The rise of RBC Capital Markets

RBC Capital Markets made it in top 9 IB revenue in 2017, above UBS and below the rest of the BBs.

Can any of you experienced professionals tell whether RBC is now considered a BB in the financial world? I know they also made it into the top 30 systematically big banks this year, the "too big to fail" list. But that's probably more of the commercial banking side.

Link: http://www.businessinsider.com/who-will-win-wall-…

 

Yes they broke top 10 in the overall league table for revenues... no I would not consider them a BB.

It is my understanding that roughly 65-75% of their deals are sourced by financial sponsor activity. Very much like Wells Fargo or pre-recession CS, they completely lead with their balance sheet. I know in particular there are a couple of specific MF sponsors they have great relationships with. As such, on the coverage side, their energy, healthcare, and tech are probably the closest to "BB-groups" due to a concentration of sponsor activity taking place in these industries (as well as the capital intensive nature of energy... I'm sure you would find generous revolvers attached to any corporate deal they did)

On the product side, they are actively trying to build out their M&A and ECM practices to varying degrees of success.

 

What I mean by "financial sponsor activity" is that a large portion of RBC's "deals" are really them representing PE firms in LBOs. That's not necessarily a bad thing or even the entire reason why they're not a BB firm, it's just that a lot of people see these deals as less prestigious. This is because in representing a PE fund in an LBO, instead of a normal M&A deal where corporations are essentially paying the bank for its advice "advisory services", almost everyone at a PE fund is an ex-banker and understands the intricacies of taking over a company. Rather, the PE fund is paying the bank to figure out the financing side (both the best strategy: ie bank debt vs high yield, and the execution: ie underwriting and finding placement of the debt at mezzanine / credit funds, banks, etc..) Additionally, as you could imagine, in exchange for these "advising fees" that the PE funds need to pay banks to arrange financing, the bank will offer up some very low cost loans/revolvers to the PE fund to keep their cost of capital low and everyone happy.... essentially why you usually see banks with huge balance sheets (CS, Wells Fargo, RBC, JPM to some extent) dominate this space.

 
Best Response

Would disagree here on three points. The most important being that you don't report how much prestige you earned on your income statement every quarter:

  1. In 95% of M&A deals, you are not offering actual advice, but are simply helping to affect a transaction. Unless you're dealing with a small cap company, chances are that the management team knows their industry about a 100 times better than your MD.

  2. Money is green. Who cares how "prestigious" the deal is? You earn a fee from advisory, plus a fee from the debt issuance, plus a fee from the credit facility. Sure, maybe you cut them a small deal on the debt issuance, but that's still more fees earned than just the advisory fee itself. Screw prestige - money is green.

  3. You have to think about this full cycle. Now, that you're on that lax credit facility, you keep earning a small fee plus the company has to keep you happy, meaning more DCM, ECM (i.e. PE sponsor who may IPO down the road), derivatives trading, and M&A work in the future. Again, that equals more cash in the bank from fees. Mr. Prestigious on the other hand has to keep his fingers crossed that they'll do another M&A deal sometime soon and will use his bank.

 

They do a lot of sponsor deals, and a lot of leveraged lending, because it was the fastest and easiest way for them to establish a foothold in the US. However, they are also representing a lot of middle market strategics. Basically their model is to let the "bulge brackets" fight over the high-risk, high-reward, name brand clients and focus more on flow business which is moving a bit down market where the competition is less fierce and where they can establish themselves. Their sponsor activity has been a huge part of their business, but as they invest in and build out coverage groups, and bring on MD's with sponsor and corporate relationships, they've been slowly diversifying. Expect the sponsor portion of their business to decline as a percentage as this ramps up.

If you define bb by fees then I'd consider them a bulge. If you define them as advising top strategics then I don't think they are and don't think they're interested in it right now. However in a few years once the bank has been further built out I won't be surprised to see them competitive on plenty of leading deals in the market. They're already seeing that with some of their groups (e.g. Healthcare).

 

Nope - it was a one shot pop for failing Canadian O&G work....

Maybe when oil prices reach inflation adjusted $100/bbl again (by that time it will likely be more like $200, if it ever happens) and a bunch of mudslimes and communists (read: Subhumans) get together to tank world commodity prices in an act of economic warfare against the US (which hilariously only made us more profitable while it bankrupted one of the colluding nations, and plunged the remaining countries into political chaos) and our Northern Neighbors are the only real casualty.. THEN they will be top 10.

 

I won't post the article, as I know WSO has rules against that, but here are the bullets: - RBC made a big push post financial crisis to break into the big leagues in IBD. They went on a hiring spree, purchased space, recruited from rivals etc. With crippled US competitors and a fortress balance sheet the firm looked prime to woo business away from US BB. - Despite all of this RBC has yet to break into the top 10 in IBD. Analysts and management were expecting large US growht, but most of the business has been coming from Canada in the mining and energy sectors. That said, they have landed some high profile deals (was on GM bankruptcy team). - Executives say they are still pleased with the progress. The unit is profitable and still has a competitive advantage to some US peers who need to meet new capital requirements and other regulatory hurdles. Canada also ranks 3rd in IBD business behind on the US and China - That said, RBC's IBD business has seen increasing cost (they have the second costliest capital markets business in Canada) and has only managed to come in 3rd place in its home country of Canada. - The foray into IBD has led their earnings, once predictable and stable, to be much more volatile.

