Early reminiscences of investment banking

Compared to the staid but drab commercial banking industry, the investment banking industry was at its nascent stage, which meant that the business model was not yet structured and still evolving.

It was in 1973 immediately after securing my MBA degree from the Asian Institute of Management (AIM) that I was introduced to the world of investment banking. The industry was still at its dawn and financial structuring geniuses, like Sixto K. Roxas, Rolando Gapud and Jovencio Cinco, had just organized Bancom Development Corporation and the Ayala Group’s Ayala Investment Development Corporation, respectively.

I was tapped by the late Norberto “Butch” K. Katigbak, my AIM professor in Investment Management, to join him in another startup investment house as a Credit and Marketing officer. The firm, Philippine American Investments Corporation (PAIC), was organized by a powerhouse group composed of Philamlife, the Madrigal Group and US banking behemoth Chase Manhattan Bank (Chase). PAIC was led by a Chase nominee, Anthony (Tony) Lord, a British expat who was more Americanized in manner and demeanor than most Americans. His main forte was credit, marketing and originating investment banking deals, while Butch was the investments and treasury expert.

It was a dream job for any brand new MBA graduate, and my main responsibility was to analyze credit proposals and to market the financial services of the company, meaning, to go out and look for deals.

Martial law had just been declared in the country the previous year and there was an air of optimism about the economic prospects of a less chaotic and more disciplined Philippines. Compared to the staid but drab commercial banking industry, the investment banking industry was at its nascent stage, which meant that the business model was not yet structured and still evolving. Because of the infancy of the business model, the industry was still largely unregulated and speed in doing deals and creativity in structuring transactions was the name of the game.

I can never forget a particular transaction, which typified this mindset. I had just called on the treasurer of a subsidiary of a leading US computer company and, on the spot, after quickly consulting by phone with my boss the merits of the financials of the client, by the time I returned to the office, Tony had already authorized the loan release of a check for P1 million. Not that we were being imprudent, but it was more the need to impress the client with our ability to be responsive to their needs in order to differentiate ourselves from the typical archaic, slow-motion response time of a commercial bank.

Since most investment houses, unless it had a license to operate as a quasi-bank, were not authorized to accept deposits from the public, the mode of funding for the industry generally was by assigning the promissory notes of borrowing clients to investors through certificates of participation or by causing the clients to issue debt securities or commercial papers to the public. The government itself had earlier on entered the fray in the Sixties issuing treasury bills to fund its own cash flow needs. Thus, the money market was already accepted as an attractive investment outlet and a thriving market for debt instruments had already evolved by the early Seventies. Investors, both institutional and retail, eagerly snapped up the corporate debt securities originated by investment houses given its higher yields compared to bank deposits. Inevitably, without regulations, some concerns emerged regarding industry dysfunctional ties such as significant mismatching of assets and liabilities of investment houses that caused intermittent periods of illiquidity for the industry, double-selling of securities and credit unworthiness of some underwritten issues which prejudiced the interests of the investing public.

Consequently, it was also at about this period that President Ferdinand Marcos issued Presidential Decree 129, The Investment Houses Law, to define and to regulate the functions of the industry, which are primarily the origination, structuring and underwriting of securities under the watchful eye of the Securities and Exchange Commission to ensure that public interests were protected. As a response, the industry organized the Investment Houses Association of the Philippines (IHAP) to work with regulators in crafting rules to put some order on how business was to be transacted.

The first president of IHAP was no less than Rolando Gapud of Bancom, the undisputed leader of the pack, succeeded by a string of top-notch investment bankers honed both here and abroad, like the late Sonny Abello of PAIC who succeeded Tony and Ayala’s Jovy Cinco. No matter how smart and creative the investment bankers were, however, the challenge was always how to be continuously relevant and make a difference in servicing the funding requirements of the market relative to the traditional source of funds, namely, the banking system. The differentiation was more distinct in so far as equity securities were concerned since banks were not authorized then to underwrite these equity transactions.

Over time however, the banking industry was restructured and given permission by regulators to become universal banks essentially allowing banks to perform the functions of an investment house. This development rendered the industry uncompetitive relative to the much better capitalized and diverse universal banks. Since then, the game has forever changed. The independent investment houses with limited firepower have been largely relegated to the sidelines by the financial universal banking behemoths. From the street-smart days of quick-witted, creative financial structuring, the local investment banking industry is now all about placement capability and large balance sheets.

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