Thursday, January 27, 2005

Financial sponsor bankers make it big

FT Article
By James Politi and Lina Saigol
Published: January 26 2005 21:03 | Last updated: January 26 2005 21:03

Last week's $800m initial public offering of chemicals company Celanese not only cemented Blackstone Group's reputation as a savvy buy-out firm, but also closed the circle on a big investment banking coup.

It was the financial sponsors group at Morgan Stanley that pulled it off. After bringing Blackstone the idea of acquiring Celanese three years ago, the US investment bank then provided debt for the purchase, and finally took the company public.

Although fees are not publicly disclosed, Blackstone is believed to have paid in excess of $200m to Wall Street firms over this three-year period. Morgan Stanley, because of its central role, is thought to have reaped as much as $80m of that.

The pay-out contributed to outside estimates that nearly 20 per cent of Morgan Stanley's investment banking revenues were generated because of private equity- related deals in 2004, a greater proportion than ever.

This explains why financial sponsor bankers - who traditionally operate in the shadows of their M&A peers advising large public companies - are now considered among the busiest and most influential on Wall Street and the City of London.

"Private equity groups constitute such a high portion of our business that everyone has to care about them," says Alan Jones, co-head of Morgan Stanley's financial sponsors group.

"The scale and size of private equity clients is certainly growing and a lot of people on Wall Street have recognised that there is a fee stream to be earned and treasured," adds Jon Weiss, global head of JPMorgan's financial sponsors group.

Some observers maintain that bankers such as Mr Jones and Mr Weiss are mere gatekeepers - attracting business and managing relationships but passing on the execution of deals to the industry and product specialists.

Others, however, claim that financial sponsors are the last great investment banking "generalists", actively engaged in trans- actions involving every sector, from chemicals to media, to every investment banking product, from mergers and acquisitions advice, to equity and debt underwriting.

Kamal Tabet, global head of Citigroup's financial entrepreneurs group, says financial sponsors have to be financially sophisticated as they have constantly to compete with trade buyers and public markets.

"There are very few 'proprietary' ideas available when dealing in the upper middle market and large transactions. It is all about execution - the ability to maximise leverage and offer more attractive values," Mr Tabet says.

Whatever their exact role, these bankers - including names such as Alison Mass and Milton Berlinski of Goldman Sachs, Ros Stephenson and Peter Combe at Lehman Brothers, and Harold Bogle of Credit Suisse First Boston - have become household figures, much like the technology bankers who ruled the M&A world in the late 1990s.

They also wield more power internally. Last year, Mr Bogle - who oversaw deals such as the sale of PanAmSat to private equity groups, in which CSFB provided the financing and advised on the sale - was promoted to the investment banking division's operating committee. People close to the bank pointed to the move as a reflection of his unit's growing influence.

It was not always like this.

"Only a few years ago, the financial sponsors group at Goldman Sachs was a fraction of the size it is today, with a fraction of the resources," says Ms Mass.

In 1994, only 10 private equity funds were larger than $1bn. And at the height of the deal-making frenzy of 1999/2000, private equity transactions made up only 4.3 per cent of deal activity.

By last year, however, the number of funds larger than $1bn had shot up to 100, and the percentage of US M&A related to buy-outs had moved up to 19.3 per cent, according to Capital IQ and Thomson Financial.

The boom is being driven by several factors.

"The lending environment has been terrific, the equity environment has been strong, and corporate acquirers - the main competition on deals - have until recently been on the sidelines," explains Ms Stephenson.

In this highly competitive environment, the key for people such as Ms Stephenson is to be able to supply clients constantly with new ideas for deals - like Morgan Stanley did with Blackstone - outside auction situations, where prices are inevitably higher.

And success as a financial sponsors banker is infinitely better rewarded than it ever used to be, which means many young bankers are choosing these teams as the places to start their career.

"Bankers always want to be where the transaction volumes are highest," says CSFB's Mr Bogle. "In the 1980s, that might have meant covering the oil and gas sector and in the late 1990s, the technology sector. Now it might be working for financial sponsors."

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