Rothschild & Co Annual Report 2017 Annual Report 2017
Contents
Message from the Chairman of the Supervisory Board 4
Message from the Chairman 5
Message from the Management Board 6
1. Overview
Overview of businesses 10
World presence 12
Corporate governance 14
Organisation chart 17
Corporate Social Responsibility 18
Shareholder information 19
2. Business review
Rothschild Global Advisory 24
Rothschild Private Wealth & Asset Management 30
Rothschild Merchant Banking 37
3. Management report
Results for the 2017 financial year 46
Information on the Company and share capital 54
Internal control, risk management and accounting procedures 66
Corporate governance 73
Corporate Social Responsibility 98
4. Financial statements
Consolidated financial statements 118
Parent company financial statements 181
Rothschild & Co | Annual Report 2017 1 History
Preserving a first-class reputation across generations
Paris Orléans streamlines its Relaunch of Rothschild’s organisation, French financial optimises its regulatory activities through Paris capital and preserves Rothschild & Co pursues Orléans following family control, with its its simplification with Rothschild & Co offers Creation of the nationalisation of conversion into the removal of banking full-scale financial advice Paris Orléans, a French the Rothschild French a partnership licences and the sale of and services around railway company. bank in 1981. limited by shares. non-core business. the world.
1838 1982 2012 2016 Today
1937 2008 2015 2017
Paris Orléans Paris Orléans acquires Paris Orléans Rothschild & Co discontinues control of the banking changes its name completes the merger railway business. activities at a global to Rothschild & Co, with Compagnie level and completes a necessary Financière Martin reorganisation of family step in the Maurel to enhance shareholdings. Group’s its Private Wealth transformation. business.
2 Rothschild & Co | Annual Report 2017 Key figures
A distinct perspective that makes a meaningful difference
Key figures for the 12 months to December 2017 (versus 12 months to December 2016) (1)
Rothschild & Co provides independent advice Revenues on M&A, strategy and financing, as well as investment and private wealth and asset +12% management solutions to large institutions, €1,910m families, individuals and governments, worldwide. With approximately 3,500 talented employees Operating income on the ground in over 40 countries around the world, we deliver a unique global perspective. €456m +18% As a family-controlled business that has been at the centre of the world’s financial markets for over 200 years, we can rely on an unrivalled network of experts and are known for our track Net profit – Group share (2) record of outstanding execution in financial services. €247m +35% Our integrated global network of trusted professionals and decision-makers provide in-depth market intelligence, meaning we can be closer to current issues than any other global EPS (2) (Earnings Per Share) financial institution in our core markets. Informed by experience yet not limited by +25% convention, we are able to separate insight €3.33 from information and access opportunities for our clients from a unique angle. It is this scale, local knowledge and intellectual ROTE (2) (Return On Tangible Equity) capital that allow us to provide a distinct perspective and effective long-term solutions 17.2% +19% for our partners.
Shareholders’ equity – Group share €1,912m +24%
(1) As a result of the change in financial year from 31 March to 31 December, the financial year 2017 spanned only nine months (April to December 2017). To facilitate the understanding of the activity, Rothschild & Co presented its results for the full calendar year 2017 compared to the calendar year of 2016. (2) Excluding exceptional items. For more information, please refer to page 46.
Rothschild & Co | Annual Report 2017 3 Message from the Chairman of the Supervisory Board
Dear Shareholders, I would like to thank the Supervisory Board, the Mr. Jacques Richier, board member for the last six years, management team and the employees for their hard work decided to step down in 2017 in order to focus on his new and dedication over this period allowing us to announce role within the Group as a member of Rothschild Martin another excellent set of financial results. The Managing Maurel’s Supervisory Board. I would like to take this Partner, Rothschild & Co Gestion, represented by its opportunity to thank Mr. Richier for all the valuable Chairman, David de Rothschild, its Executive Deputy advice he has provided and I am pleased that the Group Chairman, Alexandre de Rothschild and the four Managing will still benefit from his wisdom in his new position. Partners, Nigel Higgins, Marc-Olivier Laurent, Robert Leitão We were delighted to welcome Mrs. Suet-Fern Lee to the and Olivier Pécoux, lead the Group with vision and energy. Board following her appointment at the Shareholders Their successful strategy is committed to building long-term General Meeting last year. Mrs. Lee has significant value for shareholders and over the last five years they have experience as senior partner of a law firm specialising in successfully diversified the Group’s sources of income, mergers and acquisitions. With her deep understanding creating some very exciting prospects. of Southeast Asian markets, her appointment strengthens At the Shareholders’ General Meeting held on the Board for the benefit of our shareholders. Six female 