Andy Schaeffer suddenly found himself in a precarious situation. He’d just been hired to head the US syndicate desk at Barclays Capital, but as his appointment was about to be announced news broke that his new firm was trying to hire 40 or more debt markets bankers from CSFB, including its US syndicate head Don Devine. Not only would this have deprived him of his new post, but it would also have meant him falling victim to the same people once again.
Schaeffer had been head of US syndicate at DLJ for three years, and lost that position to Devine when CSFB bought DLJ last year.
Luckily for Schaeffer, the CSFB bankers decided to stay put. Despite having approached Barclays Capital’s chief executive Bob Diamond themselves, and promising not to consider any counter offers, they did just that.
And that suddenly put Barclays Capital on the map in the US. Its small operation there had played second fiddle to Diamond’s plans to build and consolidate the firm’s position in the European capital markets for several years. But it now appeared that Diamond not only wanted to expand the North American operation, but was also prepared to pay to do so. The reported sum of $300 million over three years for 40 bankers in a mature business such as US high-grade bonds is hardly chicken feed. But he did show restraint in not entering into a bidding war.
It was this failed raid which ultimately lured Grant Kvalheim to join last month as Barclays Capital’s global head of credit products. “Frankly, I only thought about moving here as a result of the CSFB episode,” says the former head of global debt origination for Deutsche Bank and one of the driving forces behind the German bank’s stellar rise up the international bond market league tables over the past six years.
A month or so after the CSFB story broke in late February, Kvalheim picked up the phone to call Diamond, a man he knew only by reputation, to see if he might be interested in his services. Diamond was, and Kvalheim brought his US and European heads of debt capital markets with him, Peter Goettler and John Winter, as well as seven other bankers based around Europe. Deutsche apparently managed to persuade more than 20 others in the US to stay.
There is a lot of movement right now among debt capital markets bankers. But these two raids by Barclays Capital on bigger operations, and its ability to snare, or nearly snare, such high-profile names as Kvalheim, or Jack Dimaio, John Walsh and Don Devine at CSFB have captivated the market.
Not all approve. The impression that Diamond has suddenly decided to spend a fortune on the US, raises the ugly prospect of yet another European bank spending its way to oblivion in the US.
It’s not certain how the CSFB team might have fitted in, nor whether Kvalheim can expand the US business for Barclays, a task with which he had partial success at Deutsche.
But the fact is, as the hiring of Schaeffer demonstrates, that Barclays has been quietly hiring since the middle of last year, when it appointed Robert Griffin as its first head of investment banking for the Americas. The attempted raid on CSFB – although it was really more of an acceptance of a request for asylum – simply put Barclays’ plans firmly on the radar screen.
The reason for the expansion, and the timing of it, is pretty simple, explains Barclays Capital’s chief executive officer for the Americas, Tom Kalaris. “We have always wanted to be a full-scale European global investment bank, and for that we need to have a strong US and Asian franchise. But as we invested our resources after selling BZW in 1997 we concentrated on getting our European footprint right. Now that investment is maturing, so we’re turning our attention more fully to the US and Asia.”
Since last summer that has meant hiring selectively, going for individuals rather than big teams – the CSFB attempt and, to a lesser extent, Deutsche raid aside – and concentrating especially on hiring front office executives.
The reason for that, says Griffin, is because the bank already has a formidable sales and trading operation. “We’re very good at trading different asset classes, which has allowed us to build a solid sales franchise and thus develop a robust distribution system here in the US. We have good products and good relationships, but we need to have more relationships and more people on the front end.”
Recent hires include Richard Simonson as a managing director in the telecom/media sector who joined in May from Banc of America Securities, Robert McKillip in April, also from Banc of America Securities, as a managing director in the diversified industries investment banking group, Alok Singh from Deutsche Bank in April, who joined the financial sponsors group and Christopher Kinney, also in April, who joined the power sector investment-banking group from JP Morgan. The firm also hired a head of par loan trading, a head of prime brokerage, and a head of high-yield and mezzanine financing.
