The Rothschild Exception

NM Rothschild & Sons stands out as the last family-owned international investment bank, now that Cazenove and Lazard are winding up their independence. With a limited balance sheet and a focus on advice, Rothschild stands out as something of an anomaly in the highly capitalized world of modern banking. Indeed, there cannot be many banks that have their walls adorned with lables from the family owners' vineyards.

But exceptions can often thrive as clients look for something that is a little bit different. We talk to the newly installed head of Asian investment banking, Andrew Rickards about the bank's strategy and what allows it to march to a different beat.

What makes Rothschild different from all the banks on the street?

Our core product is advisory - M&A and restructuring are the two largest subplots. We are not as distracted as my colleagues at other banks with equity capital markets. We have the ABN Amro Rothschild JV for equity capital markets. The core product of our 55 investment bankers running round the region is advisory.

You are at the top of many European league tables. How can you leverage your European strengths in Asia?

A lot of the interaction between Europe and Asia in other banks tends to be with the UK only. They have strong London businesses and there is a strong link between Hong Kong and London. Rothschild's natural strengths are more spread throughout Europe. London and Paris are the same - in fact the French operation is even stronger than the London operation. We have a very strong continental feel to us. A real strength is our linking in with Paris, with Frankfurt, with Milan or Madrid, where most banks just tend to link in with London.

We have the top clients in Italy, Spain, France or Germany; all of them want to talk about Asia. So we're getting a plethora of inward enquiries. The differentiation here is that it is not predominantly the UK as it is with other houses.

Is most of your business dealing with outsiders coming in?

No we're looking to develop our Asian business. It's not new - we've been here a very long time. In fact we first arrived in China in 1838 as silver traders. The desire is to continue to establish a local business with local clients. The hotspot for us at the moment is in China, working in areas where Rothschild has always been good: big, often government entities, looking to do privatizations and restructurings.

The most high profile deal we're doing at the moment is for Shanghai Auto. This is the biggest auto company in China. And it's also the Shanghai government's flagship asset, which they want to restructure and then IPO. The global coordinators for that deal are Morgan Stanley, Merrill Lynch, Deutsche and BOCI. Rothschild sits between them and the company/government advising on the restructuring and on how to deal with the global coordinators. I believe you will see more of this, especially as governments become increasingly wary of criticism about selling state assets too cheaply, or too rushed, or kowtowing too much to the book runners. We act as a check and balance for the whole process.

Do you help clients select the global coordinators?

At times yes that can be the case. We certainly get asked our advice.

How do you add value to this process? Surely the bookrunners can offer their own advice?

With a bookrunner the question is always who their clients are. Are they the issuer, or the investors? There's a real tension between who they are servicing. Rothschild has no vested interest on the investor side. Our interest is always on the client/government side. That is pure independent advice, which is not muddied by a desire to please another client base.

Are clients in this part of the world willing to pay for pure advice, or do they only pay for deals?

We have a number of situations where we do have retainers, but there is more pressure on fees here. The business is harder to get and there is more convincing to be done about the need for an advisor. The people who say making a business out of advisory fees is impossible tend to be the ones who rely on a balance sheet or a big equity distribution network to make their fees. When you have to make your money out of advisory, you make sure you get paid for it. It is tough, but there are not that many international investment banks that focus on advisory in the same way Rothschild does.

How do you know more than other banks and how do you convince clients that this knowledge is worth paying for?

We have 55 bankers spending 80% of their time doing advisory work. A lot of the other banks have investment banking teams that are not much bigger but who spend 80% of their day thinking capital markets. They have these huge machines that need to be fed deals to survive. My cost base is a fraction of that of the big houses. All I've got is people and a much leaner team who focus on the advisory product.

Do you employ a different type of banker from the rest of the street?

We are hiring from all the major investment banks so not really. But I would say that Rothschild bankers need to have a little bit more of an entrepreneurial spirit. They cannot rely on the big machine but have to be out there generating business on their own.

Rothschild is a very collegiate place to work. You do not have the sharp elbows that exist in some other firms. Also if you look at the tenure of bankers in Rothschild you'll see people who have been with the firm for 20 or 30 years. That is unheard of on Wall Street. Also the average age of a partner or MD at Rothschild is older than someone at a bulge bracket US firm.

We've hired people who have been successful in an industrial career. For instance, we have the former chairman of ENI in Italy, the former CEO of Rhone Poulenc, the former president of Volvo, all former industrialists who have got invited into the firm through a relationship with the Rothschilds. Their approach is very different. They are new to the business and somewhat rejuvenated.

