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Morning Coffee: The worst place in the world to be a US investment banker. Consultants will be working for private equity now

Few teams in the investment banking world have experienced the deal drought quite as severely as the China equity capital markets operations of the big US investment banks.  After splitting a revenue pool of over $1bn in 2021, they saw this fall by 87% last year, and with only $98m of combined revenue between Goldman, Morgan Stanley, JPM, BoA and Citi so far in 2023, things are not exactly looking up.

In fact, they might be getting worse.  Some big transactions are getting cancelled at the last minute, or being moved from Hong Kong to mainland markets where the fees are lower.  US bankers in the region aren’t yet being asked to give up their luxury goods, or to spend time studying the books of Xi Jinping, but they have compliance nightmares of their own – increasing numbers of key clients are showing up on US State Department watchlists of companies with military ties.

It’s enough to make you want to give up.  And in fact, a number of US banks do appear to have been scaling back their overall Asia-Pacific operations; JPMorgan has rolled its APAC equity capital markets business into an overall “international” franchise run out of London, while other banks appear to be taking their time in replacing senior ECM bankers.  But China (and China-related, “Greater China” or similar bull market terms) have been the growth driver for APAC for so long, it’s very difficult to see any other market – even India or Japan where prospects look comparatively rosy – being able to pick up the slack.

This is one reason why it’s highly unlikely that any bulge bracket bank will give up completely.  Particularly in Asia, markets have long memories, and it’s just not possible to leave during the bad times, then expect to be welcomed back to pick up your market share when things get better.  Every bank on the Street has made a point of emphasizing that they are committed to their Chinese business for the long term.

And that commitment shouldn’t just be seen as a willing acceptance that an industry like equity capital markets is inherently cyclical.  Although Jamie DImon misspoke and apologised, there’s an element of truth to the view that the Wall Street giants have been around for longer than many governments, and they are able to take a long term view even of regulatory hostility. Current Chinese policy seems to be less than friendly to banks in general, and to foreign investment banks in particular. But policy changes, and at some future date it might seem more attractive to be allowed to access global capital pools once more.

So although China-related bonuses are likely to be poor and hiring slow, it’s unlikely that any major bank is going to allow a cyclical downturn to push them out of the market they've identified as the most likely growth driver for the next hundred years.  As the industry proverb has it, the key driver of long term success in any investment banking market is the management’s ability and willingness to suffer pain.

Elsewhere, management consultants and private equity investors have a reputation about as bad as each other when it comes to making working conditions worse.  So what happens if a PE firm gets involved in a management consultancy?

According to a letter seen by the FT, this might happen – TPG Capital have suggested to EY that their previous failed attempt to split the audit practice from their consulting business could be revived, with a bit of investment, a bit of debt financing, and perhaps a sprinkle of that private equity magic.

Given that one of the things private equity investors do with new portfolio companies is to get some consultants in to suggest efficiencies, this raises two equally unpleasant possibilities for the current staff of EY.  One is that they might be asked to turn their cost-cutting and synergy spotting skills upon themselves and their colleagues.  And another might be that one of their rivals could be brought in to do it for them.

Meanwhile ...

Be very careful indeed at your next high-stakes poker game, particularly if one of the hedge fund managers or senior investment bankers you play with brings out a casino standard automatic shuffling machine.  Hackers have discovered that it’s possible to get access to the internal software of these things, and either get a full listing of everyone’s hand from an internal camera, or to adjust the shuffle to put the best and worst cards into selected hands. (WIRED)

Tatsuya Kataoka of Concordia Group is looking for Japanese traders who remember the last period of rising interest rates, and accepting that this means they will also remember Top Gun, legwarmers and Huey Lewis & The News. (Bloomberg)

If you see a colleague going outside and standing barefoot, they might be “earthing” – the latest health hack, improving your mental and physical response by getting rid of static electricity and “oxidative stress”.  The medical profession is saying things like “At the most basic physics level, a fifth-grader should be able to debunk this”, which doesn’t sound like a recommendation, though (WSJ)

Former Credit Suisse star trader Hamza has joined the “white list” club of approved lenders to private equity CLOs, one of only a few hedge funds trusted to do so. (Bloomberg)

“Personnel is policy” and “proximity is power” – it must mean something about the priorities of Brevan Howard that they’ve moved Ryan Taylor, a partner and global head of compliance, to the Abu Dhabi office. (Financial News)

It must have seemed like fun to have been recruited for Blackstone Growth, the fund that was going to combine the financial firepower of the private equity titans with a Silicon Valley ethos, like a less chaotic Softbank.  Now things have gone a bit less favourably, and the employees are left talking about “preserving capital” and reducing fundraising ambitions, while Steve Schwarzman gives helpful advice like “get your act together” (Bloomberg)

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AUTHORDaniel Davies Insider Comment

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