The distribution system punches above its weight, according to Diamond. “Our US distribution system does fluster our competitors. We’ve never been out-executed on a US deal where we’ve been joint leads on.”
That’s some claim, and might ring somewhat hollow to those banks which underwrite dozens of deals, compared to the four Barclays US has been involved in so far this year.
But Barclays can at least point to an increase in business over the past 12 to 18 months to justify its expansion, and lend some weight to its claims. “We’ve been involved in twice as many deals in the first quarter this year as the first quarter of 2000,” says Griffin. The number of lead managed deals only increased by one to four mandates but, continues Griffin, “we raised $6 billion as opposed to just $1 billion. And it’s the same in the asset-backed market, where we’ve done three times the volume over the same period last year.”
That shouldn’t be surprising given the huge increase in debt issuance this year after all the rate cuts by the Federal Reserve. But that is not the whole story. “Our clients have issued 20% more debt than last year, but our share of that has increased 100%.”
A deal which Griffin and Diamond are justly proud of is the financing of NiSource’s hostile takeover of Columbia Energy Group. The deal took over a year to close. Barclays Capital had committed $3 billion in bank financing along with CSFB to fund the bid, and was joint books on the bond deal to replace the loan in November. “It was our idea on how to finance the bid which got us there in the first place,” says Diamond. “We extended a loan, were joint leads on their bonds, and organised the derivatives elements of the deal.” As a result of these efforts NiSource awarded the firm the sole mandate for a $300 million bond deal earlier this year.
Diamond admits, though, that primary deal flow in the US is “episodic, but not episodic enough”. Kvalheim, the man now in charge of building on this base, used a similar phrase when describing Deutsche’s US high-grade business to Euromoney last March, when he called it “lumpy”.
It remains the one obvious gap in Deutsche’s bond markets arsenal. That’s not to undermine what Kvalheim achieved, though. He spent six years at Deutsche, either as co-head, and since 1998 as sole head of global debt capital markets. There was absolutely no US business, and hardly any European business outside Germany when he joined, and now Deutsche ranks among the top three underwriters of bonds globally.
He was brought in by Edson Mitchell, who had joined as head of global markets from Merrill Lynch back in 1995. Sadly, he was killed in a plane crash just before Christmas last year. Mitchell described Kvalheim as “one of the best capital markets people in the world”, and he was one of the first Mitchell lured away from Merrill to join him.
Diamond clearly shares Mitchell’s view. “Grant’s reputation in the credit markets and the US is very high. He’s one of the top two or three people you’d want to hire if you could.”
Kvalheim and Goettler struggled to build a dominant US debt franchise, and that must be of some concern to Diamond, but to a degree it’s not wholly relevant as Barclays’ plan does not appear to be one of rushing after market share. “We’re totally non-league-table-driven in the US,” says Kalaris. “We concentrate on having quality people work for us, on satisfying the client, and on being profitable. I’d like to see us have more of all of that, and we do expect to see our position improve as a natural result of the progress we’re making, but we’re not fixated on the tables.”
Instead the bank plans to make even more effective use of its balance sheet and position as one of the world’s leading loan syndicators. That’s nothing new; banks and investment banks have been talking about it for several years now. But few have actually managed to implement it. Barclays Capital is one of those which has, and goes a long way to explaining the success the bank has had in transforming itself from a loan and sterling bond house in 1997 into one of the major credit-markets houses in Europe.
“The linkage of credit products to the capital markets has really taken off in the last two years,” says Kvalheim. “Barclays is one of the few to have integrated the bond and loan books, as well as having a good rating and an excellent brand. With the commitment and will to win of the staff, it’s a combination which ought to allow us to make good headway.”
A warm welcome guaranteed
That assumes there are no personality clashes. Rumours abound in London that Diamond’s desire to hire is annoying several senior staff members. Head of origination Abigail Hofman, who went on sabbatical in March, and Richard Boath, who was hired last year as global head of primary capital markets, are the names which crop up the most.
Diamond says: “It would be disingenuous to think that we can grow and hire without people having to change roles. Accepting change is the essence of partnership behaviour and Richard exemplified that.
