Jefferies in Asia: third time lucky?
The US investment bank is finally enjoying the fruits of a decade of investment in Asia. It has spent big to hire the bankers and analysts it needs to drive deal activity in China, Japan and Australia. Now the hard part starts – making money.
Jefferies is certainly no dinosaur, but the pure-play New York investment bank is the last of its kind. In a world of full-service financial providers, it sticks to what it knows best. There’s nothing to get side-tracked by, just a robust securities trading platform plus advisory, built on the foundations of strong research.
This simple structure – which helps to keep the firm’s cost base lean – works in North America, where corporates and investors prize good research and pay better fees, and to a lesser extent in Europe too.
But what of Asia? Over the past decade, Jefferies has systematically sought to transplant its model to a region blessed with potential but burdened by a plethora of markets and dominated by powerful local banks fighting over razor-thin margins.
The investment bank posted $112.1 million in net revenues from investment banking and capital markets in Asia in its latest financial year to the end of November 2019. Asia made up 3.6% of the net revenues the division earned globally last year, against 19% for Europe, with the rest made up by its core market of the Americas.
For a few years that share has stubbornly refused to budge. In 2018, 3% of the net revenues Jefferies generated globally from investment banking were collected in Asia. In 2017, the number was 3.2%.
But has something shifted this year? The firm certainly hopes so. Its Asia investment banking and capital markets division posted $61.3 million in net revenues in Asia in the first three months of the new financial year to February 29, 2020, or 5.2% of the global total. It also marks a 140% rise over the same period a year ago.
Inside the investment bank there’s a sense of hope about a region that has long promised much, yet delivered little.
“I would like to see Asia making up 20% to 30% of our income over a period of time,” says Peter Forlenza, global head of equities at Jefferies.
“There is a consistent effort to expand in Asia, particularly in equities and investment banking, and to a more modest degree in fixed income,” adds Brian Friedman, president of Jefferies Financial Group.
It really helps us that we are strong regionally and globally
Murray Wilson, president of Jefferies Asia, reckons the firm has seen “a significant uptick in business – at least a 50% move in volumes” during the coronavirus crisis. He says the firm is: “Looking to continue to build out in Asia. We are growing at 55% a year in terms of our client base. Our focus is to expand our client base, both in terms of regional clients and global institutions expanding their focus into the region. Either way, it really helps us that we are strong regionally and globally.”
It’s admirably bullish, but is its standout first quarter 2020 data cause for hope or an aberration? This is not Jefferies Financial Group’s first foray into the region but, depending on your view, either its second or third. The firm opened its first Asia office in Tokyo in 1996 but didn’t begin to invest heavily until after the global financial crisis.
The first true wave of expansion began in the early 2010s, with a focus on delivering cash equities trading and research to clients in four markets: Hong Kong, India, Singapore and Japan. Mike Alexander, a former head of sales and trading at the Hong Kong brokerage CLSA, was named Asia chief executive in 2010. Two years later, Sherry Liu, a former China rainmaker at RBS, joined as Asia chairman.
That cycle lasted five years. By 2015, Jefferies was in cull mode in Asia. It used a scalpel rather than a scythe, letting some of its top investment bankers go, notably Liu and former UBS banker Ren Wang, but retained most of its research team. That was a tough year for the firm, with 20 people in cash equities laid off and regional net revenues slipping 20% year on year.
“They rolled the dice,” says a Hong Kong individual with knowledge of the situation. “This was a mid-market, mid-tier US investment bank with a bold plan to be a niche advisory and investment banking business. They hired a lot of people, established a foothold – then the money dried up.”
But then in January 2016, Barclays closed its sales and research coverage of cash equities in Asia and pulled out of seven markets completely, including Australia, South Korea and Indonesia.
The firm’s global president happened to be in Hong Kong when the news hit. “By the time I arrived in Japan a few days later, we were hiring,” says Friedman. “We knew this was an opportunity... for Jefferies, as what had held us back before in Asia was finding the right quality of personnel.”
The firm snapped up a few experienced analysts from the likes of Barclays and Credit Suisse, but what really caught the eye was a series of later raids on CLSA, described by one Hong Kong banker as “kind of a rolling land grab”.
