Thinking - 2010: Investment banking according to Thomas Hobbes (On the tenth anniversary of N+1)

“For all men by nature reason alike, and well, when they have good principles.”

Thomas Hobbes, Leviathan

Reality eventually renders all words outdated. This is true of the word crisis, which is no longer sufficient to convey all that is happening to us. Every day we are surprised by new nuances and each new nuance breathes fresh life into it. In order to overcome the crisis, we must shrink the term and to do this we have to shake up the convictions that have taken hold of us. The key challenge to be surmounted at this stage is the fact that the crisis is providing a crutch. Poor results are attributed to the crisis, as is the inability to come up with fresh ways around the widespread demoralisation triggered by this crisis. Not to mention the inability to make sales pitches and the lack of motivation to tackle new initiatives or shake off the fatalism that has overtaken us. And so on, and so forth. Negativity and procrastination are drowning out the willingness to act. However, a company so dependent on human capital as ours, no matter how hard hit by a hostile business environment, cannot assume that momentum will continue unabated, cannot lost its rebellious spirit and cannot waver in its continuous drive to do things better by taking a new approach. This is why N+1’s business strategy for the coming decade is articulated around three cornerstones: (i) redefinition of how we approach our business; (ii) identification of the clients for whom we truly add value; and (iii) correctly identifying and selecting our playing field.

“The investment services firm of tomorrow will necessarily have to leverage knowledge and accountable business behaviour. The former will be vital to growth, the latter to survival”

An accountable investment bank

The investment services firm of tomorrow will necessarily have to leverage knowledge and accountable business behaviour. The former will be vital to growth, the latter to survival. The traditional approach to investment banking in the broad sense (brokerage, advisory and asset management) has been dominated by the tension between the client and the deal. The extent of the triumph by the latter over the former has sparked a level of mistrust which has eroded the foundations of the organisations basing their business on agency relations. Thomas Hobbes, with his deep knowledge of human nature, had warned us of these dangers over three and a half centuries ago. Chapter 25 of his celebrated work Leviathan, dedicated to the giver of advice or counsel (to which end advisor should be deemed to include the manager), criticises the transactional approach when it says that “exhortation is directed to the good of the person who gives the advice, not of the person who asks for it,” inevitably going on to conclude that “it follows that those who exhort where they have been required to advise are corrupt advisors.”

However, Hobbes does not stop there. He continues on to define what he considers a good advisor-manager-consultant. The first requirement set down for a good advisor is that “his purposes and interests must not be inconsistent with those of the person he is advising”, while secondly, and importantly, “an advisor ought to present his advice in such a way to make the truth appear most clearly” as “metaphorical speeches, tending to the stirring up of passions… serve only to deceive the advisee.”

It is clear that trustworthiness in business behaviour was notable for its absence throughout the boom times that preceded this crisis. Now we are learning from and paying the price of this neglect. Trustworthiness vis-à-vis the client (investors and companies alike) means managing their assets or advising them on their strategic development in an independent fashion, with strict control over potential conflicts of interest with the focus on their long-term needs and targets and not on short-term deal-making, as well we have been advised by Hobbes.

Knowledge as a competitive advantage

Hobbes was also prescriptive on this subject: “the ability to advise well comes from experience and long study”. Therefore, a good advisor can and should only dispatch counsel on “matters which he has not only had great experience of but also thought about long and hard”.

Our clients require service underpinned by deep knowledge. In the good old days of investment banking, it used to be said that all a banker needed, in addition to a certain amount of training, was a pencil and phone and a desk. Even today, hard work, personal relations and communication remain important ingredients of what we do, but none of them will be a decisive source of competitive advantage in the future. This will rather be found in knowledge.

Some time ago, at N+1 we decided to exit any business in which we could not build knowledge of utility to the client. In the asset management arena this has led us to focus on direct alternative investments where we have built powerful and highly specialised teams with extensive track records in their respective areas of expertise. The primordial direction we are taking right now is one of international expansion of the management of those asset classes where the homogenous nature of the ‘underlying’ so permits. At N+1, this is the case in alternative energies and rental properties. Windmills and buildings are windmills and buildings all over the world; the only thing that varies is regulation and local market conditions.

In the financial and strategic advisory businesses, we are building a European platform which already encompasses 110 professionals located across the UK, Spain and Italy (and which we hope to expand in the near future to France and Germany). Our model for sharing our know-how with the client is underpinned by sector specialisation and multi-local knowledge/service. A construction sector client in Leeds, for example, can tap into the experience and knowledge of our advisors and analysts in the five main European markets (and through our alliances, this reach can be extended to other countries such as China, India, Brazil and the US), at all times hand-held, however, by our team on the ground in Leeds or another UK city. Hobbes himself praised the merits of specialisation: “A man who does his business with the help of many prudent advisors, consulting with each of them separately, in private, does it best…”.

The natural client concept

With the passage of time, almost twenty-five years in the investment banking business, we have come to realise that the clients we understand the best, serve the best, to whom we add most value, those who appreciate us the most and which fulfil our professional yearnings are neither very large nor very small. They are companies, institutions and family groups looking for advisors with one ear for them and the other to the ground, tremendous dedication, stable long-term teams, know-how, specialisation and trustworthiness. This is our natural client, with whom we can maintain a mutually beneficial relationship, which is to say a client with whom we can talk and debate, whom we can service flexibly, one who wants excellent execution and not meaningless sophistication, one who values transparency, professional dedication and human contact. Our aim is to stick with this client category, accompany these clients on their international adventures and on their growing and pressing needs to access the capital markets, helping them along the way with their business development and strategy needs.

The international-local loop

Market globalisation, whether we are talking about markets for goods and services, capital, talent or for the control of companies and assets, is a reality and an obligation for virtually all market players. Many European companies are behind the eight ball on this task. At N+1, despite making significant progress on this front, with over 80 of the Group’s professionals (40% of the total) based outside Spain, and although much of our activity in all of our businesses is already international due to the nature of the companies, the investors or of the transactions or investments themselves, we still have a long way to go. Our idea is simple and revolutionary in concept but extraordinarily complex to execute. It is based, as already outlined, on transforming the N+1 Group into a fully-fledged European firm. This means looking to Europe from Europe and not from one specific local market.

Our competitive advantage is specialisation at all levels, including at the client level, coupled with a service proposition that leverages the synergies and opportunities yielded by the local-international loop. Our challenge is to build a shared culture and common management systems that facilitate attracting and retaining top talent to our endeavour.

The decade ahead

Our first decade did not close on a high as far as earnings are concerned. Net profit fell by 33% in 2010. Although a good deal of the contraction in profit was driven by the sizeable investments made during the year (start-up of the private banking and equities businesses, Trinova in London, N+1 Syz Italy, etc.), the full of costs of which were recognised in profit and loss, we cannot deny that revenue is also suffering. But as we said at the beginning of this foreword, wallowing in the crisis can only lead to nostalgia.

Our next decade will be fruitful, as was the last decade in part, if we are capable of making Europe and its companies, investors and family offices part of our natural area of influence. To do this will require a titan effort, luck and a lot of good judgement, because as Hobbes also warned: “The wit required for counsel is judgement”.