We’d been trying to hire him for three years and wanted him to continue here. We consulted him fully on bringing in the Deutsche people, and he was happy to take on the role of deputy head of investment banking.”
That’s a big role change less than a year after joining, and Hofman’s role now that Winter has moved over is unclear – Diamond says both know what she will do when she returns in the autumn, but refuses to elaborate.
The room for personality clashes is there, and having a transatlantic boss or colleague does not help. That won’t be lost on Kvalheim, who is staying in New York where his wife runs a ceramics and porcelain business. He spent much of his past four months at Deutsche jostling with investment-banking head Joe Ackermann and head of liquidity products Anshu Jain – who resigned from Merrill on the same day as Kvalheim – over who would run which parts of the credit businesses following Mitchell’s death.
If Diamond is right about the flexibility of some of his senior managers to switch roles, it will make Kvalheim’s new life at Barclays Capital easier, and leave him free to concentrate on delivering results. And his new employers want to see quick progress. Expanding the US operations was always part of the plan, say his bosses, but now that plan has been speeded up. “We intended to take three to five years gradually building up in the US,” says Diamond. “But recent events [by which he means the publicity of the attempted raid on CSFB] have allowed us to look at speeding that up to one to two years. I would be surprised not to see us do well in domestic dollar issuance two years from now.”
A tense phone call
Just as the near-success in grabbing the 40-odd bankers from CSFB highlighted internal problems there, so does Barclays’ hiring of Kvalheim reveal the potential for turmoil in Deutsche’s upper echelons.
Whereas the CSFB problem was purely one of the money-makers not liking their boss, Stephen Hester, Deutsche’s issues are much more complicated to sort out, and more painful. They stem directly from the death of Mitchell in December last year.
Mitchell would hire the right people to get specific jobs done, and was a master at keeping conflicts to a relative minimum. “He was hell-bent on growing the business, but didn’t always stop to make sure that he was building a cohesive business,” says one former colleague. “For as long as he was there it wasn’t an issue, but once he died the latent tensions quickly rose to the surface.” It was an archetypal case of a system constructed purely for the use of the architect: no one else could manage it properly. Kvalheim was the first major victim. The question for Deutsche is whether he will be the only victim.
He left because he was unhappy with the way the reorganization was panning out, which was driven initially by Mitchell as he prepared to take a seat on the bank’s Vorstand. Deutsche’s spin is that Kvalheim was unhappy at seeing Jain take on a more prominent role than he had, and at not being promoted to be Mitchell’s sole replacement (the role was split between Jain, Kvalheim, head of leveraged finance Tom Gahan and head of equities Kevin Parker. And that Kvalheim’s debt business was left out of Jain’s realm purely because Kvalheim refused to report to Jain.
There is truth to some of this – clearly there were differences of opinion on how to run the business after Mitchell died, and who would do what – but there is some sophistry too. Up until the end of last year Kvalheim was global head of debt capital markets, had about 300 people reporting to him and ran a group bringing in about $300 million a year in revenues.
Before he left he had overall responsibility for loans, bonds and derivatives origination, including for CORE, Deutsche’s commercial banking division which was rolled into his division. Over 1600 people worked for Kvalheim, and he had a budget somewhere in the region of $1.4 billion. He had also been put on Deutsche’s executive committee.
He and Ackermann disagreed on a handful of occasions this year about the direction of his business, and Kvalheim apparently told him that they risked losing good people. Ackermann’s response was simple: “Good people leave all the time,” he reportedly said.
A month later Kvalheim resigned. Jain now runs debt origination, and relationship management has been passed to corporate finance.
Sources at Deutsche Bank say Kvalheim resigned by e-mail. The story from Kvalheim’s camp is that the e-mail was simply a means of time-stamping the resignation, as advised by legal counsel, and was sent to Ackermann at the same time as Kvalheim was telling him of his decision over the phone. Apparently Kvalheim reminded Ackermann of his comment the previous month about good people leaving, at which point Ackermann hung up.
