March 30, 2017

Barbarian in China

by Breakingviews.

Peter Cohen has been angling for an investment banking comeback since he merged his Ramius alternatives investment shop with brokerage Cowen Group eight years ago. He’s built on the firm’s core healthcare franchise, but a slump in initial public offerings threatens his ambitions. Now the former Shearson chief executive, whose role in putting RJR Nabisco in play was chronicled in “Barbarians at the Gate”, believes he’s found a solution: Chinese cash and connections.

Cowen is raising $275 million in equity and debt from CEFC China, a fast-growing conglomerate run by Ye Jiangming that is also known as China Energy. Assuming regulators in both countries agree – which is not guaranteed, especially given jumpiness in China about splashy overseas deals – the Shanghai firm will get a 19.9 percent stake.

For both sides, the time is right. A slump in new equity offerings in the U.S. last year hit Cowen hard. Its investment banking revenue plunged 40 percent, pushing the firm into the red to the tune of $26 million. Prior to the CEFC deal, its stock was off nearly 50 percent from its 2015 highs and got only about half the bump as other investment banks did following the U.S. election in November.

Cowen has expanded modestly into credit, prime brokerage and mergers and acquisitions. The Chinese deal means a bigger shopping budget, and potentially more business from mainland firms looking for U.S. listings.

For CEFC, the knowledge gained from owning a stake in Cowen could help boost its Shanghai securities business. It ranked a lowly 121st among the country’s 125 brokerages by revenue in 2015, official data shows, but growth was respectable and the firm is looking to grow outside the mainland. It agreed last year to buy a Czech bank.

CEFC is one of numerous Chinese conglomerates chasing financial businesses abroad. But this seems like a better fit than some other recent deals, such as aviation-to-property group HNA’s bid for fund-of-hedge-funds business SkyBridge, or China Oceanwide’s $2.7 billion move on Genworth Financial, an ailing U.S. insurer. For one of investment banking’s original barbarians, this is a good time to seek China’s blessing.



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