We didn't expect to be embraced that fast
In June 2019 Jefferies swooped on CLSA in Australia. It poached 30 staff in a single day, including Andrew Norman, who joined as head of Australia equities. In December it descended on the brokerage again, picking off virtually its entire India team, including head of research Aashish Agarwal.
Other big-ticket hires around this time include Jeff Hutchins, who joined from JPMorgan as co-head of Asia equities and co-head of Japan equities, and Jonathan Slone, the long-time chairman and chief executive of CLSA, who was hired as chairman of Asia.
If there’s one attribute most of its key hires share, it is experience. “They want veterans who aren’t too jaded,” says an executive search expert who has worked with the firm. “Ten to 15 years of top-level experience – that is ideal.” It prefers to buy ready-baked talent rather than spending money moulding and shaping it.
Friedman says his firm is: “Looking for the exact same qualities everywhere – highly ethical, smart, creative, persistent, patient and driven people”. To be fair, every firm covets those traits, although the recent shakeout in equities and research turfed many people with the right stuff into the job market, and Jefferies had the good luck (and an ability to act decisively) to be around to scoop them up.
When a financial institution gets too big, it can end up diluting talent. In Jefferies, there is a lack of bureaucracy and an ability to move quickly and make decisions fast
Many of its better hires jumped ship from firms they’d been at for years but where they had become disillusioned with their role, their employer, or both.
“We have been very successful in hiring people that were very loyal to their colleagues and to the teams they worked with,” says Forlenza. “The majority of people we hired [in Asia] were people who didn’t feel they were leaving a firm they loved but rather that the firm they loved had left them.”
“Over the past year... some great people have joined us, some from banks which aren’t committed to the market, or where perhaps there was a leadership or compensation disappointment,” adds Friedman.
I would like to see Asia making up 20% to 30% of our income
That was clearly the case with analysts Anne Ling and Thomas Chan, head of micro-strategy Desh Peramunetilleke and global head of equity strategy Chris Wood. The latter two joined last year from (again) CLSA, bringing with them more than half a century of combined experience.
In Asia, bankers and analysts are attracted to Jefferies for different reasons. The process of unbundling research under Europe’s second Markets in Financial Instruments Directive saved investors a lot of money but also forced banks to sack a lot of experienced but expensive analysts. Jefferies’ willingness to pay top-dollar for well-known analysts and to use their research to drive its cash equities business – something it is known for doing in the US and Europe – was hugely attractive to newcomers.
As the exodus from CLSA gathered pace in the second half of 2019, its head of research Edmund Bradley says he “got to the point where I wanted a fresh challenge.” He adds: “I looked at which institutions were large and bureaucratic or more focused with a leaner and flatter structure, and Jefferies fit the bill.” The New York firm made him its new head of Asia research and put him to work.
The allure of joining a firm that gives its staff a sense of agency comes through a lot in conversation. “[We] did not build our European or Asian operations as a silo, which means we are run as a flat organization,” says Friedman. “When a financial institution gets too big, it can end up diluting talent. In Jefferies, there is a lack of bureaucracy and an ability to move quickly and make decisions fast.”
'Culture over strategy'
Then there’s its ability stay in touch with far-flung offices. Most investment bankers in Asia have a tale of woe or two about being ignored by senior executives in New York, London or Frankfurt. By contrast, Bradley points to the regular calls that Jefferies chief executive Richard Handler hosts with Fortune 500 chief executives.
“I’ll sit in on them and it’s a great learning experience,” he says. “This is part of the outreach from New York. We are just as important as the North America team. We see emails going out to people who have been at Jefferies for 25, 30 years.” Covid has put a stop to most trans-Pacific travel, but Friedman reckons he visits Asia “three or four times a year,” with Forlenza and global head of investment banking Ben Lorello criss-crossing the region up to eight times each year.
We don't want to be all things to all people
This is only possible because of three related factors. The first two – the globalization of capital flows and capital markets and the quality of video-telephony services like Zoom, which had its breakout moment during the coronavirus crisis – are well known.
But the third – the flatness of Jefferies’ operating structure versus the bulky bureaucracy of most investment banks – is easy to overlook. Friedman talks with pride of being: “The essence of the historic tradition of Wall Street and the City of London. We are the original investment banking culture where the quality and drive of people matter, and culture is more important than strategy.”
