South African banks were once regarded as introspective followers rather than leaders. But in the last six months, Investec, the independent Johannesburg-based investment bank, has broken the mould to become the foremost symbol of a financial services sector that is belatedly waking up to the pressures of globalization.
Two recent forays into the UK by Investec have taken the City by surprise as first one old-established name and then, only weeks later, another fell into the hands of what was previously a relatively unknown South African bank.
First, Investec snapped up Guinness Mahon, the British investment-banking group, for £95 million ($59 million) in early April, having outstripped fellow South African banks Board of Executors and Nedcor Investment Bank in the race to buy the group from Bank of Yokohama.
Then, by the end of the month, it had launched a £428 million conditional recommended cash offer for Hambros plc, the holding company of the London-based financial services group. Having been beaten last December by Société Générale in the race to buy Hambros Bank, it was only a matter of time before it re-emerged, this time as the chosen suitor for slimmed-down parent company Hambros.
The logic was impeccable. Prizes on offer included fund management, a direct investment portfolio, private-equity funds and property investment businesses. Shares in Hambro Countrywide, the group’s 51%-owned estate-agency business, have been distributed to shareholders while Hambro Insurance Services was sold outright to the Lindsey Morden Group. The reorganization and disposal of these assets should result in Investec paying closer to £200 million if, as expected, the Hambros bid goes through in August.
Stephen Koseff, the CEO of Investec, is committed to making his firm an independent, international investment-banking, asset-management and private-banking group. The Guinness Mahon and Hambros deals are partly aimed at increasing its international presence and reach. But Koseff says the deals will also enable Investec “to make acquisitions of complementary businesses”. The purchase of Guinness Mahon had already given Investec 44% of the Guinness Flight Hambro Asset Management (GFHAM) joint venture, and it was anxious to acquire the rump of Hambros to mop up the 44% of GFHAM still held by Hambros. It swiftly persuaded the initally recalcitrant fund managers, who controlled the remaining 12%, to come on board.
Investec, established in 1974 and listed on the Johannesburg Stock Exchange in 1986, is one of South Africa’s most dynamic financial service providers. The house is noted for its technical competence, the “owner-manager” culture of its staff and for its aggressively innovative style. Even so its qualities were seriously put to the test in the Hambros deal.
The precedent established by Hambros Bank’s bond team, which sold itself to Royal Bank of Canada Dominion Securities shortly after Société Générale’s acquisition, has spread rapidly to the businesses that Investec sought to acquire. The firm is having trouble pursuading staff to remain under the new management. Compounding this are mounting perceptions on the home front that Investec is taking its business offshore and out of the reach of South African exchange controls. These perceptions were quickly refuted by Koseff. Offshore earnings were “probably still not beyond 40%” of the group’s overall earnings because its local earnings were growing strongly at 40%, he said.
But no sooner had GFHAM’s fund managers been persuaded to stay on than the management of Hambro European Ventures (HEV), the successful private equity arm of Hambros, opted to remain independent, encouraged by investors in HEV’s funds. If Investec’s bid for Hambros succeeds, the managers will continue to handle three of the funds, HEV I and II and Hambros Unquoted Growth Scheme, on behalf of Investec. But the £261 million HEV III fund will pass directly into the hands of its investors and absorb some of the fund managers’ time.
Investec has carved out an enviable niche in investment banking in Southern Africa and internationally through an alliance with Credit Suisse First Boston. It has also confidently held its own against the 70-odd foreign banking groups operating in its home territory.
But the quirkiness of the City took it by surprise. Koseff is adamant that, with the opening up of South Africa, banks such as Investec now need more than ever to develop the structures and capabilities of the foreign banks, in order to retain a competitive advantage locally.
His bank is determined to track investment flows in and out of South Africa, and he believes that having a beachhead in London will make Investec better placed to do so. Investec is a South African market leader in asset management and private banking, targeting a narrow but lucrative market niche.
Eschewing the bancassurance merger trend that has swept through South Africa since the start of this year, Investec has resolutely maintained its independence to become the largest private-banking and investment-banking group in the country with a fully-diluted market capitalization of over R20 billion ($3.9 billion).
Investec’s overseas expansion first gained momentum with the establishment of a private banking, securities trading and private client portfolio management business in the UK and Jersey, under the Investec Bank and Carr Sheppards banners. The process began with the acquisition of Allied Trust Bank in 1992 followed by that of Clive Discount. In Israel, Investec has a controlling interest in Israel General Bank, the eighth largest bank in that country, and in the US it acquired Ernst & Company, a New York-based broker dealer. The group recently established a merchant-banking operation in Australia, following in the footsteps of its closest South African competitor, Rand Merchant Bank, and has also set up an offshore banking unit in Mauritius. Richard Stovin-Bradford
