Banking & Finance

SCOLNIK: Indianapolis in dire need of more investment banks

August 17, 2009

Indianapolis: Where are your investment bankers? You know, the folks a business hires to find debt or equity capital in order to grow revenue and earnings. They also help find businesses to acquire and help sell businesses when the owners are ready.

Of course they charge a fee, but they almost always earn that fee and more.

The big problem here in Indy: There are fewer than 10 talented investment bankers, perhaps fewer than five. There are hundreds in Chicago and dozens in Cleveland and Minneapolis. But only a handful here.

Why so few? There are many theories. Some suggest Indy never had a truly national, full-service investment bank to spawn new, smaller investment banks. We had Raffensberger Hughes a long time ago but no others. Cleveland, for example, had MacDonald and Prescott Ball. Alumni of those firms have helped many businesses grow.

Others suggest our fate was sealed when the large Indianapolis banks were acquired by out-of-state banks. We lost the corporate finance groups (and the investment banks in them) to those out-of-state banks. The key decisions and the financial analysis behind those decisions were made out of state.

The lack of investment banks reflects the scarcity of investment banking opportunities here in Indy.

This may well be related to who we are. Indy has an extremely conservative business culture. Businessmen are more reluctant than peers in similar-size cities to pursue aggressive growth strategies. They hate debt. They have seen too much debt ruin a business, especially in an economic downturn like the one we are experiencing.

However, too much conservatism can cause the same disastrous results as competitors grow stronger and gain market share.

The key is to find the right level of moderate leverage that has comfortable fixed-charge coverage ratios (money coming in comfortably exceeds the money that must go out).

Such a capital structure can fuel prosperous growth, make a business bigger and stronger, and drive exceptional returns for the owners. A talented investment bank can help a business find the right amount of leverage.

Why should we care about the lack of investment banks? Scarcity hurts economic growth.

Today, the global competitive landscape requires every business to grow and become stronger in order to survive. After all, that’s what the out-of-state competition is doing.

In the movie “Annie Hall,” Woody Allen compared sharks and relationships. Sharks must continuously move or they will die—and his relationship was not moving. Businesses are also like sharks. They must continuously improve and grow—or die.

There are two companies near Detroit—Odyssey/Global and Visioneering—that illustrate the point. In the 1980s, both companies made metal tooling or molds used by their customers to make plastic parts for the Big 3 automakers. Each company independently saw Japanese car makers gaining market share and were unable to capture this business because most of those cars were made in Japan.

Each independently invested equity and debt to supply metal tooling for customers making composite parts for military and commercial aircraft.

The result has been phenomenal. Today, neither company sells anything to the dying U.S. automakers. The aerospace market they now serve is expanding rapidly as composite parts for aircraft have become increasingly more acceptable. Both companies are growing profitably and have bright futures for their owners and employees.

Dramatic makeovers are difficult and expensive. They require capital and exceptional planning and execution. This is precisely what a talented investment bank can provide.

Indianapolis definitely has made progress over the past decade. We have seen real growth in venture capital firms and we do have a few private-equity firms in Indy. These firms invest in companies here and stimulate economic growth.

Many life sciences companies have benefited from these local venture capital companies.

The lack of investment banks, however, means fewer avenues for growth—fewer opportunities pursued. Unfortunately, until Indy has a larger group of talented investment bankers, Indianapolis will struggle to grow quickly.•

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Scolnik is chairman of Hammond Kennedy Whitney & Co. Inc., a private-equity firm in Indianapolis. Views expressed here are the writer’s.

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