- by: Paul Garvey
- From:The Australian
- July 23, 201212:00AM
Mourning after Rencap's lavish Hong Kong party
IN March, as Hong Kong buzzed in the lead-up to its famous annual Rugby Sevens tournament, boutique investment bank Renaissance Capital hosted of a lavish function for its clients at a rooftop bar in the city's centre.
In honour of the bank's Russian roots (it was founded in Moscow in the early 90s by New Zealander Stephen Jennings), guests were greeted at the door of Hotel LKF's swanky Azure bar by Russian models (said to have been shipped in for the event) dispensing vodka and caviar.
It wasn't just the potent drinks lifting spirits that night.
As guests soaked up the view of Hong Kong's skyline, they did so in the knowledge equity markets had made a promising start to the year.
Hong Kong's Hang Seng index had already risen a stunning 13.3 per cent for the year leading up to March 20, the night of the RenCap party.
The Hong Kong market was back, and people were beginning to wonder if we'd made it through the worst of the conditions that savaged investment portfolios and share prices during 2011.
Less than four months on, it is a vastly different story.
RenCap's Hong Kong office is gone, shuttered up as part of a global cost-cutting exercise that has also claimed the group's Beijing office and smaller outposts elsewhere through Asia.
All but one of the 36 people who manned the Hong Kong office have been cut loose, leaving them to scout for new jobs in a city where seemingly every investment bank is, at best, in a hiring freeze.
While most banks in Hong Kong are making deep cuts to their own headcounts, with some very senior people being caught up in the redundancies, the RenCap example is particularly eye-catching, given it has made a complete withdrawal from its on-the-ground presence in Asia.
It appears to be a better story for Australia's trio of Hong Kong-based banks (Argonaut Securities, Helmsec and BGF Equities) but it is fair to say this market is testing the models and cost bases of every company, big and small, in the sector.
The Australian trio have certainly fared better in Hong Kong than RenCap.
Argonaut is only nine months into its Hong Kong foray but it has started with a low cost base and plans to keep increasing its staffing levels; Helmsec's small Hong Kong office has shrunk a little, largely through natural attrition, but has costs under control; and BGF's purchase last year by Canada's Canaccord means it has a large backer behind it.
The Australians are still managing to get deals away.
Argonaut pulled together the recent deal that will see Hong Kong-based MIE Holdings spend $US100 million ($96m) acquiring a 51 per cent stake in the Chinese coal-seam gas projects of Australian-listed Sino Gas & Energy, and Helmsec helped raise more than $20m for Kentor Gold and its Murchison project in Western Australia.
While those sorts of deal won't exactly have the major banks green with envy, they are enough to justify and sustain the presence Argonaut and Helmsec are keeping on the ground.
Having a smaller footprint means the Aussie groups have a much lower cost base, especially compared with the larger groups with leases in premium buildings around the city.
Rents, both commercial and residential, have historically been both an indicator of the health of the city's finance industry and a form of pressure valve, rising and falling in tandem with the fluctuations of the banking sector.
This time, however, the continued appetite for Hong Kong property from Chinese mainlanders means rents have not yet fallen, an encouraging sign of China's health but little relief to unemployed bankers or struggling corporates looking to trim their overheads.
As much as Hong Kong may feel it is in the grip of a downturn, those in the city who have kept their jobs generally feel lucky to be here. Certainly compared with London, and even Australia and the US, Hong Kong seems to be on a stronger footing.
"From my point of view, Asia and Hong Kong are still on a general basis where you want to be, and Asia will continue to grow into an even more important financial hub," Argonaut's Hong Kong head Travis Smithson said.
Perhaps for that reason, there remains constant talk that other Australian groups are looking to set up shop in Hong Kong.
Bell Potter is rumoured to have begun hiring for a Hong Kong office, and there are suggestions Ord Minnet is considering establishing a presence here.
So if Hong Kong still has value in the eyes of Australian corporates, where did RenCap go so wrong?
The bank is undergoing a sweeping change in strategy that has seen it retreat back to a presence in the three markets where it believes it has the most to offer: Moscow, London and Africa.
There has been talk in Hong Kong that the deep cuts to the business were required to help maintain RenCap's credit rating.
Others have posited that the market here has been turned off all things Russian ever since the disappointing listing of high-profile Russian aluminium producer Rusal on the Hong Kong stockmarket.
What has certainly hurt RenCap and the major investment banks in Hong Kong has been a steep drop in the performance of the initial public offering market here.
According to Bloomberg, by this time last year Hong Kong-listed IPOs had raised $US14.15 billion.
This year, that figure has plummeted to $US5.33bn, with a similarly steep drop in the fees generated for the banks advising on the processes. (Interestingly, the number of individual IPOs has remained almost steady, with the 44 so far this year just under the 46 that had listed by this time last year.)
Whatever the cause, RenCap has left Hong Kong, a far cry from the robust face presented that night back in March.
Eerily, it is not the first time in RenCap's history that a party has preceded a precipitous fall in the company's fortunes.
In 1998, with RenCap making money hand over fist in post-Soviet Russia, the company threw a spectacular party at Kuskovo Palace near Moscow.
Within 10 weeks, the Russian government had defaulted on its debts and had driven many of RenCap's clients, and very nearly RenCap itself, into insolvency.
In that instance, RenCap was able to rebuild itself into a bigger company than ever before.
Time will tell if the group can deliver a similar renaissance this time around.