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Taking the Fight to Investment Banking Giants

Michel-Lowy_and_Soo-Cheon-Lee
Michel Lowy, CEO (Left) and Soo Cheon Lee,
Co-founder and Chief Investment Officer
 
Michel Lowy, a former Deutsche Bank investment banker, set up the Hong Kong headquartered boutique investment firm in 2009, shortly after the global financial crisis, seeing the opportunity to leverage on his own experience to set up a fixed income focused investment bank.

“We are not like a traditional investment bank because we are nimble, fully independent and not bogged down by bureaucracy,” said Lowy, who now manages a team of over 40 across Asia-Pacific, Europe and the US. “We also differentiate ourselves from them because the traditional investment banks move more and more to fee only and advisory businesses. While we are doing the same, we still look to co-invest with our clients in transactions that we originate or source from the secondary market,” he says.“We look for partners.”

SC Lowy, which started dealing in sub-par Asian loans and bonds when it opened its doors in 2009, has since expanded into the Asian high-yield and convertible bond markets competing directly with bulge bracket banks’ debt capital markets divisions for bond underwriting, and book-running businesses three years later.

On stakeholders

Lowy believes one of the core values of the firm is to grow together with its employees, and that is part of the reason why most employees have an ownership stake in the business. “We see our employees as true partners for building the firm. Through the employee-ownership program, we provide an equity upside to employees who are entrepreneurial and high performers,” Lowy says.

The value SC Lowy adopts has helped with the recruitment of talent different from those in traditional investment banks. While acknowledging that young talent might receive a decent salary and good postgraduate education in bulge-bracket banks, these talented individuals are lacking the opportunity to create value for themselves, because they are purely an employee of a large organization.“People joining us are not only doing so because of a high salary. They join us because they know that they could take a share in the equity value of the firm, and if they perform well, the firm’s equity value will do well and they will be rewarded far better than simply with their salary.”

Contrary to some large European and US banks, SC Lowy’s pay scale is not under limitations by local authorities, which allows it to reward their employees based on performance.

Unlike traditional investment banks which serve as an intermediary for corporates and investors, SC Lowy acts as principal in transactions and co-invests with them. “We earn brokerage fees by bringing investment opportunities for clients, just like other investment banks do. But we are not pure sales people. We invest when opportunities arise and invite our partners to join – it’s a win-win situation for both parties.”

Being a co-investor in deals could be a display of responsibility for clients. The consequences for bringing a bad investment idea may be low for traditional investment banks, but it could be detrimental for SC Lowy because it would directly hurt both its reputation and its balance sheet.

Efficiency and transparency are factors which Lowy believes make the company stand out against traditional investment banks. Crucial to this efficiency, he believes, is workforce diversification.

The fixed-income specialist maintains a multicultural environment by having a mix of close to 20 nationalities among the 40 employees that work across its 5 offices globally. The fact Lowy and his co-founders Soo Cheon Lee and Jamie Tadelis come from different backgrounds means they are capable of generating ideas that cater to different investors. There are also female members among the management and “post-90s” generation fresh graduates on the team, said Lowy, allowing the firm to receive ideas from all directions.

Lowy also regards the freedom to express ideas an important element in shaping an effective team. “We operate in an open environment. Senior management sits together with the team so that everyone can speak directly and face-to-face to each other.” The plan is also an attempt to keep the company away from bureaucracy, which many large investment banks are unable to avoid.

Although strictly not an advisory firm, SC Lowy is able to advise clients over independent market decisions by being a market maker and investor. The firm maintains a close relationship with its clients, itself being both a sell-sider and a buysider. “We co-invest with clients, so they are confident about us because we are also putting money in deals. Even if we do not co-invest in certain projects, we still tell them what we think about them. The key is to be true to, and honest with your clients.”

On Social Responsibility

SC Lowy also believes corporate should “try to give back to community”. The company has set an example by sponsoring the Emerging Markets Foundation (EMpower), a not-for-profit organization focused on supporting grassroots organizations in emerging market countries that help young people in need.

As one of the corporate underwriters and board members of Empower, SC Lowy subsidizes the operating expenses of the organization financially, and ensures all the donations received go to those who are in need. “When you make a donation, you don’t want it to go to the agency’s staff, flights and computers,” says Lowy.“Through the current structure, we can ensure that all donations to EMpower will eventually go to those organizations that help the kids.”

The co-founder reiterates that SC Lowy is a profit-making organization and aims to make money, but that this does also not contradict with their commitment in the community. “When you have a family and you have kids, and you live in this part of the world, you have to do these things to give back,” he says.

What the future holds for high-yield

Regarding high-yield investment, Lowy admits that the fixed income market may soon be entering difficult times as the attractiveness of bonds fall against other asset classes. High-yield Corporations in the US may be worse off, because they have to pay more on top of their already high-yielding bonds when they refinance themselves.

The US Federal Reserve is also widely expected to raise interest rates gradually, Lowy believes. This move would drive bond yields up, potentially leading to a collapse of the bond market.

However, there could also be positives for corporate in a rising rate environment. Rising rates may suggest higher costs of operation, but also a higher chance of growth, said Lowy. High-yield corporate are known for strong growth potential, so it could be a good time for these companies to expand.

On the flip side, investors will have to be more selective because companies with worse fundamentals may not borrow as easy as better ones in a rising rate environment. As such, high-yield bonds are likely to see larger price differences. BM

Taking the Fight to Investment Banking Giants – PDF (with Chinese translation)

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