The current DCM model has worked well for issuers, underwriters and investors for decades.
Investment banks globally earned $21.7bn in underwriting fees for investment grade bond issuance in 2021*. Not to be sniffed at, but in the context of a whopping $4.57 trillion of IG issuance volume over the same period, it’s not bad value.
The DCM market is a well-oiled machine that delivers for borrowers and investors year in and year out. Of course there are competitive fee pressures, massive room for efficiency gains and process improvements. We’ll probably embrace tokenised securities at some point and likely some specific parts of the market will be able to function without investment banks as intermediaries.
But our firm belief at Bots is that the fundamental model of an investment bank acting as the gateway to the market for issuers, with all the advice, handholding and deal execution work that a bond transaction requires, is here to stay.
It’s safe to assume that most DCM leaders will share this belief. Which leads to the question:
What is a Head of DCM or Syndicate to do?
In what was surely one of the most prophetic business articles of all time, Marc Andreessen claimed in 2011 that software is eating the world. Anyone who followed his investment advice at the time would have made out very well indeed.
Andreessen talks about the suicide of Borders, who infamously handed over their online book sales to Amazon in 2001 in the belief that it wasn’t a strategic part of the business.
Banks are acutely aware of this scenario, which explains why bank-led initiatives and industry utilities have proven so popular in the primary market. Investment banks have a formidable competitive moat and are not afraid to defend it.
It also explains why the primary market has been slow to adopt technology, driven by an “if it ain’t broken, don’t fix it” mindset.
If software ate the 2010’s, data will eat the 2020’s
Most DCM and Syndicate desks have therefore been content with incremental improvements in their internal processes. Maybe a bit of Python automation on top of an existing spreadsheet, a better integration with Powerpoint to produce client materials or a nifty little tool that provides access to new datasets.
The problem with this approach is that it’s incremental and deprives banks of the benefits of fully digitalising the pre-trade workflow.
If data is eating the world, the one thing we can say for sure is that more high quality data and better data management will confer an advantage. In this sense, software is the pre-requisite, not the end goal.
Some of the leading DCM banks have invested in this years ago and spent millions in the process. If software hasn’t eaten most of your internal processes yet, you’re already behind the curve. And it will mean that you’re inevitably missing out on the data revolution as well.
The good news is that i) banks no longer have to rely on in-house development for all their software requirements and ii) deploying enterprise software isn’t any longer the painful process it once was. Staff are ready for it - even demanding it. Deployment is as simple as directing your browser to a URL. Even the vendor onboarding process is getting more standardised and streamlined.
Provided banks are able to retain proper control and ownership of their data, the build vs. buy decision seems clear cut.
As a DCM leader you can either invest in your in-house development team, with all the delay, distraction and opportunity costs it involves, or you can partner with an external provider who brings a market-leading solution that is up and running within weeks.
What you can’t afford to do is doing nothing, as then it will be the competition eating you.