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Within a short period of time Gardiner Resources has achieved remarkable goals in the Russian investment banking market. Finbuzz met Denis Khromov, a managing partner at Gardiner Resources, to talk about company’s business model and investment banking market outlook in the current economic situation.
Denis, according to the information on the website, Gardiner Resources is doing well in terms of completed transactions.
Indeed, since the beginning of 2015 we have completed five M&A transactions and carried out several consulting projects. One of the transactions was closed in classic “IB style” on December 30th.
There are good prospects for the closing of several transactions in the second half of 2016.
Most significantly, we have tested in real life the partnership business model for which Gardiner Resources was established.
Your main expertise appears to be within the oil and gas industry. What is the reason for that?
The people that stand at the origins of the company have historically worked with oil and gas clients for many years. The importance of this industry for the Russian economy cannot be overestimated. In addition to that, oil and gas are among the few sectors in Russia in which transactions continue to occur. There are always assets that, like it or not, need to be taken care of, otherwise the license will be revoked.
But it wouldn’t be correct to call us a player specialising only in oil and gas. We are quite noticeable in the Internet sector, have some interest in real estate, and we have interest in consumer services – in fact, these three sectors, in addition to the oil and gas, are our main priorities.
We plan to develop in these four segments in the foreseeable future.
In a situation where most banks see the number of completed transactions decrease, what is the reason that you were able to achieve your targets?
As always, it was a combination of several factors, and the combination of the factors for each transaction is always different.
Definitely, the main reason is the right choice of partners for Gardiner Resources, and their motivation to cooperate with us within the Gardiner Resources partnership program. As a result, we produced high-quality transactions.
As always in investment banking, in many ways the success of the transaction in is to an extent just sheer luck because there are so many factors you have little control over. It just so happened that we were a little luckier than many others.
You have already mentioned your partnership program. What is it all about?
When Gardiner Resources was established, we clearly understood that we do not want to simply become another investment banking boutique, working with a very limited number of clients and doing odd jobs.
Our goal was to build a network of partners who were not formally employees of the company but who would bring new business to Gardiner Resources and would help close the existing transactions or provide, when necessary, some kind of expertise. It made no sense to keep them on a full-time basis in the company.
This partnership is based on clear, very transparent principles on the distribution of fees received, depending on the role played by a certain partner in a particular transaction.
And which roles your partners play?
We distinguish three groups of partners:
Business development. The main task of these partners is to obtain new mandates for Gardiner Resources or provide any assistance with these.
Deal counterparty. These partners have a relationship with companies or individuals who can act as counterparties under existing Gardiner Resources transactions, for example, to buy any businesses or assets we have sell-side mandates for. Collaboration with partners is an effective tool that increases the likelihood of a successful completion of transactions, which is extremely important in the current reality.
Expertise. Partners of this group provide certain expertise – in respect of any industry, geography or product – when there is not much for them to offer on a full time basis in Gardiner Resources.
Within each of the three roles, there are several sub-roles that reflect the actual contribution of the partner in the success of the transaction. For example, the terms of obtaining a new business –contribution for the partner who brought the mandate on a turnkey basis, and a for the partner who simply introduced Gardiner Resources to the business owner who is considering its sale, are very different. This translates into different percentages of the total amount of fees that such partners will receive after completion of the transaction.
Are there any interconnections between different groups of partners?
Of course there are. For the purpose of each transaction, partners communicate with each other just as they communicate with their project team members in their banks – conference calls are made, meetings are organised, next steps are agreed.
Once the mandate is signed, execution of the transaction is no different from how it is done in any other bank. The whole process is coordinated by a deal captain – a Gardiner Resources employee who has a minimum of 8-10 years of experience in IB.
Our vision is that with the exponential growth of the partners in all categories, we will finally arrive at a situation when business development partners bring new transactions, deal counterparty partners help to settle them in the right hands, and Gardiner Resources is responsible for the overall coordination and execution. Simply put, this is our business model.
And what is your partners’ occupation?
First, they are experienced investment bankers, who have left investment banking to switch to another industry or, quite often, to retire, but have accumulated a huge number of contacts and connections over years or even decades of work. They receive calls from their former clients, they interact with them on some activities or they are simply good friends with someone who occasionally asks for help in a given situation – to exit the business, to solve the conflict with a business partner, to acquire a competitor, to raise financing.
They can also be current bankers – in cases when their bank refuses to take on any of the transactions – because of its size, amount of remuneration or compliance issues.
Another group of people are industry veterans, for example, in oil and gas, who know many personalities in the industry and can therefore help in many different ways.