28 September 2017, shareholders gave their approval members sit on a board totalling fourteen members for the change in our financial year end from 31 March and one non-voting member, and comprising nine to 31 December. As a result of this change, the statutory independent members. reporting for 2017 covers only nine months (April to In the present annual report and the Company’s website, December 2017). To enable a better understanding of its you will find more detailed information on the Board’s performance, Rothschild & Co has chosen to present its composition. In addition, our Shareholders’ General Meeting results for the full 2017 calendar year versus the 2016 document to be published soon, will provide you detailed calendar year. From now on, our results will continue to information regarding those members whose re-election be presented on this twelve-month basis. Information will be on the agenda of the Shareholders’ General Meeting for the nine-month period, from April to December 2017, this year. can be found in the Consolidated Financial Statements. Shareholders will also be asked to approve a dividend As Chairman of the Supervisory Board, my role is to ensure of €0.68 per share at the same meeting, unchanged that the Company maintains a high level of corporate compared to last year but for a nine-month period. governance. The Supervisory Board exercises permanent oversight of the management of the Company, including Last, but not least, I would like to thank you as always in particular the Company’s financial accounting reporting for your loyal support for Rothschild & Co. system and its internal control mechanisms. This year has been particularly active in France as the merger with Martin Maurel has created significant, additional challenges. Eric de Rothschild The composition of the Supervisory Board has slightly Chairman of the Supervisory Board of changed over the past twelve months, with the re-election Rothschild & Co of Mr. André Levy Lang and myself, the departure of Mr. Jacques Richier and the nomination of Mrs. Suet-Fern Lee.
4 Rothschild & Co | Annual Report 2017 Message from the Chairman
Dear Shareholders, 2017 has been another strong year for Rothschild & Co. Our Long-term thinking is also one that has always guided us Group has reached global scale today which demonstrates in our strategic choices. The integration of Rothschild & the relevance of our model and our values. We believe that Compagnie Banque and Banque Martin Maurel in France, purpose and principles allow us to hire some of the most was finalised in July to create Rothschild Martin Maurel talented individuals who together form true partnerships and we welcomed some 500 new colleagues to the Group, and teams across more than 40 countries. whilst expanding our geographic footprint, essentially in France. The combination of two family-owned businesses Our Global Advisory business had another record-breaking that share a similar history and understanding of their year in terms of revenues and we maintained our leading industry is on track to creating a first class group to serve position as the number one advisor for the number of deals our clients. globally. Private Wealth and Asset Management saw a significant improvement in revenue and profits thanks Before ending my message I would like to share with you to tight cost control and strong organic growth. Our more some information concerning our investment in the United recently developed Merchant Banking business is starting States in mergers and acquisitions and restructurings. to reach maturity and we saw its revenue jump 39%. In this world leading market, we have significantly strengthened our teams in New York, continued to develop Thanks to these strong results, our shareholders will be in Los Angeles, Chicago and launched our new team rewarded with a dividend of €0.68 per share, which specialising in technology, based in the heart of Silicon although at the same level as last year, represents an Valley. We will pursue this investment policy which we effective increase since it is only for a shorter nine-month believe will lead to strong results. period, in line with our progressive dividend policy. This will be subject to approval at the Annual General Meeting to be At the end of this more than satisfactory period, I would held on 17 May 2018. like to take this opportunity to thank our shareholders and our clients for their support. I would also like to thank all Global economic activity gathered momentum and those who work in our Group, who always give their utmost broadened through 2017, bringing the economic cycle in support of our firm and its clients. to a high point. Signs of excess remain limited despite some variations; US consumer finances remain healthy and despite the political uncertainties which persist, especially in the UK, we believe the business climate can continue to David de Rothschild offer opportunities, even if it is more reasonable to think Chairman of Rothschild & Co Gestion that the growth cycle is close to full maturity. Managing Partner of Rothschild & Co In the long term, there are certain risks, such as inflation, which could lead central banks to adjust their monetary policy or even gradually increase their interest rates. This partly explains why volatility has recently revived after a particularly favourable 2017. That said, we believe that markets still offer attractive opportunities for far-sighted managements and investors.
