Ka-Ching! Bankers rake in the fees on investment deals
Researcher says tally was just short of $500m,
Bankers raked in nearly half a billion dollars in fees from New Zealand businesses last year through capital raisings, refinancing and merger & acquisition deals, despite the country dropping into recession.
Figures from financial research firm Refinitiv show that US$348 million ($490m) was paid out in investment banking fees in 2020, up
76 per cent on the year before and the highest amount paid out in the past
20 years of data supplied.
The second highest year was 2011, just two years after the global financial crisis hit, when New Zealand was in the midst of a collapse in the local property and mezzanine finance industry. That year saw US$255m in fees paid.
Roger Wallis, a partner at law firm Chapman Tripp specialising in capital markets, said bankers, lawyers and accountants tended to get busier during periods of change.
He said the total fees paid looked a bit high but that could be partly due to the delay in when bankers are paid for their work.
“One of the phenomena is that the investment banks tend to get paid when the deal settles. Like chief executive remuneration, sometimes the gross figure that is published actually relates to what happened the year before.”
Wallis said a couple of large merger and acquisition transactions that happened in 2019 did not close until 2020, which would have pushed the fee payments into last year.
That included ANZ’s sale of finance firm UDC. “That took a while for all the conditions to be satisfied.”
The amount of fees could also be high because of what is known as “jurisdiction shopping”.
“Some of those deals might involve deals that were sold into Australia and Asia or somewhere else but with a New Zealand party – so you need to view them with a bit of suspicion. I wouldn’t put too much store in the figure by itself, but the direction was higher than previous years.”
Some large overseas-based transactions by New Zealand-domiciled businesses are also thought to have driven up the figure.
But James Lee, chief executive of Jarden, said the figures appeared to be ludicrously high. “The numbers just don’t make any sense at all.” He estimated that there was around $5b of capital raised in the New Zealand market with an average fee of 1.5 per
cent, meaning about $75m in fees from equity capital or around US$40m.
Lee said merger and acquisition activity was down in 2020. But fees from loan refinancing could show high fees from the retail banks.
“Directionally those numbers are right. But what they might be doing is triple counting at times.
“I wish NZ investment banking fees were $500m NZ. I wish those numbers were true.”
Lee said that in any given year, fees from local equity capital raising were around $30m to $50m, while debt capital raising was $30m and mergers and acquisitions about $40m.
Talking to competitors, he said, most had had an average year, just slightly down, not a boom year.
Lee said 2020 was very different to 2009 when investment banking fees were “outrageous”.
He said average fees in 2009 for capital raisings for large companies were 2.7 to 3 per cent because it was seen as emergency funding.
“What changed in New Zealand was that fees collapsed pretty quickly because there was so much capital around.” The fee percentage was now around 1.2 to 1.5 per cent for large companies, although it remained higher for smaller businesses, he said.
“Everyone wants a brand new Ferrari – don’t get me wrong. They would love to be charging 3 per cent fees but that is just not happening.”
The Refinitiv figures show fees from mergers and acquisitions fell 57 per cent in 2020 to US$29.11m, while fees relating to equity deals rose a whopping 477 per cent to US$174m from US$30.09m the year before.
Wallis said the big story last year was the equity raisings driven by Covid. He pointed to Auckland Airport’s giant-sized $1.2b equity raising, SkyCity’s $230m and Infratil’s $300m.
“There were some big headline numbers so when the [investment banks] are being paid a percentage of that, it’s a meaningful number, but it’s hard work. It was a challenging environment – that’s an obvious reason for the step up in equity fees.” He said activity in the secondary capital raising market had been “unprecedented”, even compared with the
GFC’s credit crunch, when numerous companies raised capital.
Wallis said there would have been close to 20 secondary capital raisings last year where already-listed companies raise capital.
Companies raised debt by issuing bonds, and fees paid to investment banks for bond deals rose 210 per cent to US$92.8m, according to the Refinitiv data.