He points to the moment in 2008 when Morgan Stanley and Goldman Sachs “somewhat abruptly became bank holding companies.” Jefferies’ management “sat down and debated for four or five days, asking if we were missing something, if it would be damaging or limiting to become a bank holding company.”
In the end, unlike most of its peers, Jefferies was not offered financial assistance under Washington’s $700 billion Troubled Asset Relief Programme (TARP). “We weren’t offered TARP, we didn’t want TARP, we weren’t and aren’t a bank and we are doing fine and are way better off for it,” says Friedman.
He views the development of the industry in the intervening years with a waspish eye. “What happened was that someone decided to run a science experiment, taking Wall Street firms and turning them into banks. You are taking a job based on communication, camaraderie, creativity and undying focus on the client, and merging it with a business that is about stratification and minimizing balance sheet risk. It’s oil and water and it’s a challenge to meld those two models together.”
New hires say they feel the positive effect of this collegial bonhomie but also of being part of what one banker describes an “eat what you kill model”. He adds: “There is much more of a focus on generating results here” than at his previous employer. This chimes with the firm’s image as old-fashioned Wall Street grafters.
But positive intent and good hires are one thing, and long-term success is quite another. What is Jefferies doing to ensure that a decade of somewhat lurching investment and results in Asia can be permanently translated into financial success?
Focusing on four
It is clear the firm has learned from previous efforts to crack the region. It is still focused on four markets but with variations. Japan and Australia remain part of the quartet but Hong Kong has morphed into ‘Hong Kong-China’, and Singapore into ‘southeast Asia with India at its core’.
The last one is the least important. Foreigners can buy and sell Indian stocks without limit these days, but the onshore capital markets are hobbled by a lack of big stocks and razor-thin margins on broking and underwriting. In the near-term, the name of the game for the firm in India will be producing good research.
Japan is the big beast hiding in plain sight. It’s “one of our largest markets, and [one] of the largest equity fee markets,” says co-head of Asia equities Hutchins. “[It] looks and feels a lot more like the US, in that it is full of big, attractive stocks and you can make money here just by gaining market share.” He adds: “Our clients, as is the case across Asia, are a mix of hedge funds and long-only funds.”
China will become something like Japan in the long-term
Then there’s Hong Kong-China, increasingly a single market courtesy of the south and north-bound Stock and Bond Connect programmes that link the two. It is already “the largest [market] in fee terms in Asia,” says Hutchins. “China will become something like Japan in the long-term – it’s just a matter of time as it continues to deregulate, barring an unforeseen event. The fastest growing piece of Asia is the Hong Kong-China Connect wallet.”
Capital flows into Chinese securities will only rise going forward. Jefferies wants to be there to act as broker and adviser to mainland firms as they issue fresh capital and buy assets, and to ply its global clients with local research. When Jefferies hired a raft of analysts from CLSA in 2019, “we covered 70 China stocks,” says the firm’s head of Asia research Bradley. “Now we cover 240, which is where a number of the other major banks are. We will go to 300 by the end of .”
Finally, there is Australia, the biggest investment of them all. Two years ago, Jefferies had no footprint in the market. In March 2018 it lodged its application for an operating license; 11 months later, it was granted approval to offer a full suite of onshore services, from trading and equity sales to research and investment banking.
In between, it hired voraciously. Michael Stock became chief executive and head of investment banking Australia, with Norman coming on board as head of Australia equities. After swooping on CLSA, Jefferies scooped up six seasoned Deutsche Bank operators, including equity capital markets bankers Peter Molesworth and Kyra Hannaford, after the German lender cut 50 jobs at its local equities business in July 2019 and stopped providing research.
There were plenty of local naysayers – and for good reason. After all, Jefferies was the first new financial firm to enter the fray in Australia in nine years. And while its new management team liked to tout the case of Macquarie, which jumped from being the 12th ranked broker in 2000, to top three in a couple of years, aided by a wider market downturn, there was no guarantee of success.