Rothschild & Co | Annual Report 2017 5 Message from the Management Board
Dear Shareholders, Rothschild & Co produced another set of strong results in Financing Advisory revenue increased by 34% to 2017 with good growth in revenue and profit. Overall €379 million, with particularly strong activity levels in our revenue increased 12% to €1,910 million and net income European Debt Advisory and Equity Advisory businesses – Group share excluding exceptionals (1) rose 35% to €247 as well as in our US restructuring franchise. million. Our strategy is on track with all three business lines We continue to add to and strengthen our senior team. performing well. During 2017, fourteen new Managing Directors were hired The uplift in revenue was largely due to Private Wealth and into our offices in the US, the UK, Japan and Switzerland. In Asset Management, up €146 million, of which €105 million the US, we recruited eight Managing Directors into our M&A was due to the merger with Martin Maurel, and Merchant advisory team. We also made investments elsewhere during Banking where revenue increased by €52 million. the year by opening two new offices: a new wholly-owned subsidiary in Tokyo, as well as the establishment of a new All our financial targets set by the Group have been office in Switzerland. achieved in 2017. In particular, our compensation ratio, targeted at low to mid 60s through the cycle, decreased Rothschild Private Wealth & Asset Management revenue from 64% to 62.4% thanks to our growth in revenue. for the year increased significantly to €514 million, up 40% This in turn drove our Return on Tangible Equity, excluding when compared to the previous year, mainly due to good exceptional items (1), which is targeted at 10-15% through organic growth and the consolidation of Martin Maurel the cycle, to 17.2% up from 14.4% for the prior 12 months. (representing €105 million of revenue). For the first time we have disclosed the profitability for In a highly evolving market that has been challenging on Private Wealth & Asset Management and for Merchant several fronts including regulatory change (MIFID II) and Banking so as to provide transparency on the performance fee pressure from clients, we have undertaken a number of these two businesses. of initiatives to build revenue, cut costs and refocus the business on its core activities. This resulted in growth in For 2017, Rothschild Global Advisory delivered another profitability with operating income, excluding Martin Maurel record annual revenue performance with a healthy balance integration costs of €27 million, rising to €82 million for between M&A and Financing Advisory despite lower global 2017. This represents a 16% operating margin, significantly M&A activity levels. Revenue reached €1,183 million and better than previous years and on track to reach our target the business ranked sixth globally by financial advisory of 20% by 2020. revenue for the year to December 2017, maintaining its position from the previous quarter (2). Operating income for the year was €211 million, representing an operating income margin of 17.8%. This excludes ongoing investment in the development of our North American M&A franchise, and including this investment, the margin would have been 15.7%. In M&A advisory, we continue to outperform compared to the overall M&A market. We ranked 1st globally and in Europe by numbers of both completed and announced transactions in 2017, the same position as in the previous year (3). M&A advisory revenue for the year was €804 million, down 9% year-on-year from a record performance in 2016, in the context of an 11% decline in global completed M&A activity by value.
(1) Exceptional items include Martin Maurel integration costs and a one-off tax credit. (2) Source: Company filings. (3) Source: Thomson Reuters, completed and announced transactions. Excludes accountancy firms.
6 Rothschild & Co | Annual Report 2017 In July 2017, the merger of the two French private banks Outlook Rothschild & Cie Banque and Banque Martin Maurel was completed and the French private banking activity is now In Global Advisory, we continue to maintain our position operating under the name “Rothschild Martin Maurel”. as one of the leading global advisers. Despite lower global The operational integration is progressing to plan. M&A market activity in 2017, principally at the large cap end of the market, the conditions for M&A continue to be Assets under management increased to €67.3 billion in relatively positive. We therefore expect current activity levels 2017 due to €10.0 billion from the merger with Martin to persist into 2018, although the Group remains alert to Maurel group, €1.7 billion of net inflows and market the risk of volatility. appreciation partly offset by negative exchange rate effects of €1.6 billion. Net new assets were driven by inflows of Private Wealth & Asset Management is well positioned to €1.3 billion in Private Wealth across all major geographies deliver net asset inflows and improving profitability. Our and of €0.4 billion in Asset Management. strategy of focusing on our core target markets, leveraging our network and targeting entrepreneurs is bearing fruit Rothschild Merchant Banking continued to perform strongly across our geographies. In France, the operational during 2017 and profitability here has developed into a integration of Martin Maurel is on track to be finalised major contributor to the Group’s growth. The business by the end of the year. generated revenue of €185 million, an increase of 39% on the prior year and of 28% when compared to the average Merchant Banking is committed to growing its assets under of the last three years. Revenue from Rothschild Merchant management. Within the Private Equity funds, FAPI II has Banking comprises recurring revenue of €61 million and successfully deployed in excess of 70% of its commitment investment performance related revenue of €124 million. and we will therefore aim to launch FAPI III in the course of Operating income rose to €120 million for 2017, 2018. In the Private Debt funds, following the successful representing a 65% operating margin. FADL fundraising, we will continue to expand our product offering both in Europe and the US. The increase of both revenue and operating income reflects the enduring strong performance of funds, mainly driven Overall, financial markets have been much more volatile by the performance of the Five Arrows business line. in recent weeks than seen for the whole of 2017. If such volatility were to continue through 2018 then that could The alignment of interests between the Group and impact market sentiment with a negative effect on our third-party investors remains a key differentiator. During businesses. However, if markets continue to be benign the year the Group’s share of the investment made by the we would expect our performance to be broadly in line division amounted to €116 million, of which €94 million with recent years. was the Group’s own investments in funds managed by Merchant Banking, and €22 million in direct investments This has been a successful year for Rothschild & Co and (including those made as part of the Rothschild Private we are proud of our achievements, but we remain single Opportunities co-investment programme). Disposals minded in our focus on the long-term and growing the generated proceeds of €156 million. business for the future. As each of our businesses develops, we are seeing increasing synergies between them, Thanks to the team’s strong track record in private equity producing positive results. Our strategy of diversifying our and private debt across multiple economic and credit earnings is progressing well. This success is due to the cycles, the division continues to expand. Our teams have highly talented and devoted teams of people who work now developed a recognised, niche position in Europe within Rothschild & Co and who share the same culture with a solid track record of long-term value creation. of utmost professionalism towards their clients, providing Merchant Banking’s assets under management were outstanding execution and effective long-term solutions. €7.5 billion as at 31 December 2017 compared to This strong culture is what gives Rothschild & Co its distinct €5.8 billion as at 31 December 2016. perspective and unique position in the financial markets.
