Tuesday, July 10, 2012 | 2 a.m.
Given the timing, the decision by three former Deutsche Bank professionals to open a research, investment and brokerage house in Las Vegas was quite gutsy. It was 2009, and their specialty — the gaming industry — was reeling in the recession.
But just as casinos are slowly but surely clawing their way out of rotten economic times, so, too, Union Gaming Group is along for the ride, having expanded by opening an office in Macau and planning another one in New York.
At the same time, the company has expanded from the three founders to 17 positions, including the addition of three managing directors in its institutional equity trading unit last month. While there are other gaming researchers and analysts in Las Vegas, and local investment bankers and stockbrokers covering a wide range of industries, Union Gaming has carved out a niche locally combining gaming research, custom analytics, securities trading and investment banking.
Its success, says Union Gaming analyst Bill Lerner, validates the founders’ strategy to get as close to the action as they can — constantly visiting properties and taking the temperature on the ground while others might visit Las Vegas every month or so, if that often.
“Parachuting into Las Vegas once a quarter, twice a year or once a month and extrapolating the length of a cab line to a trend in the market is like connecting one data point; it doesn’t help your clients,” said Lerner, who founded Union Gaming along with Grant Govertsen, who is now based in Macau, and Institutional Securities Sales Executive Rich Moriarty.
“So we’re here,” Lerner said. “Our employees live in some of the properties. We’re on the ground constantly. Sometimes we count machines; sometimes we look at various indicators throughout the market. We understand development differently because we’re here and we can see it.
“Macau is the same thing. We have a team of people who are counting buses, who are pacing distances between new development and existing properties, who are looking at table limits. Ultimately, all that primary research comes back and is rolled up into an evolving view of the sector.”
Lerner said that when they struck out on their own in 2009, “many of the large investment banks were running away from the gaming sector. They were letting resources go associated with gaming — analysts, investment bankers, they were dropping research coverage.
“The commitment from a funding and financing perspective was also waning. We were going the other way. We wanted to build a business on the ground in Las Vegas and embrace the sector in a way that was 180 degrees different than how our traditional peers were behaving.”
The game plan was simple: Run the business out of Las Vegas, the industry’s longtime capital, and embrace the gaming sector.
And that’s how Union Gaming got its name.
“‘Union’ means we were embracing the sector at a time when the rest of the financial world was not,” Lerner said.
In gaming, as in many industries, capital-raising efforts are run largely out of New York and Hong Kong.
But Union Gaming feels there are advantages to having offices in Las Vegas and Macau, the world’s largest gaming markets, Lerner and Moriarty said.
Since its start, Union Gaming has grown to offer research, custom analytics, securities trading and investment-banking services tied to the gaming industry.
The research and analytics services include assessing whether a company should enter a new market, support in gaining gaming licenses, and advice on mergers and acquisitions.
The company, which has more than 40 institutional clients like mutual funds, participated in last year’s MGM China $1.5 billion initial public stock offering as well as this year’s $415 million financing plan for the $744 million SLS Las Vegas at the former Sahara site.
“We’re the only investment bank that focuses exclusively on gaming,” Moriarty said, adding Union Gaming’s model is similar to that of Allen & Co., a New York boutique investment bank focused on media and entertainment.
Just as the low-key Allen & Co. managed to leverage longtime relationships into a key role in the Google initial public stock offering in 2004, Union Gaming has worked to cultivate relationships.
In the corporate securities world, those relationships are largely based on trust, discretion, proper execution of trades and the value of a firm’s research.
“The relationship in the institutional business is more important than any of the components of the business,” Moriarty said. “The reason mutual funds and hedge funds would do business with our guys is they have multiple years of relationships, and trust matters more in execution than any other part of the business.”
Despite the struggles of the U.S. gaming industry during the recession, Union Gaming has benefited from strong growth and investment interest in Asia.
That pattern for Union Gaming and other players in the industry likely will continue, Lerner said.
For Las Vegas, Lerner said there’s no question the gaming industry is recovering.
“The Las Vegas recovery will be long in duration and modest,” he said. “But that’s OK. Gaming companies can thrive. That’s because they’ve done the work they needed to do on the cost side of the business, and many of those changes are permanent. And they’ve done a tremendous amount of work on the balance sheet front.”
Casino stocks may benefit because, with only modest hotel room growth seen in Las Vegas, room rates should increase during the next few years, Lerner said.
On top of that, volatile gaming revenue is becoming less important to Las Vegas resorts as they continue to capitalize on strengths in more stable restaurant, retail, nightclub and convention operations, Lerner said.
“We’ll see modest visitation growth, stabilization in spend-per-visit and lower levels of costs. That could translate to the stocks really working,” Lerner said.
And in the United States outside of Las Vegas, Lerner expects gaming revenue to grow in the “very low single digits” as the U.S. casino expansion story frequently involves cannibalization of existing business as opposed to growing markets.
Asia, of course, is a different story, with growth under way in Macau and the Philippines and several nations considering the expansion of gambling, including South Korea, Japan and Taiwan.
“We’re bullish on Macau,” Moriarty said. “It’s the most exciting market in the world.”
The success of Singapore’s new integrated casino resort model hasn’t gone unnoticed throughout Asia.
“If you think about Southeast Asia and Indochina, every country is clamoring to do something similar,” Moriarty said.
And in the long run, populous India may enter the picture while U.S-style casinos could be developed in Europe once the economy there stabilizes.
“Whether it’s in parts of Latin America or all over Asia, you think about the opportunity. I wish we could live long enough to participate in all of this,” Lerner said.