It was a big pay day for investment bankers in New Zealand last year. Photo / file
Bankers raked in nearly half a billion 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 US$348 million ($490m) was paid out in investment banking fees in 2020, up 76 per cent on the prior year and the highest amount paid out in the last 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 local collapse of its 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.
Wallis said the total fees paid looked a bit high but that could be partly due to the delayed nature of when bankers were 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."
He said there were a couple of large merger and acquisition transactions that happened in 2019 which 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 due to 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 there was around $5b of capital raised in the New Zealand market with an average fee of 1.5 per cent, meaning around $75m in fees from equity capital or around US$40m.
Lee said mergers 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."
He said 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 booming 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 2.7-3 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 caps, 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 3pc 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 where there was a step up in the number of deals and the amount raised.
He pointed to Auckland Airport's giant-sized $1.2 billion equity raising, SkyCity's $230m and Infratil's $300m.
"There were some big headline numbers so when the IBs [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 against the likes of the GFC's credit crunch which saw numerous companies raise capital.
Wallis said there would have been close to 20 secondary capital raisings last year where already-listed companies raise capital.
Companies raised debt through issuing bonds and fees paid to investment banks for bond deals rose 210 per cent to US$92.8m.
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."
He said some companies issued bonds to expand their businesses while others were a result of companies needing to refinance as banks reduced their exposure to customers during that Covid period.
Ultra-low interest rates have made it a particularly attractive period for companies to re-finance their debt at lower rates.
Credit Suisse topped the list earning the highest amount of fees at 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 both 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 were also involved in the SkyCity capital raising.
ANZ and Westpac tended to dominate in the arranger roles for corporate loans, he said.
Goldman Sachs New Zealand 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.
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 on the mergers and acquisitions side the deals were probably more likely to happen in the private company space 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 out there 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.
"NZ 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, NZ 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 reflective of growing confidence, "on hold" processes restarting, and financial buyers and corporates alike were active, and it was seeing interest from overseas parties 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 Covid-impacted sectors will continue to explore opportunities."
US investment bank Goldman Sachs had one of its best years on record in 2020.
The bank reported revenue of US$44.56 billion in the year to December 31, up 22 per cent on 2019 and its best year since 2009 when the GFC hit.
Its full-year profit was US$9.46b - up 12 per cent on 2019 - while its profit in the fourth quarter of 2020 was US$4.51b, more than double the last quarter of its 2019 year.
Goldman Sachs chair and chief executive David Solomon said at its results presentation it was a challenging year on many fronts.
"I am deeply proud of how our people helped clients respond to the economic disruption brought on by the pandemic and the extreme market volatility experienced over the past months.
"Our people responded admirably to a series of professional and personal challenges, while working from home or in offices that were reshaped dramatically. Thanks to their perseverance, we were able to help clients navigate a difficult environment, and, as a result, achieved strong results across the franchise, while advancing our strategic priorities."
Investing banking, which generated 21 per cent of the group's revenue, hit a record net revenue of US$9.42b driven by record equity underwriting and the second-highest annual revenue from debt underwriting.
Its global markets division, where it derived nearly half of its revenue (48 per cent), also performed strongly with net revenue of US$21.16b - 43 per cent higher than 2019 and its highest annual net revenue in 10 years.
It also earned higher revenues in its consumer and wealth management arms which was partially offset by lower net revenues in asset management.
The results were much better than analysts polled by FactSet were expecting, according to the Wall St Journal.
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