Formerly known as iReality, and formerly having an expansive business plan to conquer the e-world in Asia, the firm has now rebranded and refocused as an investment banking boutique called iRG. Chief executive and former Lehman tech banker, Matt Burlage explains the new vision.
Why did you change the name from iReality to iRG?
Originally, we set up iReality because we believed people were about to get a dose of reality. We thought that only five in 100 of the Internet companies were going to survive, hence "reality" in the name. The "i" represented a lot of different things such as implementation, and the Internet.
We are rebranding to iRG, because the "e" and "i" no longer have the right connotations when you are trying to do work for a broader set of clients. What we've done is focus on what we are really good at. At present we're mainly corporate finance professionals. Originally we'd built a services-based model, and did strategy consulting, and executive recruiting, along with investment banking.
We looked at doing a couple of acquisitions in the services sector. And we had said we were going to raise a second round of capital and that became a challenge. Meanwhile the chinadotcoms, and the PCCWs were being de-rated in the markets. So we looked at whom we had hired and what we were.
Well, basically we'd hired some really solid corporate finance professionals, such as Ravi Sarathy, Juliette Chow and myself from Lehman, as well as Tom Britt who was a managing partner at Clifford Chance, and we hired some people from DLJ, HSBC, Merrill Lynch and Morgan Stanley on the financial institutions group side. We had good corporate finance experience and good sector expertise: in telecom-media-technology and financial institutions, which are what we call the 'core growth' sectors. We could look at anything that will be a core part of Asian growth. So we also looked at biotech. We knew how to finance the TMT sector, and feel the same way about biotech, where we've done some pioneering work in the region for a US client.
So now we are closely focused on strategy and financial advisory - basically a corporate finance boutique. A couple of things have driven that. If you talk to the major bulge brackets, they've reduced their client list to only large issuers. So all of a sudden, if I was still an MD at Lehman Brothers I would have found my client calling list would have been cut from 50 to 5 to 10 - because Lehman needs to do large transactions. They target $10-20 million fees as opposed to $1-2 million.
That actually worked to our advantage because those 20-30 smaller companies are not being called anymore, and so we get a lot of referrals. The bulge bracket firms say, sorry we can't do business with you anymore, but by way there are some pretty smart people at a shop down the street called iRG.
You don't see the boutique guys in the US out here, so we don't see a lot of competition from there either.
It's mostly M&A stuff we are doing at the moment, because not a lot of people are doing capital raising. And we've maintained the Asia-Pacific platform. We have a small office in Tokyo, a small office in Singapore, a small presence in Korea, and our headquarters here in Hong Kong.
That's the good news. The bad news is that the business development cycle has lengthened. Instead of taking four weeks to get a mandate it takes 10. And closing a deal, which took 8-12 weeks in a hot market, now takes 16-20 weeks. So, all of a sudden, it takes you twice as long to do a transaction and your deal sizes are smaller.
We went through our own fairly aggressive restructuring. In Asia, we now have 16 professionals doing financial advisory work. All of those have media, legal or financial backgrounds.
It's a good group of people. All of us went into this with different goals. But you start to realize a few things. I realized that our core strength is less running a multi-disciplinary service provider and more working on deals.
So you are now like an equity partnership - each of the 16 people shares profits?
Not exactly. The equity upside is obviously less attractive than it was during the Internet boom. So we had to say, listen - we've all got to take pay cuts and get cash-flow positive. But there is a salary number that we all want to get back to longer term. We want to make a profit, and, after that, get back to that salary. We are looking at an incentive strategy such that if somebody has brought in two or three deals, then there is a rationale for saying they get a bonus, above and beyond all the other colleagues.
And we do still have equity. So if we do well, and go public, or sell the firm, that is always there at the back of every body's mind.
We're not legally-speaking a partnership, but it is a close group of employees operating the business under this principle.
So it's an "all for one, one for all" thing now?
It's become that way - more like a family. We're not running a big organization. We're running a relatively small team that's very focused on delivering for our clients. It is a culture I am comfortable with. I understand corporate finance and Ravi is a great business development guy and focuses on the bigger clients.
We have seven MDs, three senior principals and then associates and analysts. We all execute and work on business development.
One of our big client bases is the venture capital community. We are trying to help them get out of investments where it might only be $3 million, but it is still taking up 20-30% of their time per week. Meanwhile, they might have an investment in Korea that is doing really well, so they'd like to put that 20% of their time into that.
We've developed a good calling base with those clients. In the case of a data-center client we have, I've known the CFO for seven years and he asked me to make a proposal. A major private equity firm sits on their board, and we'd just helped them and they were comfortable with us. That's what you need to win business as a boutique. Trust that you can deliver, based on past reputation.
That's a brand thing, and it needs to be built.
And we have a footprint. We have a Korea and Japan presence and so that means we can go to Singapore, where the clients always want to regionalize. Early on, we got a couple of Singapore clients who wanted to find strategic partners in Japan. Never forget Japan is 50% of the GDP of Asia and so an Asian business model needs to take account of Japan.
How many transactions are you working on now?
We are doing Asia and Japan-market entry transactions, as well another type of transaction that could be loosely described as "help me evolve my business model to be more traditional media, and get me to profitability". It is retainer based, monthly advisory work. We have about four or five of those, and more than 10 other capital raising, M&A, and recapitalization situations. Some of these include success fees.
I wish we had three or four examples of deals we could talk about. Some of them we simply can't address publicly. But we will get things done by the end of this year and the first quarter of next year.
What's the ultimate goal? To build the firm and then get bought by a bank?
At the moment we're focusing on getting profitable even on a retainer-basis and accruing success fees and thus having the money to pay bonuses and monies back to shareholders.
Once we've got this established the one thing we don't want to do is go into secondary trading and research and get all those overheads. I don't believe in that model in Asia - particularly in a down market.
We will stay boutique. But we may start to look at a small asset management operation, such as a small VC fund and a small hedge fund.
And if it doesn't go so well?
We have restructured and created a cost structure that will allow us to survive in any environment - and likely prosper in this current environment. We have a theme internally "Taking on the Bear, Ready to Ride the Bull". As a team, and as professionals, we can learn a lot now. We are building a strong reputation as the guys to call when the cards are down, because we have lots of ideas. That's Ravi's thing " ideas and energy". When the market starts to turn around we plan to scale this into a pretty profitable model.
Would it then be attractive to a larger financial institution to buy us? Then the answer is probably yes. We've already had a couple of banks ask us about being their cross-border mechanism for showing them deals, and in return taking a piece of us.