 

Don't read too much into the BB designation; frankly many people consider RBC a BB already. What matters more is the relative perception of the bank, and more importantly, of the specific group (driven by deal flow, exit opps, etc). Subjectively, RBC on the whole might be considered a mid/lower tier BB, but that doesn't really matter on a practical basis. Group specific attributes and what kind of experience you can get are the most important. So If you're asking from the perspective of whether or not it's a bank "worth joining" or one that will open doors for you, I'd say yes.

For what it's worth, being heavy on sponsor deals isn't necessarily a bad thing, and your mileage will vary from an experience perspective based on the type of mandate and the particular sponsor you're working with. The best sponsor deals are ones where you have a truly dual advisory and a financing mandate (ie. not just a tack-on an advisory credit). True, banks are likely adding less incremental value given the expertise of PE firms, but you'll still run a lot of the typical LBO analyses.

 

Of the factors you mentioned, exit opps is the only really tangible one. Recognition and prestige only really matter in this context to the extent that it helps with exit opps. On the whole, people from "better" banks tend get "better" exits. That being said there will be plenty of opportunities to recruit for similar, if not the same, positions. You'd just have to just impress them that much more to overcome the branding difference.

 

"Skate where the puck is going."

There's a reason GS is trying to take deposits (w/out revealing they are - gotta protect that brand!), and its b/c the balance sheet is a real competitive advantage (it is a bank after all). As an investor I'm long/strong on the RBCs, Wells, JPMs (#1) and tepid at best on the GS/boutiques. You can't monopolize knowledge, so its unclear to me that advantages in 'advisory' are long-term sustainable (in fact, that's why we now have all these EBs competing with what used to be an oligopoly of GS/MS). The ability to save someone a few mil on financing = real competitive advantage

 

Definitely. It's group by group within that firm. They have a massive balance sheet that will continue to open doors for them in other industries, too. Solid bank, just isn't universally in the lead left conversation yet.

"Anything less than the best is a felony"
 

I struggle to understand why the firm you work for, all else equal, matters to the person considering hiring you in this industry. Obviously I do understand that if you want to leave finance and work for, say, Disney or Facebook or PepsiCo, then its probably easier to get a job at those companies if you have Goldman on your resume versus RBC. This is because you cannot dumb down your experience nearly enough to make sense to those companies. But they have heard of Goldman and likely associate it with prestige and will assume on name alone that you are smart and competent and probably have a solid network. This is simple name recognition stuff. But if you’re jumping within finance, then the person thinking of hiring you is going to want someone with the right relevant financial experience - be it banking, research, trading. And they want to know what specific deals you were on and how you contributed and made the firm money.

A previous commenter noted that people on this website care about prestige. For a college kid trying to get the best career start, sure, and that makes sense. Beyond that, firms are not prestigious... if anything deals and relationships are prestigious. I know that RBC has the #1 or #2 internet analyst on the street. As a result they are on every deal and know everyone in tech. If you like tech, would you rather work at Goldman or RBC? It’s a no brainer you want to work at RBC in this example.

For example, say you have a scenario in which two tech bankers are gunning for the same tech PE job. One is at Goldman and one is at RBC. If the RBC banker worked lead on several more high profile deals than the Goldman banker, then RBC guy is probably getting the job. It’s all about your track record of making money for your shop, and who you know. Totally irrelevant what bank you are working for when it comes to finding new opportunities within this business.

 

High ranking sell-side ER analysts translate to more influence in their published research reports and are better regarded by institutional investors. As such, sell side ER analysts' reports carry more weight and have heavier influence on stock prices than say a medicore ER analyst. If a bank is gunning for a client, the sell-side ER analyst will try and publish more favorable reports, updates and recommendations to make the client happy (equals positive stock price influence) to help encourage the client using the same bank for IB purposes. It's all about the relationship

 

Agree mostly with what you're saying, but that more applies to the perspective of a bank and being a senior banker. PE recruiting is so early these days that 1st year analysts don't even have any closed deal experience by the time it kicks off and the headhunters look at the prestige of the bank and the group. Sure, maybe the RBC TMT banker might have worked on more high profile deals but on a pure exit opp basis, every PE firm and headhunter would be much more focused on GS TMT.

As an aside, not sure if you were using the group as an example, but if you like tech and you're an undergrad, it would be a no-brainer to work for GS TMT instead, over RBC...

 

I just re-read your comment and have a follow-on thought. You mention that the PE recruiting process is so early now and that young candidates haven’t the solid experience yet to really speak to. Let that sink in for a moment.... then why is anyone, let alone a PE shop, looking to hire somebody with no valuable experience? You are saying that these kids have no experience... and that hiring managers know this... yet they seek to hire them anyway. Forget the name rec or “prestige” stuff for a moment. Am I misinterpreting? What assets/skills/upside is a PE shop buying when it hires a person who worked at Goldman or JPM for only 11 or 13 months? Versus the same individual from Wells, RBC, or SunTrust even?

 

Nice try HR, RBC is dogshit in every way that matters. Sure, RBC broke top 10, but it's all lead with their balance sheet. They don't take lead on as many deals as other BBs, especially not in M&A (the mandates they are lucky enough to even get)

 

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