But when they go and talk to clients they really know what they are talking about. There is not a mad scramble 24/7 to produce big pitch books. CEOs in their mid 50s feel comfortable talking to a banker in their mid 50s with a similar set of experiences.

You don't exactly fit that model at all: you are new to the firm and relatively young.

In Asia we had a good position that people didn't know about. Over the last ten years we are actually the number one bank in China M&A by number of deals. We are number three in terms of dollar value. A lot of people are surprised to hear that. One of my jobs is to get out on the front foot a little bit more and let the world know about what we're doing.

At Goldman, your previous incarnations were as a TMT banker and then running the JBWere acquisition in Australia. Can one extrapolate those strands of DNA to what you plan to do at Rothschild? Will you be looking to boost telecoms banking or do any acquisitions?

Rothschild has been very strong in global TMT, particularly in European privatizations. The TMT DNA exists in Rothschild and I only add to it. In Asia the TMT business has been quite quiet. I think it would be folly to suddenly ramp up a great big TMT effort when there is not a huge amount going on. We do have a good team here already - for instance we have done every China Mobile asset injection there's been.

On the other aspect, we're aware of our relative size and partnerships are things we would consider to develop our business further. We don't have the same command and control mentality as other banks. So we have a greater degree of autonomy in the regions than other banks. We can make decisions that are in tune with what the local market requires.

I believe that Rothschild makes a good partner. We are probably easy to work with, although not pushovers. For instance most people were writing off the ABN AMRO joint venture on the day it was created, but that was eight years ago. Rothschild has had an alliance with a Nordic group that has worked well. We're actively looking at a couple of partnerships in the region that I think will help us expand our footprint.

Is that like the Goldman JV in China?

No, not really. We are content with out China business as it is at the moment.

So you wont say what these JVs are that you are looking at?

No. But they are all very sensible. It's about being smart. We have a strong brand name. Providing we can find people we think can live up to that level of quality, then why not extend our reach to markets we are not in at the moment that our client base around the world is interested in having access to. I would rather not name the countries, but Asia is a big place and we cover Japan to India to Indonesia from here - but not Australia.

Now that Cazenove and Lazards are going the way of all banks, is there extra pressure on Rothschild to justify how you are structured?

I am not a Rothschild, I am a Rickard so it is not for me to say. However, the bank has been around for 200 years and we have proven that you can make this model work. There are enough clients around the world today that still value independent advice over the long term.

If you combine the investment bank with the private banking businesses, these clients have been around for a long time and we believe our linkage between the two businesses differentiates us from a bulge bracket firm.

How much of a cross over is there between the investment bank and the private bank?

Some and it's growing. Certainly in Asia it's clear in my mind that we should grow the private bank and the investment bank together.

What else is there to your business after investment banking and private banking?

The third leg to the table is the private equity side. We have a small fund in Singapore at the moment, which is a technology type fund. We're looking at the prospects of doing more in private equity including in north Asia.

But we have some of Europe's biggest and wealthiest industrialists as clients of Rothschild who are keen to increase their exposure to Asia - not just corporate exposure but family money. Some of the dialogue we're having with these clients is in helping them make private equity investments alongside Rothschild in Asia. There is a model here that is a little bit bespoke; it may not be a fund but a virtual pot of money.

The flaw in the usual private equity model is that they have these massive funds, with huge amounts of money being raised and with the exception of Korea, Japan and Australia, it is very hard to find deals of a size that they need. Smaller pots of private money may be better placed for a smaller deal into a family company where there is a reason for it. There is not the same time pressure to get in and get out, as this is family money that expects to be invested for the long term. I think this plays to Rothschild's strengths.

Staying in Europe, you say that there is lots of talk of deals but we haven't seen that many actually happen. Thomson TCL stands out, but apart from that there are not that many.

I do think you will see an increased flow. There are certainly dialogues going on right now, which if they come off will result in another two or three Thomson-type deals. These things take a long time and sometimes companies go for a greenfield approach. But there will be more high profile joint ventures from Germany and from France.

So this is a good niche to have going forward although it is yet to show its full potential for Rothschild.

Absolutely. Over the next three to five years, these things will start to pay off. I was having dinner with our head of European investment banking last night and he said that after ten minutes of every client meeting he has, they ask what is going on in Asia. These deals might be a little on the small side for some of our competitors, but they are perfect for us.