“We were concerned that clients might say: ‘Oh we don’t need another broker in Australia,’” says Norman. “But once we spoke to them about our plans, feedback changed to: ‘We like your team and we are encouraged by what we hear about Jefferies. We’d like to open an account.’ We didn’t expect to be embraced that fast.”
Stock reckons the firm got its timing right, pushing into a market undergoing a rare cycle of change and fragmentation. “You’ve seen a lot of flux in recent years, as global banks like Deutsche step out of the market and other firms like [New Zealand based investment bank] Jarden establish a presence,” he notes. Jefferies now employs 65 people at its office in Sydney, offering equities, fixed income and investment banking.
With all this in mind, Jefferies’ operating model in Asia is not hard to see. It is no barebones strategy, but it is investment banking in one of its purest forms. Friedman points to the firm’s “consistent effort to expand... in equities and investment banking, and to a more modest degree in fixed income.”
In Australia, notes country chief executive Stock, Jefferies has no interest in private banking or wealth management. “Our absolute focus is on our corporate, private capital or institutional clients. They are at the heart of everything we do,” he says.
“We focus on a small number of sectors and countries where we want to be the best. We don’t want to be all things to all people,” adds Bradley.
Head of Australia equities Norman notes that 60% of the firm’s equities business is domestic in nature, “with the rest focused on London, New York and Hong Kong, so we work very closely with global counterparts.”
Our absolute focus is on our corporate, private capital or institutional clients
As is the case in North America, the foundations on which everything is built in Asia is comprised not of assets under management or huge retail deposits, but top-class research, which in turn drives its capital markets business.
Everything grows from the ground up. Forlenza says the “value added, impactful research” it produces in Asia makes the firm “increasingly important” to its largest global investor clients “across research, trading and capital markets”.
For years, Jefferies has snagged prime roles on initial public offerings in the US and to an extent in Europe, by dint of the excellence of its research.
“I love that firm in terms of what they do in America,” says a senior Hong Kong-based investment banker. “The chief executive of a company in Asia will include Jefferies as a bookrunner on [his] Nasdaq IPO just because he wants a specific analyst, who might only write about telecoms software, to cover his stock.”
The depth of the firm’s coverage team, allied to its lean cost structure, also enables it to take part in smaller M&A deals that few global investment banks will touch. “If a US firm wants to put itself up for sale for $80 million, their analysts call Google or IBM and they will listen, as Jefferies has that kind of pull,” the Hong Kong banker adds. “It’s a genius advisory model.”
But is it one that can be transplanted to Asia? One can argue this both ways. On the one hand, Jefferies’ chosen business model in Asia – using its research to drive volumes in cash equities and revenues in capital markets and investment banking – is a tough task.
Students of recent history would probably advise against it. Unbundling rules have forced banks to prune or hack away at financially unviable research teams, while the rising cost of running a cash equities team forced far bigger operators to exit the business in Asia, including Barclays, Standard Chartered and Deutsche Bank.
“If they have a way to make the cash equities/research model work for them in Asia, good luck to them. Maybe they see something no one else does,” says the head of a Hong Kong boutique advisory firm.
“The rise of passive over active investors is a long-term trend. It’s not clear to me there are enough conscious investors who are willing to pay for great research,” adds the financial adviser to a regional family office.
Jefferies sees it differently. It serves: “The higher end of the investment market, particularly middle market and upper middle market companies and institutional investors, and to a lesser extent governments,” says Friedman. That, he adds, comes from having: “Highly regarded strategists on the ground who are very strong in strategy and research, then melding them into a more coordinated global view.”
The investment bank clearly believes its latest push into Asia is well timed. Friedman points to a long-term shakeout separating those who “are and are not committed” to the region. Forlenza adds that while its peers were “distracted”, Jefferies “built a very flat, sophisticated and robust equity trading platform, which we have exported to Asia. We are excited about the opportunity in front of us.”
But to ensure long-term success in the region, three key things have to go right.
First, its analysts need to be respected and they need to be read. This seems to be happening. The firm says its Asian research generated 270,000 unique hits in June, a four-fold rise from a year ago, led by reports from the likes of Desh Peramunetilleke, regional head of internet and media Thomas Chong, and Chris Wood, whose weekly newsletter ‘Greed & Fear’, published during his time at CLSA, made him a star.
