The Magellan Financial Group Ltd (ASX: MFG) share price has been flat after announcing a 40% stake in new investment bank, Barrenjoey. Regardless, the company has managed to secure some top flight talent to run the fledgling investment bank.
This includes outgoing chairman of Australia and New Zealand Banking GrpLtd (ASX: ANZ), David Gonski. He has been appointed as the independent chairman of the new investment bank.
Magellan has also secured many top investment bank deal makers of UBS Group AG (SWX: UBSG) in Australia, and can boast ex-CEO of BHP Group Ltd (ASX: BHP) Ken McKenzie as a strategic advisor.
But despite Magellan’s moving and shaking, the financial news has been filled with the investment banking activity of Macquarie Group Ltd (ASX: MQG). Furthermore, the Macquarie share price has risen steadily by 5% over the past month.
Investment banks act as intermediaries between companies and capital markets. For example, companies could engage an investment banker for assistance with an initial public offering (IPO), a capital raising, or a refinancing strategy.
What’s fueling the Macquarie share price?
In recent weeks, Macquarie Capital has been named a key player in many major ASX events. For instance, just last week the Australian Financial Review disclosed that Macquarie had secured an IPO funding pipeline for local services marketplace, Air Tasker. Moreover, the investment bank is running the Nuix IPO, likely to be either the largest or second largest IPO this year.
Nuix has developed technology that extracts meaningful information from unstructured data. It finalised IPO details last week, settling on a listing worth $975.3 million. When combined with the shares the company owns, it values the company at $1.8117 billion.
Other companies seeking to float in the near future include legal company HWL Ebsworth, with an estimated value of $917 million; Fantastic Furniture, planning to raise up to $669 million; and Sapura Energy, which is potentially a US$2 billion float.
The Magellan-backed challenger
Magellan holds a 40% stake, and a 4.99% voting interest, in new investment bank and full-service brokerage, Barrenjoey. The bank plans to provide corporate and strategic advisory services, equity and debt capital market underwritings, cash equites, research, prime brokerage and fixed income trading. However, Magellan’s investment in Barrenjoey has received mixed reviews. In fact, the Magellan share price fell 5% on the day of the announcement.
As a rule of thumb metric, investment banks are often valued at 1 to 1.5 times revenue . Given that Magellan has paid $155 million for 40% of Barrenjoey, the full valuation would be just under $400 million. Meaning, the start-up bank has to be earning $400 to $600 million to justify this price.
Foolish takeaway
Macquarie Capital is regularly among the top three investment banks nationally every year. Something that is reflected in its ASX share price.
With the current pipeline of IPOs under way, it may repeat that again this year. However, despite being a start-up in a competitive sector, Barrenjoey has plenty of talent at the helm.
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Motley Fool contributor Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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