The news that Lehman Brothers is to hire Nick Jordan from Deutsche Bank to relaunch its Russian investment banking business is the latest in a series of moves that signal that it wants to become a serious player in the emerging markets.
Jordan will follow other recent senior appointments, including Soroosh Shambayati as head of fixed income emerging markets Europe, Jameel Akhrass as chief executive of the Middle East, Bassem Snaije as head of capital markets and investment management for the Middle East, Uzay Kozak as chief executive of Turkey, and Graham Boyce as chairman of the bank’s Middle East advisory board.
Lehman’s hires and internal promotions are not just isolated to emerging Europe and the Middle East. In Latin America, the firm is rumoured to be opening a new office in São Paulo, five years after closing a representative office in Brazil. Roberto Moraes, a senior salesman based in New York, will head that effort. In Asia, it has announced its intention to expand its activities in India and has moved Tarun Jotwani, who was co-head of European fixed income at the firm, to lead that business. In China, it has teamed up with IBM and created a fund that will invest in mid-stage to mature public or private local companies. Also in the asset management area, in January Lehman bought a 20% stake in Spinnaker, a hedge fund that specializes in the emerging markets.
What is to be made of all of these moves? Clearly for any investment bank to be considered a global player it requires a strong emerging markets franchise. It’s no secret that Lehman lags behind key investment banking rivals such as Credit Suisse, Deutsche Bank and Morgan Stanley in these growth markets. One traditional criticism of Lehman is that it lacks both geographic and product diversity. If the bank wants to generate annual net revenues greater than $20 billion – last year it achieved net revenues of $17.5 billion – then it needs a variety of businesses.
In its emerging markets strategy, Lehman is targeting the obvious countries. The fee pools for investment banking in Brazil, Mexico (where Lehman already has an office), Russia, India and China are growing fast. Overall revenues in 2005 in Brazil and China are about $3 billion, while in India, Mexico and Russia they are between $1.4 billion and $1.8 billion, according to Boston Consulting Group.
It seems the firm is keen to transfer its fixed-income skills to the emerging markets. In Brazil, for example, it will initially focus on trading local instruments and cater to Brazilian financial institutions. The operation will complement its market-making activities in sovereign bonds and CDS.
The hiring of Shambayati, who was global head of emerging markets credit derivatives at Citi, is another indication that the firm will try to take its structured credit expertise to the developing world. For this to happen effectively, however, the firm needs to be more competitive in winning public mandates. Lehman has started to win some notable transactions, including in January acting as one of the co-lead managers on Mexican glassmaker Vitro’s $1 billion bond. At the time it was the biggest bond issued by an emerging markets high-yield borrower. But these landmark transactions are still rare events.
Two issues face Lehman as it seeks to become a player in the emerging markets. The firm has history in some of these countries, especially in Russia, where it pulled out following the financial crisis in 1998. What’s to say that it won’t do the same if another crisis hits there or any other developing country where it has a presence? Doubts will persist about its commitment.
Because Lehman has such a chequered history in the emerging markets it might feel that hiring people such as Jordan, who is one of the best-connected financiers in Russia, will give its business a boost. But these bankers do not come cheap or without big demands.
Can Lehman build a sustainable emerging markets business around its key hires or will it remain a bit player? Only time will tell.
