By James Sproule, Head of UK Research, Accenture
London based investment banks have had a torrid few years. Returns in the order of 20% are as long gone as generous bonuses. If there is to be any hope of the former, new sources of revenues and profits must be found. Those London based investment banks that are in a position to expand, have all made the logical conclusion that emerging markets offer the greatest hope of underlying economic growth and a consequential need for investment banking services.
James Sproule talks about the opportunities that emerging markets offer to London's investment banks
Within every emerging market there are of course a host of local banks meeting businesses' financing needs. The mix of business undertaken by local emerging markets investment banks, unsurprisingly, reflects the very different historic business structures found in the underlying economy. But as these economies are changing, so too are financing needs. How rapidly businesses in emerging markets will move away from a ‘corporate lending and bank debt’ dependant model, towards a financial model where wide range of capital markets options are considered is going to vary. But what does seem more certain is that growth is on the agenda. Data over the past few years indicates that corporate lending in emerging markets has continued to grow rapidly, up by 48% in 2010 and 30% in 2011. While many companies may be reluctant to move away from a financial model which has served them well, we believe there are four reasons why emerging markets companies are likely to continue to move towards a capital markets funding structure:
- Others will follow the path of success. The rise in equity market capitalisation seen across rapidly growing emerging market economies points to larger companies embracing capital markets financing solutions.
- Intraregional competition requires capital. Companies from South Africa and China are racing to become early leaders in the next wave of emerging markets such as sub Saharan Africa.
- Bank balance sheets cannot take all the strain. Emerging markets banks do not have the balance sheet strength to support the range of companies needing finance, a problem that becomes more acute as the economies grow.
- Alternative paths can be successful, but they are slow. While many G7 and developed economies have achieved high GDP per capita without relying upon capital markets, their time to double GDP can be measured in decades, the desire for rapid growth points to a capital market financing.
Stock Market Capitalisation and GDP per Capita
What is even more remarkable is how developed market investment banks have come to dominate emerging markets over the last decade. In 2005, the total amount of equity raised in emerging markets was $131 billion; of this sum, 22% was raised by developed market banks. By 2011 the amount of equity capital raised had risen to $686 billion, with 51% of the capital being raised by developed market banks, with similar figures being seen in 2012. Clearly emerging markets are presenting significant opportunities to London based investment banks, opportunities where they are doing their very best to rise to the challenge.
About James Sproule
James Sproule is Global Lead for Capital Markets Research and Head of UK Research for Accenture Growth & Strategy.