When Institutional Investor’s latest All-Asia Research Team survey, which grades the region’s best analysts, was published in June 2020, Jefferies came seventh overall, with Chong ranked first in the internet sector and Wood a runner-up in equity strategy.
Second, that research needs to drive revenues. This is likely to be a longer slog. The year started positively for Jefferies in Asia, but Covid’s impact on its second quarter figures have yet to be seen; and Forlenza’s target of generating at least a fifth of its global investment banking revenues in the region seems a long way off.
Deal activity is rising. Jefferies was sole financial adviser to US private equity firm KKR on its $2.2 billion acquisition of the Australian biscuit maker Arnotts in August 2019. Over the past two years, it has done four leveraged finance deals in Australia, raising $2.5 billion, and advised on M&A deals led by Japanese personal care giant Shiseido and China’s Tencent Music.
In the first six months of 2020, it was a bookrunner on five China-related stock offerings, including the $320 million IPO of online grocery firm DaDa Nexus, and the $3.9 billion secondary public offering of e-commerce giant JD.com, both completed in June in Hong Kong.
But this has to be just the start for the firm’s 60-strong team of investment bankers in Mumbai, Hong Kong, Singapore, Tokyo and Sydney.
New York will want them to generate more deals that make more money (the firm ranks 47th in Asia ex-Japan ECM in the current year to June 18, according to Dealogic, and 86th in Asia ex-Japan M&A). Nabbing a role on the JD.com listing augurs well, but context is important here: Jefferies was one of 16 underwriters who shared total fees of just HK$361 million ($46.6 million).
Finally, it needs to restrain spending, which can only be done by keeping headcount low and maintaining the lean-and-mean ‘eat what you kill’ model. Even this won’t be easy. In the US, the firm is run according to a single set of rules; in Asia, it has offices in four completely separate markets. “The reality is you don’t get operating leverage,” says Friedman. “In Asia, we have four compliance teams.”
If they have a way to make the cash equities/research model work for them in Asia, good luck to them. Maybe they see something no one else does
It says it has no plans to renew its raids on rivals. “In Asia, we are digesting a good number of recent hires”, notes Friedman. He adds that the firm has a “strong appetite to hire” in investment banking in the US, with “some openings” in Europe.
The firm avoided having to build a research team in every market by publishing co-branded reports with the likes of Fubon Financial Holding in Taiwan, Indonesia’s Mandiri Sekuritas, and Philippines-based Regis Partners. “These firms are very well connected – why spend money playing catch-up with them and their 30, 40, 50 years’ worth of experience when we can align ourselves with their products, research and contacts,” says Bradley.
But that doesn’t mean its costs are capped or that the firm’s digestive system won’t be tested again for a while.
Covid has been a stressful time for all financial institutions. Jefferies suffered a personal loss when it mourned the passing of its long-time chief financial officer Peg Broadbent, who died in March from coronavirus complications aged 56.
Yet the firm believes it was better prepared for the pandemic than many of its peers.
“We didn’t wait for governments to react,” says Asia president Wilson. “We were already utilizing our [business continuity plans] and having people working from home in January.”
At the time of writing, 95% of its employees were still housebound. That’s vital for health and safety but trying to those who covet real face time. Bradley says he misses “that collegial feeling as we can’t all be in the office together,” while Hutchins just wants to start travelling again. “I haven’t seen an aeroplane in a long time,” he sighs.
The firm is also looking beyond Covid to the financial fissures that are sure to open in its wake. “We believe we are going to have expanded opportunities in the region,” says Forlenza. “We have proven to be nimble in our reaction to grasping opportunities in the past, and that will continue.”
Could that mean more hires in Asia (and therefore more to digest) or even a push into new markets? Costs would need to rise, but this could be a once-in-a-generation opportunity for an entrepreneurial firm that loves to grasp the nettle.
Forlenza predicts a new wave of retrenchment from the region by: “Smaller regional players in Asia... who may not have the ability to get through this crisis in as firm a position as us. The opportunities will continue to arise for us.
“We have an opportunity in Asia, we’re talking advantage of it and we are seeing the benefits of our regional expansion already. Where we end up depends on the market and the opportunity, but the doors are open and we are walking through them.”