How Banks Cover Sovereign Wealth Clients

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Advising sovereign wealth funds is emerging as a hot career niche for investment bankers.

Recognizing the growing influence of these government-controlled capital pools, investment banks are boosting their coverage. A recent Financial News story gives a wealth of detail on how it's being done.

While sovereign funds have grabbed headlines with passive minority investments in several bulge-bracket U.S. and European banks, they're also jumping into M&A, sometimes buying up whole companies. Although the $60.5 billion that sovereigns spent on acquisitions and minority stakes last year pales next to private equity firms' $800 billion deal volume, bank executives are mindful that sovereigns are becoming more active while PE is slowing down.

The funds' switch to active dealmaking "means banks must adopt a more integrated approach and pitch more products to them," notes Financial News. For example, doing a wide range of M&A deals has turned sovereign funds into strategic users of leverage, "which increases the range of opportunities available to the funds and to their advisers," Credit Suisse's David Livingstone told the newspaper. Their governmental or institutional character "brings a challenging and broad coverage requirement," added Livingstone, the head of investment banking for the Europe-Middle East-Africa region.

Merrill Lynch and Lehman

Merrill Lynch has a dedicated sovereign coverage team, called the global public sector client group, within its global markets and investment banking division. The team is led by Brian Henderson, a senior vice president based in New York and past vice chairman of Merrill's Europe-Middle East-Africa subsidiary. Team members in Beijing, Hong Kong, Singapore and Dubai cover Asian sovereign wealth funds, calling on the resources of both the bank's financial sponsor group and the investment banking division.

Merrill Lynch treats sovereign wealth clients much the same as major private equity clients, according to Mark Aedy, head of investment banking for Europe-Middle East-Africa. That includes "strategic dialogue," such as approaching them when the bank is shopping for a buyer for assets.

Lehman Brothers assigns local coverage of sovereigns to "a strong and senior" banker, augmented by a senior managing director with global responsibility for helping the client access the bank's full menu of services.

The article also discusses coverage set-ups at UBS, Morgan Stanley and Lazard. When Lazard advised China Investment Corp. on its $5 billion investment in Morgan Stanley last December, the lead banker was Gary Parr, a former head of financial institutions at Morgan Stanley.

Although Parr told Financial News, "These funds have a global view but they need investment ideas just like Permira and Kohlberg Kravis Roberts and they understand and appreciate ideas from investment bankers," the paper notes most of the recent sovereign investments in big financial institutions were negotiated without external deal advisers.