Investment Banking Shall Now Take a Lead — Not Economics

There is a reason why countries and cities with robust financial markets tend to do extremely better than their peers, economically speaking. Take a look at New York, London, Hong Kong, Tokyo, Frankfurt, or even our own Mauritius Islands in Africa. What they all have in common is relatively vibrant financial markets industry, better than their peers. Their financial markets move capital and stimulate growth. Their economies expand a lot faster, remain resilient during downturns, and recover relatively faster. Looking at just recently, in Two-thousand-and-eight, during the global great recession, countries like the United States, the U.K., and Japan recovered a lot faster than their Euro peers which were sluggish due to collective recovery slowdown among their twenty-seven member countries.

Within just a couple of years, around Twenty-eleven, the United States and the likes were already kicking off bull markets and expansionary growth while Spain, Italy, Portugal, and Greece — and a batch of other eastern Europe economies, not to mention the rest of emerging markets — were still weathering the storms and stuck in muddy waters, until as late as Twenty-fifteen. Some of them were still shaky, just before the Covid-19 pandemic.

In the financial markets system, however, not everyone lift equal weight. As much as investment advisers, and fund managers from the buy side, do the heavy lifting to keep the secondary markets and trading going, real players who make significant economic impacts are on the sell side, the primary market. These are investment bankers and securities underwriters. They get the ball rolling from the very beginning. Investment bankers advise on all sorts of transactions — from underwriting new deals, advising on private or public mergers, and acquisitions; to taking companies public, private placement deals, debt, and equity financing transactions, to name a few. They merge companies, acquire others, package new venture deals, and create growth and employment opportunities in the process.

Investment bankers are among the very few financial markets professionals who work directly with founders of companies, producers, regulators, governments, researchers, and, of course, the buy side (such as fund managers, investment advisers, and wealth managers). They advise private and public enterprises, as well as governments, on all sorts of financing deals listed above. They are sales people. They must understand the global macroeconomics, geopolitics, and financial dynamics in each and every country they have deals in.

Based on my experience in most of Africa in general, and Rwanda is no exception, most of work designated for investment bankers is done by corporate lawyers. They do a fine job where it is due, especially when it comes to drafting corporate contracts, term sheets, and shareholders agreements, just to name a few. However, they are not trained to underwrite and package deals for investment returns and risks management purposes. They are not necessarily great at valuations methods, future value forecast, and quantitative finance.

Not necessarily great at advising on those deals respective to the rest of global macro-financial dynamics. They are great at lawyering.

We also have brilliant economists across the continent. Most of them are either academics or politicians. Very few economic researchers and career analysts. For that reason, we tend to have very well-written economic policies, and less economic analytics.

But why is it so important for our continent, and Rwanda in particular, to adopt more of the investment banking approach than economics? Because the vision and the pace we chose to undertake cannot be driven by traditional Keynesian economics alone. At least not organic local year-over-year economic multipliers. Yes, we will need to maintain growing productivity and other macroeconomics variables, but the most effective way to take the next leg up, to enhance our economic growth, is to get more capital in-flows, to attract more capital in the due course, and to adopt the sell side method: the investment banking method. We will need to package local investment deals ourselves, underwrite them in terms of risks and returns, then go out there to sell them to potential investors. Funds mobilisation strategies through existing conducive investment code and policies alone won’t be enough. Because everyone is doing it. Extra value-add is needed.

Again, we have brilliant economists, and so does nearly everyone out there. Everyone is adopting friendlier business environment, ease of doing business, investing in skilled workforce, and human capital development efforts, infrastructure, and even better tax code. All of those are great and necessary. But investors need a reason to write a check. And to whom to write it. They won’t write it to the government itself nor the investment promotion agency. They will want to know to what project, deal, venture the check is to be written to, and for how much. What are the risks versus expected returns, within what time horizon. Doing a little bit of extra heavy lifting and being able to have these investment opportunities underwritten, packaged, and well presented on pitch decks is going to stand out in terms of how much foreign direct investments we get to secure, and how fast we get there. Sometime we will even need to incorporate shelf companies, under which those proposed deals can be temporarily held, build their websites, and then sell them as for acquisition — ready investment opportunities.

Investors would just assess the already underwritten investments, and once it is all good to go, they would just acquire the shelf company which hold those deals. They could elect to amend the company’s name and structure or keep things the way they are already set.

There are other ways, of course, but if we are to make even greater strides and take the next leg up to our vision, it is robust financial markets — and investment banking approach in particular — that is going to get us there.

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