Principal investments is not the most secure of jobs right now as banks in Hong Kong trim their teams. In general terms, firms are culling their distressed businesses, which typically lie within their special opportunities groups and make principal investments across the board in private equity, pre-IPO, mezzanine, special situations, real estate and other sectors.
But it isn’t a case of cutting back the deadwood. A handful of highly-regarded principal investment MDs – such as J.P. Morgan’s Paul Lauritano, who is now reportedly on gardening leave – have left the banking sector recently, according to an anonymous Hong Kong recruiter.
The main motivation for the retrenchments is not to reduce headcount costs or penalise poor individual underperformance, but to comply with the recently regulatory drive against banks speculatively trading their own money. This ethos is most prominently enshrined in The Volcker Rule, which is scheduled to be implemented on July 21 as part of the part of the US Dodd-Frank Act.
It’s not just US banks that are making reductions. The headhunter who asked not to be named, says HSBC plans to cut its small Hong Kong principal team, which has about four people, including MD Heath Zarin, head of principal investments, Asia Pacific.
And he believes the job cuts signal a trend which won’t just affect a couple of banks. “This is the beginning of the fall of certain parts of principal investments in Asia.”
Not that those who lose their banking jobs will necessarily have their financial careers curtailed; even in the current market, buy-side firms are selectively hiring. “They will create certain roles if the people have a strong background with unique skills, which clearly a lot of them have, whether they are associates, or senior bankers with strong track records,” says Jens Soderlund, managing partner, Sirius Partners. However, principal investments bankers who specialise in distressed investing and recently lost money for their banks may not be in such high demand.
Establishing your own fund is even more difficult. “Any seeders will need a P&L track record of two years, and you must reach the critical minimum mass of US$200m before your fund can take off to the several-billion-dollar size that is needed to be successful over the long term,” says Soderlund.
He adds: “If you’re coming straight out a bank, the money belongs to the firm; you can’t take your numbers with you, unless the bank seeded you itself. So it will be interesting to see which banks, if any, will do this, or which banks will move their activities out of the bank and seed them up.”