December 1, 2023

Investment Banking

Let Your Investment Banking Do The Walking

How Matthew Grounds and Guy Fowler split from UBS and built an investment bank after a false start

Failure to launch

Behind the scenes, there was plenty going on. And it turned out that Grounds – the man James Packer once described as a “rockstar banker”, who had helmed UBS with the lower profile but equally well-connected Guy Fowler for more than a decade – wasn’t quite ready to jump into a new firm.

Despite being regarded as central to the start of any new shop, he wasn’t all in – yet.

After months of discussions, the structure and financing was all but in place. Barclays, which now holds a 10 per cent stake in the business, was in talks to provide balance sheet capital and so was Magellan, which paid $156 million in cash and shares for 40 per cent.

With the deal all but sewn up, the thinking was Fowler and Grounds were good to go.

But in fact, they weren’t ready at all.

Grounds had resigned from UBS in May 2019, and stayed until the year-end, as the summer of bushfires raged. He’d been advised by business heavyweights that a year away from banking before starting anything else was the best course, whether or not there was any real threat of legal action from UBS. In fact, it was two years until he formally joined Barrenjoey in May 2021.

So Grounds wasn’t yet all in, a major issue. In addition to that, Fowler and UBS’ former head of equities Chris Williams – who’d been leading the charge – were beginning to understand the enormity of the job ahead of them.

They needed someone to run it. Grounds didn’t want to. After 10 years of being dictated to by UBS global politics and corporate policies, he wasn’t about to step back into that – or worse, a version of it that involved negotiating licences, back office systems and tech.

So perhaps the key meeting in the establishment of Barrenjoey – which has stoked envy, frustration and fascination in equal measure among rivals, despite the unravelling of one of its major backers – was one that occurred far more quietly.

Over four or more hours, and one or two bottles of good red wine, Guy Fowler and former Challenger chief executive Brian Benari thrashed out what life at this new investment bank Barrenjoey could look like.

Fowler had worked closely with Benari – who had been central in setting up another investment bank, Zurich Capital Markets – for years, when UBS acted as Challenger’s banker. Fowler and Benari had been chatting informally for months about the new venture.

Now, at Benari’s home in Balmoral, the path seemed obvious: Benari would lead the new venture and choreograph its growth, leaving Fowler free to focus on deals and people.

Unlike the way that Zurich Capital Markets had been set up, Barrenjoey would focus on getting the infrastructure right first, and then recruiting the revenue earners.

The venture, with Benari running it, was back on. And, this way, with the new structure in place, it was far more palatable to Grounds, who still kept everyone guessing about when he was joining for many more months.

Barrenjoey was up and running by September 2020, when capital flowed into the business in the form of Magellan’s cash and shares, which were quickly sold. By May, the group had booked revenue for its first corporate finance deal in the form of the $900 million merger of Aussie Home Loans and Lendi and its first equities trade – buying shares in Qantas. They were away.

Break-neck pace

Since then, Barrenjoey has been operating at a breakneck pace.

Aggressively, according to some, who point to how expertly Barrenjoey has broken into other banks’ longstanding relationships. Necessarily, others say, pointing to the $450 million valuation ascribed to the business before it had inked a deal. Within Barrenjoey they simply talk about GSD – getting stuff done.

This new team is impossible to ignore – it’s everywhere.

“We are seeing Barrenjoey at every turn since they got their feet under the desk,” said one individual who works closely with investment banks of M&A deals. “They’re hungry. We are seeing them across all the major takeovers going on at the moment.”

Even if UBS had managed to overlook the defection of some of its key staff, splitting of fees and the endless comparisons, Barrenjoey showed it couldn’t be ignored when Grounds and his team turned up at the UBS’ Chifley offices to negotiate KKR’s buy-out of long-standing UBS client Ramsay Healthcare. They had successful cut in on Credit Suisse’s mandate. The team would have felt right at home – the same receptionist was at the front desk to greet them.

Barrenjoey had snagged the KKR mandate despite whisking PEXA away from the private equity giant at the last minute, pushing through an IPO just as KKR thought it had the prize.

It was a master class of how investment banking relies on relationships and timing, not just the franchise, though Barclays involvement remained central.

Another notable deal was advising Seven on its takeover over of Boral (which had Jarden, Citi and Flagstaff in its corner). It was the first time Barrenjoey had the chance to flex the Barclays balance sheet, with the UK bank financing the $8 billion bid.

Of course, the Ramsay deal wasn’t the first time UBS and Barrenjoey had found themselves around a deal together.

Poaching infrastructure banker Jarrod Keys in the middle of the Transurban takeover of WestConnex meant that Barrenjoey had found themselves on the same side – and splitting fees with UBS. And they also worked together on Sydney Airports, chaired by Barrenjoey chair David Gonski, on one of the local market’s megadeals.

