The optimism that greets the new year is not exactly brimming over in the offices of Australia’s investment banks. After a lacklustre 2012, prospects seem no better this year, and what was once a supercharged industry running on a flow of deals and bonuses has become one of the underperformers of the Australian financial industry.
While fund managers contemplate consolidation and the survival of the boutique model, they do at least have the benefit of around $1 billion a week in superannuation inflows looking for a home.
Not so for the investment banking industry, nor the dealmakers in advisory and equity capital markets. Sitting around hoping for an advisory mandate or a bit of M&A action has, for many of them, been a long wait as it has been to for those expats who arrived back in Australia displaced by events in Europe waiting for a job – any job – to welcome them home.
The situation has also impacted on salaries, with the average investment banking salary down below $100,000 per year for the first time in several years. Bonuses? There won’t be any for around 50 per cent of the investment-banking workforce as a result of the barren 2012. Headcounts are down around 10 per cent across the board.
In 2012 investment-banking revenue fell to its lowest level since 2005. Figures from Dealogic, a platform provider, show that the top 10 investment banks in Australia shared $1.4 billion in revenue, down more than 25 per cent on 2011, while transaction volumes were down around 35 per cent year on year.
Fees for advisory work were just over $500 million, barely half of 2011. Deal sizes are down significantly and the number of $1-billion plus deals has largely dried up.
At the heart of the issue domestically is that corporate Australia is still running scared after the global financial crisis. Although companies have deleveraged and cleaned up their balance sheets – which made for some nice deals in the ECM space, particularly for hybrid instruments – they are strangely reluctant to take the next step and move into M&A mode to grow.
Decent IPOs have all but petered out and some big ones have been shelved, despite the market’s relative health. The phrase out there is “glass half empty, not half full.”
Traditional industries where M&A has thrived – such as the media – are in decline and a lack of cashed-up offshore bidders has taken out the competitive price tension. Old-fashioned takeover deals with competing bidders can be counted on one hand.
Private equity, as evidenced by the CVC Asia disaster at Publishing and Broadcasting, has also been problematic, although the recent activity for surf wear company Billabong – with two rival bids – is a welcome ray of light for the whole industry.
Not much change ahead
So while debt markets are ticking along at a decent clip, hybrid issuance is popular and even securitisation – if you include covered bond issuance – is showing signs of life, the masters of the universe who were once our investment bankers are still waiting for the tide to come back in, and that needs a renewal of foreign investor interest. In 2012, the high dollar played a part in muddying valuations and scaring foreign players off – or at least persuading them to wait.
The hope in the towers of the investment banks is that many of the deals the market expected in 2012 will come to fruition in 2013. A look around the mining (particularly gold), agribusiness and infrastructure sectors hints at a number of possible deals which, if the year can shrug off its doubts, could bear fruit.
At one time, bright young financiers went into investment banking because it was where the excitement and the bonuses were.
Not many people are expecting 2013 to be too different to 2012, which begs the question on the future of an investment banking industry which many have said, for a long time, is over-banked and over-serviced by lawyers.
Thankfully, there is still the funds management industry and the $1 billion in superannuation inflows, but even that could be ripe for consolidation, for a host of different reasons.
So, as the financial industry returns to work, 2013 is a scary prospect for some. Thousands of people have lost their jobs in the last few years and only a significant uptick in the market can prevent the trend from continuing.