the entire organisation from investment banking and risk management to corporate broking and ultimately wealth management.”
For Wieseneck, Kinder Morgan and HP were landmark transactions that exemplify one-stop shopping. “These were transformational deals for our clients that they announced during periods of severe market volatility. To execute successfully, we needed to deliver seamless M&A, debt, equity and risk management advice. Looking back, it was an incredible accomplishment.”
Rapid-fire progress in ECM
International ECM and equity sales, trading and research – the major build project alongside international M&A – came on in leaps and bounds in 2011. Given the short time it has been active outside the US, BarCap’s ninth position in global ECM is impressive.
“In Europe and Asia, we’ve put ourselves in the upper tier in content quality, in IPOs and corporate broking in the UK. Market share is a lagging indicator, but we know our secondary business is pointing in the right direction. We’re consistently taking market share and have done so in every single market we operate in. We have great momentum,” Donini said.
The build-out of sales, trading and research has been extraordinary: from a standing start of 10-plus team members in EMEA in October 2008 (primarily in corporate equity derivatives) and no research, BarCap now has a team of more than 50. And more than 500 of the 1,800-plus names in the global equity research coverage universe are in EMEA.
Outside the US, the core focus in 2011 was establishing a strong business in Europe – first in the UK and then on the continent. “Our strong momentum in corporate broking in the UK is at the heart of this strategy,” del Missier said. “At the same time, we have continued to develop the franchise and executed some important transactions for clients in CEEMEA, Latin America and Asia-Pacific.” The firm’s momentum in corporate broking certainly impressed competitors. Bearing in mind the years of history typically tied up in UK corporate broking relationships, the fact that BarCap has been able to secure 23 assignments is impressive.
Just two years into the European project launched under Dean and Renwick, BarCap’s EMEA ECM build-out is still early-stage, but BarCap had completed 28 EMEA trades by the time 2011 was nearing its end, against top-ranked Goldman Sachs’s tally of 39 (albeit with a significant value differential).
BarCap has certainly taken on trades where the risk was considered too high for some established players, but accusations of buying league table and doing unprofitable trades are wide of the mark. Of the 10 accelerated bookbuilds that BarCap completed in the year to November 2011, it did not make a loss on a single transaction. Rights issues for Piraeus Bank (€807m), Banca Popolare di Milano (€800m) and UBI Banca (€1bn) were certainly punchy trades, but BarCap’s willingness (perhaps, need) to look at the smaller, tougher deals also means it is the only bank to have done two sole bookrun marketed trades in Germany of more than US$50m (for Nordex and Aurubis).
Competitive pricing allowed BarCap a place at the table. It won it a sole books mandate on the €385.5m stock sale in Spanish travel operator Amadeus. The real benefit of doing that trade was that BarCap had shown BC Partners and Cinven – the private equity houses behind the sale, and active firms when it comes to European IPOs – its distribution capabilities, arguably the greatest test for a new entrant. Asian ECM expansion is about a year behind that of Europe, but December saw BarCap price its first IPO in Japan as bookrunner: the ¥98bn (US$1.26bn) float of South Korean online gaming firm Nexon.
In the US, Lehman had had a decent equities franchise, but the team was almost forced to start again under the BarCap moniker. “When you’re out of business and you show up representing Barclays Capital having never done an IPO, people are leery of you,” said David Erickson, global co-head of ECM. “Even though most of us were from Lehman Brothers and everybody knew that, we had to spend an enormous amount of time convincing issuers and sponsors.”
In the circumstances, BarCap’s seventh position in the US ECM league table is all the more striking. Even more impressive, the firm jumped from sixth to third in US IPOs – behind Goldman Sachs and Morgan Stanley but with unparalleled market-share momentum. The firm ran the books on six of the 10 largest US IPOs in 2011 and, more significantly, had an 18.2% share of PE-backed IPOs, second only to Goldman Sachs. BarCap jointly ran the best-performing IPO among the sponsor class: Dunkin’ Brands’ US$486m offering.
The firm maintained its number one ranking in US blocks/ABBs, and on 20 separate occasions – nearly twice that of its nearest rival – stepped in with the winning bids – to claim US$3.7bn worth of business.
As well as stellar work on Kinder Morgan’s IPO, BarCap was trusted banker to healthcare operator HCA. It was joint bookrunner both on HCA’s US$5bn senior notes offering – the biggest high-yield deal since the credit crisis – but notably also on the company’s US$4.4bn float. HCA’s IPO was the largest of the year out of the US, the fourth-largest globally, the largest ever global healthcare IPO and the largest ever sponsor-backed IPO, attracting orders from more than 500 institutions worldwide.
On Capital One’s US$8bn acquisition of ING Direct USA, BarCap was joint bookrunner on the company’s US$3bn multi-tranche bond as well as joint books on the associated US$2bn follow-on stock offering, which involved the largest-ever forward sale of equity.
Marquee DCM franchise
DCM continued to be a core and truly marquee product for the bank and in 2011 BarCap consolidated its position as a key partner for buy-side and issuer clients. It is one of only two banks that can boast a top-five underwriting slot in the euro, US dollar and sterling markets, and one of just three across all the international FIG, SSA, corporate and securitised sectors. The firm commands a seat at the table for the largest and most noteworthy transactions.
BarCap demonstrated the advantages of global capabilities; securing funding in borrowers’ home markets as well as uncovering new investor bases overseas. It brought US issuers to the euro or sterling markets, found international demand for Asian issuers, and took international issuers to the US market. The bank was present in every sub-segment of global debt markets – excelling in areas like international ultra-long dated issuance; corporate hybrids (60% of all completed trades); European and emerging market sovereigns; agencies and supranationals.
In covered bonds, BarCap was again a leader. It opened and re-opened dollar and euro markets, brought the biggest deals of the year, brought new life into sterling, and opened new jurisdictions – most notably in New Zealand, where it arranged every inaugural issue. The fact that these came largely from Australian-controlled borrowers was a key impetus for the introduction of covered bond legislation in Australia, something in which BarCap was again heavily involved.
Additional reporting by Philip Wright, Owen Wild, Stephen Lacey and Tessa Walsh
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