Copyright: David Lawson - Europroperty May 2003
The argument has simmered since US investment banks launched a campaign of financial shock and awe in Europe, spending most of the last decade cutting and slicing companies, portfolios and property debt worth billions. But the rivalry has been sharpened as lucrative merger and acquisition business dwindles.
Banks have been accused of trying to compensate by taking on smaller deals dominated by real estate, treading even more firmly on the toes of advisers. At the same time they are carving into the regime of another heavyweight division, the German mortgage banks, by making straight loans as small as £10m.
Yet few agree this trend is just a result of falling M&A. Management buyouts have made up a lot of ground lost on external takeovers and there is still the odd titbit like the UK retail revolution which has seen a £3bn bid for Safeway, £600m for Selfridges and £1.5bn for Debenhams – all hinged around real estate.
Ian Marcus, managing director of real estate investment banking at CSFB, one of the giants said to be sprinkling around small loans, insists it is natural to adjust to suite the cycle but pointless going up against the cheap money German banks can offer. The real attraction is ‘clever finance’ involving layered lending. A bank may increase the loan-to-value ratio from 75% to 85% so it can then sell on the mezzanine layer to a specialist.
‘The dream ticket is to provide a one-stop shop for a buyout, where a bank can bundle up advice and funding, but not all can do this,’ he says. ‘Some are strong on advice, some on funding.’
Cutting and slicing was behind the deal where Pillar took over Wates City. CSFB did the number crunching and brought in DEPFA for the heavy finance. Wembley Stadium was similar, providing mezzanine debt with senior funding from WestLB
Marcus has done eight buyouts in the last couple of years, mainly in the UK. It is this fertile ground of public-to-private deals on which the banks and advisors are converging, re-sparking debate on which is the most able to meet clients’ needs. Meanwhile, both are looking over their shoulders at the mortgage banks since Eurohypo staked a claim by setting up its own strategic investment team.
So who is winning? Each has a victory to offer – and a cogent argument why they are natural leaders. Tony Edgley, chairman of Jones Lang LaSalle Corporate Finance, reels off a string of deals where the firm has taken a lead role: the Eur108m takeover of Laing Developments, the Eur289m deal for Banimmo, work being done to spin off J Sainsbury Development and - the jewel in the crown - disposal of Railtrack Development. Less than a year after rebuilding its finance team DTZ Debenham Tie Leung is working on raising £50m for an hotel chain, according to head of M&A at DTZ Corporate Finance Chris Nicholle.
Both see these as indicators of the way advisors can take business which would have gone to investment banks a few years ago. While the US names have overwhelming financial strength, property firms have the edge in numbers of people on the ground, says Edgley. ‘An investment bank will have anything from 10 to 70 people on a real estate team. We have hundreds. It is inconceivable they can provide the same degree of certainty.’
Nicholle points out that business does not always gravitate to big names. It has to be sniffed out and that’s where a European office network wins out – plus the fact that the eventual deal can be structured from a lower cost base of a compact finance team.
None of this cuts much ice with the investment banks, of course. They don’t dispute that property advisers have great expertise – in its place. ‘We may call them in if we want valuation advice,’ says Wilson Lee, managing director of Lehman Brothers Europe. ‘But we have the real estate skills to decide strategy for ourselves.’ And the financial skills to advise on a buyout like Burford, which involved rolling up management equity options. Plus the ability to provide the whole financial package of sale and leaseback, bond issue and securitisation for the takeover of Allders.
Morgan Stanley shows what the pretenders are up against. It stands head and shoulders over the competition in lending, with £6bn secured on more than 1,365 properties in the UK, Ireland, Italy, France, and Belgium through its European Loan Conduit. But this is a continuation of its early entry into the market rather than a change of direction. It is also lead partner in major buyouts like the Safeway takeover and Weston’s bid for Selfridges..
John Carrafiell, head of European real estate at MS Finance, and something of a god-like presence in European real estate circles, offers two big advantages over the opposition. Firstly, the bank has the strength to underwrite deals off its own balance sheet and then securitise rather than putting the load on clients. It’s an approach other banks are now trying to follow.
But just as critical is the automatic assumption among blue-chip companies that investment banks are the first port of call for business restructuring. Like Marcus, Carrafiell is happy to work with property advisers and even cede them precedence for ‘bottom up’ deals that are heavily real-estate led. But he gives no quarter on the big ones.
‘A large group comes to an investment bank because deals may involve more than real estate. They are about credit rating and structure, about earnings per share, cashflow and how stock markets see impact of divestiture of assets,’ he says.
Nor are one-stop shops just about skillsets, adds Marcus. Clients can be paranoid about information escaping and they prefer the tight band of an investment bank rather than the potentially leaky Chinese walls of a real estate advisor.
The argument holds less water against another bank, of course. Eurohypo has taken the big US names on at their own game by setting up an investment team under Paul Rivlin. He sees a crucial advantage bringing senior debt and investment advice under the same umbrella and is now planning a move into securitisation as well. For all the image of single teams, the investment banks split advice and funding into different administrative divisions, he says.
‘And we are European,’ he adds, a psychological advantage dealing with European clients. ‘They feel at home with us.’
As for property advisors, lack of access to big bucks is crucial - but not just for winning deals. ‘They could have a problem retaining staff when restricted to advice fees,’ he says. Big bonuses come from handling big money, not from advice.
Other mortgage banks are eying Eurohypo’s progress jealously but it is a huge step from bulk lending into strategic advice. ‘You need a track record to win this kind of business,’ says Carrafiell, while Lee adds that the model ‘has yet to prove itself.’
Rivlin, quite naturally, detects a hint of nervousness below the surface, pointing out that his team is no group of beginners. It cut its teeth before being bought in from with Deutsche Bank and proved itself with deals such as the Euro1.8bn takeover of Univest-Merwede & Lehman in the Netherlands and a lead role in the Land Securities/Pears acquisition of Telereal assets in the UK.
Property advisers also feel they have unsettled the investment banks. Their deals are still nothing like the same scale and tend to be based on ‘bottom up’ advice. But Nicholle says this could be a growing trend, as real estate is no longer the easy path that brought big US names to Europe.
‘The low-hanging fruit has gone,’ he says. Hands-on skills in dealing with ‘grubbier’ assets will become more of a premium. Property firms have also moved on from the days of insular partnerships. JLL is now a global giant while no-one should underestimate the importance of DTZ’s new chairman, Peter Cadbury, a veteran corporate financier and his top level connections.
Edgley is happy to admit that the giant banks have an enormous advantage in their close relations with clients. But he does not see it as unassailable. ‘We have cracked the mould,’ he says.