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Investment banker needs more than fancy shoes

By Leigh Davis

Friday 2nd May 2003

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Investment banking is primitive in New Zealand and resembles a cottage industry ­ the manufacturing and distribution of investment banking services revolves around individuals who offer "me-too" services to clients. The capital needs of the business are low and are related to the day-to-day requirements of working capital only. For this reason as well as others, there is a capacity for change in the industry.

The demand for investment banking services is uneven and much of it is idle, on any given day. In the hot flurry of bankers seeking clients, there is little room for specialised business management.

Business model innovation is not high. Each investment banking firm struggles to be more important than the individual service practitioners who work there.

Investment bankers are artistes: charismatic marketing types, earnest boffins, easy affable types, like real estate agents but with a better class of shoes. They manufacture their wares ­ pieces of transaction service ­ and take them to market, set up their stalls and call out to passers-by. They work hard to accentuate small differences of offering quality: "I know this company;" "I have done a lot of work;" "I can run a good process;" "I am inexpensive" and so on.

These offers are all that prospective clients are given, but they rarely inspire confidence in them. This is evident from the simplistic advocacy heard in boardrooms when decisions about the appointment of this or that investment bank are discussed.

The reasons an investment banking firm is chosen above the others are rarely compelling and are always politically cast or too price-sensitive. Politics and price drive the choice of service provider, when differentiation among these providers is poor and only weakly supplies alternative buying guides. Clients often pay too much for a product that fails to live up to its promise.

The industry has cycled through boom and bust markets and ownership changes over the past 40 years but this has only changed the value and the size of the activity. The fundamental character of the industry has changed little. It has always been a big or small, local or foreign-owned cottage industry.

The next phase of investment banking will see the emergence of investment banking firms with strong business brands. All investment banking firm strategy will be set with reference to the promise and fulfilment of these brands.

They will organise and inform demand. They will communicate significant differen-
tiation with existing and new customers. They will represent attributes that are important to clients and will drive their buying behaviour. Brands will organise the supply of services within investment banking firms.

They will call out strong product differentiation. They will drive scalability, raise entry barriers and help increase overall capacity use.

This is important for investment banking in New Zealand, because the country has a low density of clients who are able to value and afford investment banking services.

The average transaction size is relatively small and the wealth of the industry as well as its relevance depends on doing a lot of them, with low costs of customer acquisition, low costs of service delivery and high value added.

To see the future of investment banking in New Zealand, we should consider the essence of the value that this industry offers to its clients. Investment banking is the provision of services that improve the equity finance companies have available to them, considering both its volume and cost and which enable these companies to be bought by other companies, to buy other companies, or to be sold to other companies. These services are of high relevance to corporate decision-makers.

Imagine what you feel like as a homeowner when you want to sell a house. It is something that you don't do a lot, you only know half of what you want to know, you make your own decisions, and the difference between a right action and a wrong action is 10% of your net wealth. Now imagine that same type of uncertainty, magnified enormously, and felt by your average investment banking client chief executive and board of directors.

Investment banking provides assistance with these sorts of decisions. Investment bankers deliver their services into a "crisis" space. Using the word technically, and accurately, investment bankers provide services to clients so that they can manage crises, and create or preserve capital value, relative to the damage they could do if they managed these events poorly.

Investment bankers provide specialised analysis, judgment and effective courses of action at such times. The best firms communicate to everybody who is not close to the transaction, but who is interested in the outcome of such things, that right thinking and right action has been put in place.

Ordinary Kiwi companies have crises too. These events, "moments in the history" of any company, are not just reserved for top-end corporate New Zealand companies.

Investment banking services should be available to a majority of New Zealand companies at the right price.

Investment banking firms require serious brands, the right people and business-process horsepower. This is the future of New Zealand investment banking.

Leigh Davis is a business partner of Deloitte Corporate Finance

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