As an investment banker with one of the foreign banks, Mehul Savla had a lot of smaller companies asking him for advice on raising funds. In March this year he quit to start his own firm for equity syndication to cater to small and medium enterprises (SME) in smaller towns.
Huzefa Sitabkhan, who was working with one of the domestic investment banks (i-banks), left to start PNR Consulting, an advisory and consultancy firm for equity and debt syndication for SMEs.
As the big deals dry up owing to falling markets and the US financial crisis, bankers are realising that fresh business will originate from the smaller firms that will continue to need growth capital. This remains an opportunity even as the big foreign banks are busy putting their houses in order as they reel under the crisis that has gripped the American financial system.
According to recent data from Thomson Reuters , there have been just 55 deals worth $ 105.8 million in the equity capital market segment so far in 2008 against 131 deals worth $404.9 million in the same period last year. In the debt capital market segment, 220 deals worth $33.5 million were done so far this year compared to 239 deals worth $45.9 done last year.
"Firms continue to need growth capital and given the growth context, promoters are willing to look at both financial as well as strategic investors, at this point," says Ajay Garg, chief executive officer and managing director of Equirus Capital. Last July, a bunch of investment banking professionals broke away from MAPE Admisi to start Equirus Capital, a firm offering investment banking and advisory services. Equirus has since completed 16 transactions at a time when markets are down.
"The big boys will not look at this segment because it is painful but this is where 80 per cent of the business comes from. Moreover, promoters are increasingly willing to look at strategic investors rather than financial investors alone as they would bring better valuation and increased business potential to the table," says Savla of RippleWave Equity.
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Merchant banking circles are abuzz with stories of bankers starting their own advisory outfits to cater to smaller balance sheets. Though all these firms have bought real estate space, it is even possible to work with just a laptop and a phone. RippleWave is tapping the network of large chartered accountants who usually act as financial advisors to most of these smaller firms in smaller towns as also the industry associations to source business.
The internet has also made things easier. "Sometimes forging an alliance with a UK-based boutique investment bank is just a Google search away because even these firms have grown similarly," says Savla, who has tied up with Australian and UK-based firms to offer cross-border services.
Several established i-banks are realising that tapping these entrepreneurs is a good way of sourcing deals at a time when "everybody is talking to everybody and there is no sanctity in getting a mandate".
So one of the bankers was not surprised when a big brokerage house actually offered him a finder's fee just to source the deal. So even though no deals are being signed now, termsheets are being prepared and handed over.
While bonuses, commissions and carry would be seriously compromised for these bankers initially, the business can offer steady fees compared to the i-banking fees from a single big deal. In fact, while this trend started some years ago, it has only picked up pace in recent times. Avendus Advisors, which set up shop in 1999, saw tremendous success especially in the mergers and acquisitions (M&A) space in the IT sector. Saffron Capital Advisors was another firm that was set up last year by K Srinivas and Jinesh Mehta.
"In any case, nothing much is going to happen in the market for the next one year or so. If this venture does not take off, I will always get a job with one of the bigger i-banks in two years. I will give myself that much time," said a banker who has just resigned from his job with an i-bank to start his advisory outfit.