SC Lowy seeks European bank acquisition and Brexit hedge
Boutique investment bank SC Lowy is seeking to acquire a small European banking business in what would mark the firm’s second acquisition of a bank since it was launched in 2009.
By Duncan Kerr GlobalCapital 09 Aug 2017
The Hong Kong-headquartered firm, which has about 50 staff and was founded by two former senior executives in Deutsche Bank’s Asia-Pacific business, bought Shinmin, a small South Korean mutual savings bank, in 2013.
The bank has since been restructured, recapitalised and renamed as Choeun Savings Bank – Choeun is the Korean word for good – and primarily lends to small and medium-sized companies in Korea.
Seeking to replicate the same success in Europe, Michel Löwy, co-founder and CEO, told GlobalCapital during a meeting in London in late July that the company was “scouting out a small, traditional commercial banking platform that can be acquired and strengthened”.
While the scouting is still underway among some of the more opportunity-laden countries of southern Europe, Löwy said he hoped to be able to announce an agreement as early as later this year.
The speed of execution is important because of the operational implications the UK’s exit from the European Union raises for the firm’s European business, which was established in London in 2012.
“Brexit is an additional aspect that motivates us,” said Löwy, a Belgian national. “The opportunity to make an acquisition is of course itself attractive, but having a physical business, with people and a licence on the Continent is a good hedge against Brexit and the uncertainty that comes with it.”
With less than 20 staff in its Mayfair office in London, SC Lowy does not face the same scale of challenge its larger wholesale banking rivals face. But its small size does mean the impact of a hard Brexit – essentially no access to the single European market, preventing the sale of financial services freely across Europe – could be even more damaging to its five-year-old European operations.
At this stage the bulk of its European business is in the trading and sales of high yield loans and bonds, but the plan is to try to replicate the success it has had in Asia across debt capital markets and financial advisory too.
Recent transactions include being joint advisor on the cross-border debt restructuring of Mongolian Mining Corporation, the country’s largest coking producer, acting as joint books and lead on a Chinese property developer’s $250m bond and on a $350m secured note for Australia-based underground miner Barminco, which is part owned by UK private equity firm Gresham.
SC Lowy was also lead bookrunner on a $150m bond last year for Russia’s B&N Bank, owned by entrepreneur and billionaire Mikhail Gutseriev.
High yield bond and loan trading is by far the firm’s most powerful business, with a total of $13bn traded across Asia and EMEA last year, according to the firm. On the current run rate, Löwy said the firm could trade close to $20bn this year, which by volume would rank it as one of the top five, if not top three, broker-dealers in Asia.
Such a rapid rise has ultimately been enabled by global investment banks pulling back from fixed income trading and sales in the years since the global financial crisis.
SC Lowy’s biggest threat, therefore, is, “if the major investment banks decide tomorrow to move back in to the market aggressively”, said Löwy, who ran Deutsche’s strategic investment group – focused on distressed and special situations – for Asia-Pacific before leaving to co-found the firm with Soo Cheon, formerly Deutsche’s head of research and trading in the strategic investment group.
“That could happen if we see some of the deregulation that is being talked about particularly in the US. Such a move would not be an existential threat to our business anymore but it would impact the returns that we can make.”
The Office of the Comptroller of the Currency, a US banking regulator, is already in the process of seeking to loosen the Volcker Rule, part of the Dodd-Frank banking reform that bans banks from proprietary trading.
But it is still far from certain if banks will be allowed to restart prop trading, and if so, when.
Until such time, SC Lowy’s acquisition of a European bank will help strengthen its business, to the extent that a partial listing potentially becomes an option.
“For us completing another acquisition of a banking platform could be transformational for our business in Europe,” said Lowy. “It could ultimately mean creating an organisation that has the right critical mass, which could lead to us asking whether it is now time for us to become part publicly listed or not.”
Having completed a management buyout last year – repurchasing all the shares from the original seed investors, which included private equity – the reward for doing so, if they do so, is now much more attractive than it was.