Alexandre de Rothschild Executive Deputy Chairman of Rothschild & Co Gestion
Nigel Higgins Marc-Olivier Laurent Robert Leitão and Olivier Pécoux Managing Partners of Rothschild & Co Gestion
Rothschild & Co | Annual Report 2017 7 8 Rothschild & Co | Annual Report 2017 Overview
Overview of businesses 10
World presence 12
Corporate governance 14
Organisation chart 17
Corporate Social Responsibility 18
Shareholder information 19
1Rothschild & Co | Annual Report 2017 9 Overview of businesses
An integrated global network
•• M&A and Strategic Advisory Rothschild st •• Financing advisory 1 globally and Global Advisory –– Debt Advisory and Restructuring –– Equity Advisory 1st in Europe •• Worldwide platform with a presence by number of completed in over 40 countries M&A transactions (1) •• 1,039 bankers, of which 212 are Managing Directors th •• Advisor on c.650 transactions with 6 globally a total value of US$560 billion by revenue (12 months to December 2017)
(1) Source: Thomson Reuters, completed transactions, any nation/region involvement, as at 31 December 2017.
•• Private Wealth Rothschild •• Asset Management Private Wealth •• Trust €67.3bn of Assets under management & Asset Management •• Strong European presence with (as at 31 December 2017) targeted extensions in Asia and the United States •• 202 relationship managers for Private Wealth •• 41 investment managers for Asset Management
•• Corporate private equity Rothschild •• Secondaries, multi-managers’ Merchant Banking funds and co-investments €7.5bn •• Direct lending of Assets under management •• Credit management (as at 31 December 2017)
•• Solid position in Europe •• Proprietary investments in emerging countries •• 84 investment professionals
10 Rothschild & Co | Annual Report 2017 1. Overview 1.
Revenue (in millions of euros, 12 months to ecember) 2. Business review
2013 66% 34% 692
2014 64% 36% 852
2015 71% 29% 947
2016 76% 24% 1,171 2 1 68% 32% 1 1 3
M&A Advisory Financing Advisory (debt & equity advisory) 3. Management report Assets under management (in billions of euros, as at 31 ecember)
2013 56% 44% 41.2
2014 57% 43% 47.8
2015 60% 40% 51.0
2016 59% 41% 54.0
2 1 (1) 63% 37% .3
Private Wealth Asset Management
(1) Including Martin Maurel Group. 4. Financial statements
Assets under management (in billions of euros, as at 31 ecember)
2013 23% 77% 2.9
2014 20% 80% 3.1
2015 14% 86% 5.0
2016 12% 88% 5.8 2 1 11% 89% .
Group Third party
Rothschild & Co | Annual Report 2017 11 World presence
An unrivalled network of specialists at the centre of the world’s financial markets, combining scale with deep local knowledge Stockholm Tallinn(1)
Riga(1) Moscow Copenhagen Vilnius(1) Manchester Leeds Minsk(1) Amsterdam Birmingham Warsaw London Brussels Frankfurt Guernsey (1) Luxembourg (1) Kiev Paris Prague Zurich Geneva Lyon Milan Aix en Provence Grenoble Marseille Monaco Sofia(1) Istanbul Madrid Lisbon Athens
Tel Aviv
Chicago Toronto Beijing Reno New York Silicon Valley Washington Seoul(1) Los Angeles Tokyo
Shanghai