In the value chain of traditional investment banks and venture capital firms, financial advisors play a unique role in the financial capital sector by helping ventures build IPO models. But their livelihoods are being challenged by the global economic crisis. How can they adapt to survive?

As the global financial crisis hits the capital markets, institutional investors around the world are preparing for a cold winter. But many of them are still not sure if they’ll survive it at all.

A Chinese investment broker surnamed Chen is one of them. Chen normally spends his time soliciting capital from investors for new business ventures. But over the past month, he has been busy attending seminars to learn more about what institutional investors think of the current investment situation. The outcome was quite discouraging. His conclusion from the seminars is that one third of all institutional investors will slow down their investment pace, around half will wait and see, and the rest have already frozen investment temporarily.

A recent study shows the number of initial public offerings (IPOs) of ventures with a VC/PE background in China this year is less than 50% of last year’s figure, and the average return on investment (ROI) has also hit a record low of 197%.

In the past, investment brokers looked for good opportunities everywhere by taking advantage of their own connections with investors, and then tried both hard and soft tactics to act as an intermediary. As a result, they could get several percentage points of the investment as commission. Sometimes they could learn the inside of an industry by using “investment meetings” as a learning tool. But for now, investors are keeping a tight grip on their money. Only about 20% of new ventures are able to attract investment and their values are assessed lowly. “No one knows how long this economic downturn will last,” says Chen, recalling a caricature of a tombstone with a message from Sequoia Capital to investors, which reads “Rest in peace, good times.”

In fact, since 2000, many Chinese companies have been chasing investment from international capital markets, spurred on by the legend of ventures raising funds by going public overseas. The subsequent inrush of overseas capital made it easier to make money with the “Capital Connection” model. As a result, the number of financial advisors and consulting firms mushroomed. Prime examples include China-ecapital; Hina Group; New Access Capital; China Renaissance, and the up-and-coming Balloch Group. Within two years of its creation, the latter had helped dozens of companies complete US$560 million worth of private placement and M&A deals.

Currently, the emerging financial advising industry has come to a reshuffling stage. A senior financial advisor told CEO & CIO China that many small intermediaries have already changed their business because it is increasingly difficult for capital brokers to survive. “Of course, some new competitors that are more powerful will still join this industry,” he said. When the financial storm came, many century-old companies like Bear Stearns and Lehman Brothers collapsed. Some investment banks are now preparing to set up their own financial advising firms.

Due to changes in the investment environment, every player in the industry is starting to consider new business models. As the market gets more transparent, corporate clients are having a more mature understanding of the capital market. The advising firms need to think about whether their products can meet market demands, and what added value they should deliver to clients. More importantly, the downward economic trend will surely have a different impact on their business. How will they survive such a difficult time? And will the survivors be even stronger after the storm has passed?

Addressing the Challenges One by One

Unlike Chen, who is anxiety-ridden, many financial firms seem optimistic about their own platforms and market share outlook for the coming years. The collapse of top-notch investment banks brings an opportunity for rapid growth in the number of financial advisors. Previously, they often accepted shares from the top investment banks by helping out on venture projects with financing and M&A deals, and acting as co-underwriters for IPOs. Now they can pick up some of the business of traditional investment banks, and take the opportunity to solicit talent from these banks as well.

“Although our private placement business has been affected, there has been a significant rise in our M&A business recently,” said Wen Bo, Executive Director of the Balloch Group. This company is owned by Howard Balloch, a former Canadian ambassador to China, Mongolia and Democratic People’s Republic of Korea respectively. With extensive personal connections in Chinese political and business circles, Balloch resigned from diplomatic duty and set up the Balloch Group in China.

From 2006, Balloch Group and its strategic partner, CIBC World Markets, decided to provide securities underwriting and other services in the secondary market for ventures, and focus on helping China’s rapidly-growing private businesses attract private equities (PEs). Its ever-increasing number of business clients, even amid the current market downturn, is testament to Balloch’s ability to exploit a niche.

“On one hand, many entrepreneurs who were originally extolled by VCs have gradually returned to a more rational value expectation. As a result, many deals originally locked in stalemate are now being finalized. On the other, many Chinese companies cannot raise funds through IPOs within a short time frame and the more prudent credit policies now adopted by banks are forcing ventures in urgent need of funding to consider private placement, or even the possibility of selling some of their shares,” said Wen.

Before the economic downturn, financial advisors needed to spend a lot of time “educating” their clients about what they could offer. But now, even the most arrogant business owners are turning to them for help. Over the past two years, boosted by investment, many businesses spent a lot of money on rapid expansion. But some still failed to complete the last round of financing for their IPOs in the short run. Therefore, institutional investors are more prudent in times of recession and are more eager to exit through M&A.

