Dealmaker § Cross-Border Bonanza

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Cross-Border Bonanza

At the large banks and private-equity funds, 2006 was the year big bonus checks took on an international flavor. Our exclusive survey provides some hard numbers. SCROLL DOWN FOR THE DATA.

March/April 2007 , Page 86

In 2006 — a remarkable year when everything seemed to go right for big investment banks and private-equity firms — the money was increasingly hauled in across international frontiers.

“Global banks combined record derivatives trading and cross-border banking with an emerging-markets explosion to generate the best bonuses ever,” says Michael Karp, CEO of Options Group, a global executive-search and strategic-consulting firm based in New York.

Proprietary investments burnished balance sheets as the bulge bracket secured footholds in new markets such as Shanghai and Dubai, while gargantuan deals seemed to occur weekly, spurred by the estimated $3 trillion stowed in the war chests of private-equity firms.

Indeed, the line between banking and building, between advising and investing, continued to blur last year as private-equity firms advised corporate customers, hedge funds made private-equity deals and investment banks built energy-trading operations replete with infrastructure once reserved for top oil producers.

Above all, 2006 was the year when major Wall Street firms proved that a single entity really can successfully play the roles of advisor and principal simultaneously across every facet of the capital markets.

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Where the bulge bracket once stumbled over conflicts of interest, strayed from its core competencies or failed to capitalize on opportunities in new markets, it now functioned with military efficiency. The global investment bank, in other words, finally reached its full potential.

Speaking Mandarin was a decided advantage, as dealmakers of all stripes sought to capitalize on the wealth of opportunities presented by the stirring dragon in the Far East. The October initial public offering by the Industrial & Commercial Bank of China was the largest in history, for which underwriter Goldman Sachs generated tens of millions in fees — and (ho-hum) a nearly $1 billion paper profit just six months after its $2.6 billion purchase of a 6 percent stake in the bank.

“Native bankers with senior contacts — whether in government or industry — in emerging markets such as Hong Kong, Dubai and Shanghai were in tremendous demand last year, and they will continue to be in 2007,” Karp says.

Citigroup, for example, scored a coup last spring when it convinced Zhao Jing to leave her post at Morgan Stanley — from which she had overseen China Construction Bank’s 2005 IPO — to join Citi’s burgeoning operation in the People’s Republic.

Ironically, as Citi negotiated its contract with Zhao, Morgan Stanley was hurriedly arranging to bring Wei Christianson, Citi’s former head of banking in China, onboard as its CEO there. In addition to creating standout IPO opportunities, Chinese economic growth has also helped ensure that energy bankers had a very busy 2006, as demand for oil in that country continued to increase. Anadarko’s acquisitions were a bountiful gift for advisors — “a fee-fest,” in the words of one industry analyst.

Beyond the M&A advisory work generated by Anadarko’s $23 billion Kerr-McGee and Western Gas Resources pickup, financing asset-sales transactions kept teams busy at Credit Suisse, Lehman Brothers, JPMorgan, Citi, Goldman and UBS. The latter helped spearhead the $24 billion, 364-day loan facility to make the deal happen, and sources say it has been rewarded for its trouble with the lion’s share of the incidental business; the UBS crew handling asset sales and financing in that space was bolstered by the arrival of Jim Schaefer and Greg Hazelton, lured from Lehman last year.

Real-estate transactions continued at a frenetic pace in 2006, as concerns about a softening domestic market failed to affect deal flow as badly as initially feared and international opportunities beckoned. Goldman snagged ace UBS banker Michael Smith to head its real-estate business in the white-hot Asian markets; in a further blow to UBS, the Singapore-based Smith was joined at Goldman by his cohorts Peter Best and Vincent Peng. Observers say the trio has already dramatically increased the bank’s Asian real-estate presence.

Private-equity funds continued to increase their dominant position on both ends of the domestic markets; they accounted for roughly one-fourth of M&A activity and sponsored more than 40 percent of all IPOs, with the time between purchase and sale often shrinking to mere months. No deal better symbolized the growing power of the buy side than the audacious $33 billion HCA LBO, launched by a syndicate headed by Merrill Lynch, Bain Capital and KKR.

With the buy side throwing around such huge figures, it’s small wonder that PE funds have become the first employment choice for top-tier MBAs who once would have flocked to the big banks.

Not all the fees generated in ’06 by the voracious appetite of the private-equity community ended up in the bulge bracket’s pockets, however. In addition to regional and specialty investment banks, last year saw M&A boutiques’ profile increase significantly as they competed with the big boys and won a seat at the table in deal after deal.

One case in point was August’s successful Evercore IPO, which raised $83 million and gave the firm a market cap of around $570 million, improving its ability to attract talent from large banks. In the end, though, another boutique M&A advisor, Greenhill & Co., perhaps best exemplified both the agony and the ecstasy of bonus season.

Late last year, it was reported that the firm intentionally circulated a memo, detailing every managing director’s bonus, that left no doubt about the identity of the top dogs. “If they tried that here, they’d probably start a riot,” says one vice president at a second-tier bank.

Although we’d certainly like to avoid provoking violent upheaval, Dealmaker sought to provide some transparency to the figures — or, at the very least, to the medians — with our inaugural bonus survey, which encompasses both banks and PE firms.

Partnering with the Options Group, we canvassed hundreds in the industry to peg the payout at every station on the depth chart. Compensation differs from firm to firm, of course, but our overview should provide a glimpse of how you made out, relatively speaking, in what was a most extraordinary year.