Some of the brightest investors I know are stubbornly long the US dollar and have been selling the euro, in vain. Five and a half years after Lehman Brothers went bankrupt, the Federal Reserve is still keeping interest rates at emergency levels. It seems new Fed chairman Janet Yellen is not inclined to raise rates soon.
The world is awash with liquidity. Most intelligent investors recognize this, but are too frightened to step away. A senior executive at one of the biggest European insurance groups confessed to me that the firm had €40 billion of cash to invest this year. “The problem is,” the mole sighed, “we have to make a return for our policyholders. Therefore we cannot be out of the market. I’m telling my guys to buy Spanish and Portuguese government bonds. But heaven help us if there’s a reversal and we have to start selling into a falling market.”
The mole could be on to something. Actions that were intended to make the world a safer place might in fact be having the opposite effect. Basel III capital provisions and the Volcker Rule both discourage banks from trading for their own account. So banks now offer very limited liquidity to their fixed-income clients. Effectively, they play the role of agent not principal. One can envisage a situation where everyone runs for the exit and craters rather than potholes open up in the road.
The five international US banks – Goldman Sachs, Morgan Stanley, JPMorgan, Citi and Bank of America – collectively had their weakest first quarter in fixed income since 2008. Of course clients aren’t trading much because they are nervous that interest rates will rise and bonds will spiral into a bear market. But it is worrying for the banking industry that FICC, one of the largest revenue-generation hubs before the crisis, has wilted so quickly.
Against this unsettling backdrop and perhaps smelling blood, sophisticated players have been selling. Private equity firms have flung their protégés onto the public markets with disingenuous alacrity. Spring fever has been replaced by IPO fever. Think AO, Just Eat, GrubHub and King Digital. In a few weeks’ time, Chinese e-commerce company Alibaba will go public and there is chatter of a valuation as high as $150 billion. Insiders have also been selling stock, which is rarely a good sign.
So I tip my hat to Ken Moelis, who took a calculated risk that such benign market conditions would not persist for much longer. Moelis & Co, the private corporate finance advisory firm, launched an initial public offering in mid-April. Although the firm was forced to reduce the issue price and the amount of the shares, the deal got done: $163 million was raised, valuing the company at $1.3 billion.
|Ken Moelis takes a calculated risk |
by going public
Seven years ago, he left UBS to start his own firm. Moelis questioned whether the big banks were able to provide clients with unbiased advice given the conflicts of interest that their model perpetuated. It is fascinating to contrast the miserable fortunes of UBS for most of the intervening years with the rapid coming of age of Moelis & Co.
This story certainly shows that if you get the macro story right, you can do no wrong. Moelis and his colleagues recognized that there was room for another independent corporate finance firm (think Lazard, Greenhill, Evercore) and that the big banks, hobbled by increasing regulation, would lack the will and focus to grow their advisory franchises as resources were diverted elsewhere.
I have met Ken Moelis several times and found him to be engaging and intelligent. Few bankers have achieved what he has done – create a publicly listed company in seven years. Let’s hope the firm continues to flourish even if market conditions worsen.