Finally, the partners working in private equity, asset management, and private banking play the most important role. A huge flow of potential deals goes through them, and later they can recommend us.
Technically, any person who has the ability to obtain or facilitate the delivery of new mandates, but would not engage in the execution of the transaction themselves, can be a partner.
What is your partners’ motivation to work with Gardiner Resources?
From the very beginning the partner understands how much he earns on each transaction, based on the role he has played. There is no need to wait until the end of the year, as is the case in banks, fees are distributed as soon as they are received by us from the client. There are no deferred payments, everything is paid instantly.
Therefore, working with us is very rewarding and pleasant. And when the person feels good, he it motivates him.
At the same time, we do not insist that cooperation with us shall be our partners’ main occupation. There is no need for this.
You mentioned that many partners are investment bankers themselves, why don’t they execute transactions on their own?
Getting a mandate is just a beginning of the process, which takes 6-12 months. There is a lot of daily work, which consumes a lot of time and effort. Even if you have worked in investment banking all of your life, you still need a team of junior people who know how to do the investment banking job.
You need a legal entity – or several – for signing of the agreements. You need an account in a proper bank. You need the back-office – lawyers, IT, compliance, secretaries, accounting, HR. You need an office with conference rooms.
Unless you want to make it your main occupation, all of the above do not make sense. Moreover, even if you wish to continue, it is still not meaningful to have it all to one person or a group of two or three people that will generate business. You begin to compete with investment banks, and to compete in terms of fixed cost base inefficiencies.
We use the infrastructure we created to work with a large number of partners, and this infrastructure can easily be scaled as the number of transactions and revenue increase.
Compared to working in a large bank, does the absence of a certain platform, which is provided to the employees, mingle?
Presence of the platform is important in capital markets transactions or when you need to use the bank’s balance sheet. The market for such transactions decreased substantially: virtually no IPO/SPO transactions in Russia occur, and as for transactions requiring a balance sheet, ones with large state-owned banks and the few Western banks, in which limits for Russia are not yet fully closed, dominate this market. We do not get to claim a part of this pie.
With regard to M&A transactions, the presence of a platform does not help much and sometimes directly interferes. Primarily because of bureaucracy, which irritates many Russian clients. We are much more flexible in this context.
Doing M&A transactions is primarily a business built on relationships. Specific people possess these relationships. Our partners often bring us transactions, which are close to the signing of the mandate. They themselves have carried out all the preliminary negotiations with the client. Often, it is not even the negotiations but simply a friendly dialogue with the people they have known for a long time.
Our main objective in this case is to provide the highest quality of execution for the transaction, to exceed client’s expectations and to not in any way deteriorate its relationship with the partner.
How many partners are there at the moment?
Nearly 25 in Russia and 10 abroad. Our objective for 2016 is to increase the overall amount to 150, after that we will plan further.
So you are planning to develop outside Russia too?
Definitely. Our model can be easily spread out globally.
Even now, in addition to Russia, we have partners in Ukraine, Kazakhstan, China, Turkey and Brazil. We plan to increase the number of partners in these countries, as well as to go to India, to the Middle East, to several African countries and, in the long term – to the developed countries like the UK, USA, and Canada.
As a result, we want to build a global network of partners working under Gardiner Resources brand.
What difficulties arise as the number of partners grows?
There are practically no problems with the gathering of new partners. Many people want to work with us, our existing partners actively recommend us. The main difficulty is to prevent the deterioration of the quality of the transactions brought by partners as their number increase.
It is therefore extremely important for us that potential partners have the ability to estimate properly the possibility of closing the transaction.
How are the relationships with the partners settled?
We have a standard agreement, where the partner is referred to as a consultant we undertake to provide Gardiner Resources a number of services on the transactions in which he is involved. The agreement regulates all issues related to the rights and obligations of each party, the procedure for defining and confirming a “transaction”, confirms the role of the partner fees distribution mechanism, the matters of exclusivity and confidentiality. Every new partner signs this agreement.
What are you offering to your partners?
Anything that is necessary for effective work; we take on a wide range of issues.
First of all, we provide support in obtaining new businesses, such as a Gardiner Resources brand, business cards, product or industrial expertise, if necessary.
We provide a platform for execution – a team of experienced investment bankers, we create a virtual data room, and provide legal support.
We also provide administrative support – a legal entity for contracts and payments, if necessary, an office space and a temporary workplace, corporate e-mail, secretarial services, accounting, bank accounts.
We take risk-management responsibilities as well – clients/transactions background checks, conflicts resolution. Each partner chooses what is necessary for his or her purposes.