Wallis said existing bond issuers raised more debt while three large corporates also raised debt through the listed bond market for the first time.
“[Retirement village operator] Ryman – they haven’t raised equity since 1999 and last year they put their toe in the water as a bond issuer. The same thing with Oceania and Kiwibank. That was the first issue done under some of the new bank capital rules.”
Ultra-low interest rates have made it a particularly attractive period for companies to re-finance their debt at lower rates.
The rankings
Credit Suisse topped the list, earning the highest amount of fees – US$43.27m – and taking a 12.4 per cent share.
A major international investment bank, Credit Suisse previously paired up with local bank Jarden but the pair decided to go their own ways last year as Jarden expanded into Australia.
Jarden itself had the fifth-highest earnings at US$18.61m. Second highest was Goldman Sachs & Co with US$41.56m, followed by ANZ Banking Group with US$32.59m. JP Morgan was fourth with US$21.67m.
Lee questioned how Credit Suisse could make that much when it did not have a presence in New Zealand, while others like Forsyth Barr seemed to be on the low side.
Wallis expected Credit Suisse would have benefited from a tail of payments from deals done with Jarden in the previous year and was also involved in the SkyCity capital raising.
ANZ and Westpac tended to dominate
in the arranger roles for corporate loans, he said.
Goldman Sachs NZ chief executive Andrew Barclay said its revenue was broadly based across mergers and acquisitions, capital raisings and capital solutions, with some of its notable transactions including a2 Milk’s acquisition of Mataura Valley Milk, the sale of Fonterra’s farms in China and advising the Government on Air New Zealand.
Year ahead
Wallis said there were still lots of opportunities for the investment banks to make money in 2021.
“Every day I get an AFR [Australian Financial Review] and it is talking about another IPO [Initial Public Offer]. IPOs in Australia were very strong in their last calendar quarter and this year looks like there is some carry-over and there is a bit of that permeating over into this market, as you would have seen through MyFoodBag and Vocus and other announcements – indications look quite strong on that front.
“I think you will see some more corporate debt – new issuers and continued use of those programmes for the same reason.”
Wallis said that on the mergers and acquisitions side, the deals were probably more likely to happen among private companies, rather than the public markets.
“There were a few transactions that got up last year – Metlifecare and Abano – there are indications of a bit more of that but probably more at the private company level this year given the market is getting pretty fully priced.” He said there was still plenty of downside, with uncertainty over borders reopening and Covid.
“Certainly we are busy as are a lot of our peer firms. Whether it is more or less than usual – it probably is more, but we are only three weeks into it. There are lots of opportunities out there, New Zealand seems pretty well placed with the way Covid has been managed; compared to the US it would look like a reasonably attractive place for both M&A and equity market opportunities.”
Lee said he was expecting a busier year for IPOs in 2020 and said there was also a stable background for mergers and acquisitions. “I think what you will see is listed companies making acquisitions of unlisted businesses and a lot more IPOs.”
Barclay said he would characterise its outlook as cautious optimism and so far the year had started strongly. “New Zealand has been recognised globally for its effectiveness in managing the Covid pandemic and this combined with vaccines on the horizon should help with confidence moving forward. Based on our virus response, New Zealand is well positioned to begin its economic recovery sooner now the health crisis is largely controlled domestically.”
He said there had been a notable increase in mergers and acquisition dialogue, reflecting growing confidence, “on hold” processes restarting, financial buyers and corporates alike were active, and it was seeing interest from overseas in New Zealand assets.
“If 2020 taught us anything, it’s that we can’t speculate on what may be ahead of us, but we are cautiously optimistic that corporates with solid balance sheets in the less Covidimpacted sectors will continue to explore opportunities.”
Everyone wants a brand new Ferrari – don’t get me wrong. They would love to be charging
3 per cent fees but that is just not happening. James Lee, Jarden