Q&A: 'Firms look at investment advice quality'

Europe-based N M Rothschild & Sons, the only unlisted top-run global investment bank, entered India in the late 1990s "� a period that saw several of its competitors exiting the country - after the dotcom bust and a slowdown that followed.

Rothschild prides itself as a pure advisory firm, and it was involved in some of the high-profile deals such as restructuring of the Dabhol project, and most recently, as advisors to the Tatas in its acquisition of Corus.

Sanjay Bhandarkar, the low-profile managing director of Rothschild India, explains to Reena Zachariah and Rajesh Abraham that corporate houses in India are increasingly realising the value of pure advice, as against finance-cum-advice provided by other global i-banks.

Q: You have been one of the early entrants into the Indian market. How much have things changed from then?

SB: Rothschild is basically a pure corporate finance advisory firm. There are a few things that distinguish us from the rest of the investment banking fraternity. One: we are amongst the only global privately-owned company in the investment banking world. We are still being owned by the Rothschild family which has been there for 200 years.

So I think that makes us a bit different. Second, we only provide advisory. We don't lend, we don't invest. Our bread and butter are driven by the quality of advice that we provide. Clients come to us are for our advice and not because we have a huge propriety pools of capital, and to that extent we are focused.

And third, we can find a corollary of this corporate advisory bit on the fact that we typically tend to have more senior guys on transactions. So providing advice just doesn't mean putting together a model and doing documentation. It also comes with experience. You need to be able to use your experience to impart a certain kind of judgment on that particular case. So you need to have senior guys on it.

So in a sense our model tends to be more intensive as far as senior management is concerned compared to a lot of other banks. In that sense, we tend to be different. Internationally, our 800 bankers are just doing corporate advisory. In the advisory stream, we are as big as any other big investment banking firm.

It is interesting, although it is not an easy model to sell in the Indian market, as you know most Indian corporate houses are very keen on combining capital with advice. Now things have started to change. People are taking advice very seriously.

Till recently, people were not looking at the quality of advice that investment banks can provide. In the context of cross-border transactions, or in the context of approaching a new sector, you are increasingly seeing corporate houses willing to take advice and are willing to pay for advice on a standalone basis. So things are changing.

Plus, we are also seeing good opportunity in advising international companies which are entering India. They are not familiar with the Indian market and they need advice.

Q: Is the fact that you don't provide finance a big disadvantage for you?

SB: I don't thing it is a disadvantage. There are two elements to an M&A transaction: there's one element of doing the transaction, your experience of having done it before, your understanding of a particular situation, your understanding of the people behind it -- whether its the person who is selling the assets or the management of the company, whether it's understanding of the sector. So that's core advisory work on the transaction side on how to get a deal done on the best possible terms.

The second is about the financing: now there are people who have split these two: - I'll take the best available on that and on the advisory. I'll take the best available on that, and I won't combine the two. There are others who say, fine I'll combine the two - I want somebody with a balance sheet, who can also give me advice.

Then, obviously, it is not a market that we can play. So, we have to be smart about the kind of business that we can try and target. Until recently (before the US credit market turmoil), pure money to finance a deal, particularly for big corporates, was never an issue. It may be an issue for $ 15-20 billion deals. There are a lot of serious players who are bidding for financing the deal.

Rothschild is the largest independent debt advisory firm in Europe. Essentially, what we do is to sit by the side of the corporates and help them to get the best possible deal (for getting finance). Since, we are not competing to provide finance clients know that we can get the best possible deal for them.

Q: What does the deal street look like after the US subprime turmoil?

SB: There is far greater uncertainty in the US and Europe, relative to Asia. Asia and India are relatively unaffected. Private equity led buyouts are very rare in Asia, and particularly in India. The levels of leveraged debt for acquisition financing have been fairly modest.

Unlike in Europe you had debt being raised by corporates who actually in addition to the entity that they are acquiring, they have a strong balance sheet of their own. So to that extent they have the ability to kind of outer support to the financing that they are doing. We don't see as much of an effect in India as you see in the kind of more active markets like the Europe or US.

Q. Companies such as Tata Steel are raising funds abroad. IS the cost of financing going up significantly because of rates?

SB: You are seeing costs generally going up .There is an evidence of both spreads going up as also the basic interest rates. Look at what has happened to LIBOR. Libor itself has moved up significantly. It just reflects a lack of liquidity in the market and there is also an evidence of some increase in spreads.

Nobody can deny the fact that there are issues in the current market. India and Asia in general will come off very lightly compared to the kind of things that are happening in Europe and the US.