Caliburn resolves its dilemmas

The decision by the founders of the specialist advisory firm Caliburn to sell their business to a US investment bank says something about the environments and ambitions both within and outside the firm.

Caliburn's Peter Hunt, Simon Mordant and Ron Malek founded Caliburn in 1999, positioning it as an independent investment bank focused purely on advice and without the conflicts, real and/or perceived, of the full-service investment banks.

With other firms like Carnegie Wylie and Gresham – and more recently a host of smaller boutiques – Caliburn carved out a space, and a large one, for the independents. While its revenues fell to $68 million in the year to June last year, the preceding years, where it generated more than $80 million from its advice-only platform, underscores how significant that space has become and how much of it is occupied by Caliburn.

The dilemma for Caliburn – and Carnegie Wylie, which sold to Lazard in 2007, before it – was whether the principal-owned, domestically-oriented advisory firm could satisfy the ambitions of the business and its people.

There are some companies, and some transactions, where the solely Australasian nature of the business has been no hindrance.

As the clients and transactions have become larger and more international, and the firm faces more and larger and more international competitors, however, the absence of an international network of its own threatens to throttle its growth rate and deny opportunities.

Internally, Caliburn was facing, or would have faced, the issues that always confront the founders of successful start-ups.

The founders own most of the equity but to grow the business and retain their best staff they need to find a way to reward them. That's more easily done with someone else's equity than their own.

Moreover, the founders need to create their own exit path if the business – and their own net worth's – aren't to suffer when they eventually exit.

The Caliburn team have known their counterparts at Greenhill & Co for some time.

When they first established their business they had a relationship with Lazard, which ended in about 2003. From that point they developed an alliance with Greenhill, a very similar New York-based independent advisory business founded two years earlier than their own by Robert Greenhill, a former president of Morgan Stanley and chairman and chief executive of Smith Barney.

Greenhill, with a market capitalisation of about $US2.4 billion, has had a parallel success story to Caliburn's. During the financial crisis it doubled its number of partners, taking advantage of its more integrated competitors' distress, and has expanded more deeply into Europe and Asia.

Apart from the familiarity with each other's business and people, the firms' ambitions coincide. Greenhill wants a bigger platform to expand into Asia and Caliburn wants the unfettered access to an international network and resource base that Greenhill proffers.

The recent scramble to beef up the capabilities and staff of the big full-service US investment banks in this market – all the former Wall Street heavyweights have been hiring at senior levels – underscores how appealing the Australian market and economy must look to Americans and Europeans.

The size and stability of the savings pool, the capacity of that pool to provide equity to fund corporate growth in a debt-constrained post-crash world, the sophistication of the financial sector and its people, a robust economy that is plugged firmly into Asia and a corporate sector that is broadening its engagement in the region make this a market that is attractive in its own right but even more as a stable launching pad into the wider region.

Caliburn delivers a lot of relationships with Australian corporates, while Greenhill delivers a still-developing international network, albeit one with a heavy emphasis towards North America and to a lesser extent Europe.

Greenhill also delivers value, and a lot of it. It will issue just over a million shares, worth about $US91 million at its current share price, in exchange for Caliburn. It will do the same again, in two tranches after check points at three years and five years' time, if Caliburn can generate average revenues of $US50 million in the two years leading up to the check point.

It has been a long time since the firm turned over less than $US50 million, so the overall consideration, all of it scrip, is worth about $US182 million ($A198 million) at Greenhill's current share price and today's exchange rate.

With up to five years before the Caliburn principals will be able to calculate precisely how much they have received for their business, it would be very surprising if the addition of fee flows from Greenhill's client base into this market didn't result in an ultimate total consideration considerably higher than $198 million. Greenhill's share price has performed exceptionally well during the crisis.

The nature of the deal means the Caliburn principals are locked in four five years, which will keep them motivated before they ultimately exit, while the fact that Greenhill has a listed currency means it can retain and reward other Caliburn staff – and offer them international opportunities – in a fashion that wasn't as readily or comfortably open to Caliburn's founders.

For a host of emerging boutique advisory firms, the sale will provide encouragement (a) that Caliburn and its clients may be disrupted to some degree by its new New York owners and (b) that there is very serious and very real end-value to be created from growing a local advisory firm to the point where it becomes desirable to one of the international firms.

Mark Carnegie and John Wylie, principals of the corporate advisory and private equity firm Lazard Carnegie Wylie, are investors in Business Spectator.