Bankers from both firms say the animosity is overdone: after all, they’ve worked together for years, know each other’s wives and families.

Performance helps too. Because for or all the speculation about how Barrenjoey would kill UBS by hollowing out its key deal makers, the local offices of the Swiss bank have done well, helped by its pragmatic approach to working alongside Barrenjoey and keeping clients on-side.

The throwaway line within Barrenjoey is that they have everything they want from UBS anyway, except maybe the in-house chef.

Who has never done a bad deal?

This week, rivals were quick to point out Barrenjoey’s role in bringing gold-testing company Chrysos to market as an example of the firm being too eager to get a deal done. For some, it was a surprise to see Barrenjoey on the float; Morgan Stanley had managed the most recent pre-IPO round. But Barrenjoey had apparently swooped in with a more aggressive valuation.

Shares have tumbled since listing – and even amid a market sell-off, it’s been among the worst major listings since the credit crisis. Critics declared it an example of Barrenjoey’s bankers losing their heads in their enthusiasm to snare a deal.

But who can say they haven’t done a bad deal?

Certainly not Fowler and Grounds, who when at UBS oversaw the controversial PNG-Oil Search loan that is now the subject of a PNG government royal commission.

Others are quick to point out that the pair also were at the helm during the poles and wires research scandal where the bank released two different notes on the $13 billion NSW government sale, for which UBS was the adviser.

But while each scandal attracted headlines and investigations, nothing stuck.

UBS was cleared by regulators in poles and wires; and in relation to PNG, so far the Australian regulators haven’t said they are actively pursuing any investigations.

For all the sniping, it’s clear that Barrenjoey has done something no-one else has.

In less than a year, they’ve established a full-service bank in Australia to compete alongside Macquarie, UBS and Goldman Sachs, and cemented themselves among that top tier within a year.

New entrants

It’s come at a time when other new entrants have come into the market – including US-based Jefferies and New Zealand’s Jarden (also populated with former UBS bankers) – to shake up the old pecking order.

They are also quick to declare that they are in profit, as parent Magellan reported in its annual accounts. However, that did require stripping out all the hefty upfront costs of establishing a full-service investment bank.

So they’ve got the talent and the momentum. They’ve sunk serious money into most of the upfront costs. Some 300 staff are on the books, of which 90 are in corporate finance, which means both firepower and a large, ongoing cost base.

And – with the exception of fixed income and prime broking – services offered to hedge funds including securities lending – most of the divisions are up and running, in one form or another.

Investors also got a reminder of their plans for asset management when Barrenjoey bought Magellan’s stake in Mexican food chain Guzman y Gomez this week, adding to a stable that includes investments in Allied Credit and Credible. It’s another example of how quickly they’ve used relationships to embed themselves in this market; ideally, Barrenjoey gets a role on any exits.

Have they re-shaped the investment banking market? Well, yes, if you consider that they’ve re-cast the top four or five players and, potentially, have made some of the smaller players re-examine whether their own presence in the market stacks up.

Same old faces

But really, they’re bankers, doing what they’ve always done, at a different office.

“It’s the same faces in a different firm,” says one banker.

And they’re not there yet. Everyone is aware that it takes more than a blockbuster first year in M&A – this is a three- to five-year build. And the challenge will be all the greater if the deal making and capital raising frenzy of the last few years dries up – as expected – as markets tank and interest rates rise.

To prove they’re in it for the long haul and align themselves with their backers, Fowler and Grounds don’t take bonuses with the rest of the bankers. Instead, they are waiting for distribution and re-valuations, alongside Magellan and Barclays. It’s not a factor, rivals say, that will make or break the new venture.

Rather, it’s getting fixed income and prime broking up and running fast. Cash equities can be a drain on profitability, rivals point out. Those last two pieces, sources say, are crucial to the venture’s ongoing profitability, and – if successful – will help deliver on the ambition of replicating a UBS or Macquarie.

And, of course, crucial to the success is the continuing relationship with Barclays. As well as the balance sheet, global deal flow in both M&A and equities has also been an important component for a successful local bank. The deal was introduced by Barrenjoey’s senior strategy partner and BHP chairman Ken MacKenzie to Barclays’ then chief executive Jes Staley. Now, a new chief executive has been installed.

As for Magellan? So far, it’s publicly backing Barrenjoey, despite it being a deal struck by co-founder Hamish Douglass, who resigned this year. Within Magellan, sorting through its own business, there’s a keen awareness of the dangers of building businesses around stars. But so far, Barrenjoey has to proved to be an exception.