Financial advisors, including China Renaissance, the number one player in the industry, have firmly grasped this chance. Bao Fan, founder of China Renaissance, used to be in charge of M&A and IPO businesses at Morgan Stanley and UBS. Since the founding of his own company at the end of 2004, he has gained a broad knowledge of the products and clients of financial advisors. This year, because of the financial crisis that originated from Wall Street, China Renaissance managed to recruit senior financial talent from international investment banks. It also strengthened its M&A business and even expanded its analyst and marketing teams.

Keep the “Good Clients”

For financial advisors, to find good clients and get good clients are the two most critical things. However, it is no easy task to win good clients. In a bull run, the top 20% of all companies and another 30% in the market can successfully raise funds. However, in a bear market, only the top 20% can do this. Only financial advisors who have good brands and strong competence can get these projects and seize the opportunity to expand market share.

To find “top-ranking” companies in expanding industries, Wen normally combs the top 20 companies one by one, ruling out state-owned, state-controlled or otherwise troublesome companies, and enterprises whose management is weak. He then picks the clients that can be pursued. After that, he pays multiple visits to these clients.

For instance, after the IPO of Wuxi Suntech Power Co., Ltd., Wen attended numerous solar energy exhibitions and became highly familiar with the most promising solar energy companies. Consequently, Balloch Group not only quickly completed private placement for the IPO of Canadian銆€Solar銆€Inc. (CSI) (NASDAQ.CSIQ), the second Chinese solar PV maker to be listed overseas, but also participated in more than 80% of the overseas listings in China’s solar PV industry. And it helped CIBC World Markets snatch the position of lead underwriter for the IPO of JA Solar Holdings Co., Ltd. from Bear Stearns. With his knowledge of and personal connections with the solar energy companies, Wen even helped CVCI, the direct investment business of Citibank, to invest in a solar energy company that went on to be successfully listed.

In addition, to satisfy clients, Wen points out the need to provide more value-added services. “What our clients are concerned about is just what we need to do. For instance, if a client needs a CFO, we will do our utmost to find one. If a client wants to know about its rivals in overseas markets, we will write a report and do some analysis.”

In contrast, Bao Fan tries to establish long-term strategic partnerships with his clients. He prefers to focus time and energy helping “trustworthy entrepreneur friends” weather the current storm. He attaches so much importance to people because, in the TMT area, team work always plays a critical role. For instance, when Zhou Hongyi’s http://www.qihoo.com solicited investment, it was basically impossible to raise any funding on the domestic market due to the debate between Zhou and Jack Ma, President and CEO of Alibaba.com. However, Bao approved of Zhou and his team, and helped them find investors in the U.S.

Bao fan also believes that even small businesses can be valuable in helping China Renaissance open up new business circles, and this is another aspect of the company’s client relations strategy. In fact, financial advisories are knowledge-intensive businesses. The money they make from projects is a short-tem benefit, but the knowledge they gain is a long-term return.

The Future of Financial Advisors

The current business model for financial advisors is very clear. But no one can predict what this model will be in future. Currently, when the financial climate is sluggish, many companies shift focus to more dynamic M&A deals.

According to Bao, financial advisors of the future will need to return to the traditional businesses of investment banks, including underwriting stocks and bonds, brokerage, and M&A. China Renaissance, as the English name of this domestic company suggests, is also oriented around revitalizing traditional businesses.

“We hope to provide one-stop services tailor-made for our clients,” said Bao, who finds that the needs of clients are expanding to include help in the areas of taxation, law and HR in addition to financing. They also need more long-term plans for the capital market. Bao hopes to build a platform that links professional accountants, lawyers and even headhunters and trainers to build a capital ecosystem that provides a one-stop service for clients.

On the other hand, China Renaissance’s PE and VC investors who have completed their investment also need someone who can provide refinancing, merger and other services. Bao hopes the added value delivered by his company includes more detailed study and analysis products, as well as channels to jointly build new projects. “I think it’s not so important what kind of investment bank we are. The key is that we have a core client base,” he said.

However, as businesses grow larger in size, the competition between financial advisors no longer depends on an individual’s ability, but the strength of the team. According to Bao, the reason why China Renaissance maintains its leading position in the industry is that it and its partners are no longer simply expanding the business; they are devoting over 30% of their energy to team building and internal management improvements. According to data provided by China Renaissance, it has contacted over 1,000 companies since its founding. Currently, it contacts more than 50 new companies every month, and has over 30 cases in progress at any given time. The company’s client data is no longer dispersed, but centrally maintained in a CRM (Customer Relationship Management) system.

The current readjustment taking place in the investment world is a good thing for PEs, as it offers a chance to reflect and let the situation calm down. At least that’s what most VCs and PEs we talked to said when asked about their thoughts on the current state of the investment industry. Every crisis also creates opportunities. And those who take them survive.

By Zhang Xiaojie