I AVOIDED WRITING about the UK referendum on EU membership in the run-up to the historic vote. And now that the UK has voted to leave, I’m not sure there’s much I can add to the cacophony. The jaw-dropping downward spike we saw in equity and FX markets in the immediate aftermath was a typical market over-reaction, but prices will obviously still be susceptible to bouts of volatility as events unfold.
Having taken an early decision to stay away from the political fray, I did want to keep a distinctly UK flavour and highlight something I’ve had an eye on for some time: the rise of UK broker-dealers and investment banks in UK equities and ECM. This is not a referendum-driven phenomenon; nor is the skillset of the UK firms restricted to the small and microcap space where global players fear to tread.
In a sign that the UK’s vibrant capital markets will continue to be a magnet for investors and intermediaries alike, UK independent brokers-cum-investment banks have emerged from the nether regions of equity syndicates and have beat bulge-bracket players in the mid-market space that dominates UK ECM (and European ECM for that matter).
And they’re taking on bigger deal sizes, competing toe-to-toe with the bulge-bracket for joint or sole bookrunner slots. In fact, bulge-bracket firms have done just three UK IPOs so far this year without at least one UK broker-dealer present.
And as they work with the global firms, they’re doing a lot of the heavy lifting around research, distribution and market-making. They’re on the radar of independent IPO advisers; some have carved out syndicate functions away from equity sales to facilitate deal execution; and they’re working internally in a more joined-up way (aligning advisory/corporate broking, sales, research and market-making) to feed deal flow and boost fee income.
If “The Death of Gentlemanly Capitalism”, the 2001 book by Philip Augar, chronicled the virtual disappearance of London brokers and investment banks following a wave of global takeovers in the wake of the UK’s Big Bang deregulation of 1986, we’re witnessing a renaissance of sorts – not on a global scale but in terms of owning the backyard.
The UK market has consolidated over the years, though the landscape continues to be fluid. I was chatting the other day to a senior exec at one of the UK independents. He told me that in 2006, his firm did some UK market segmentation analysis that captured close to 40 small and mid-cap brokers.
By 2014, half of those had disappeared. Half a dozen of the remainder were bulge-bracket firms (including JP Morgan, which acquired UK broker Cazenove in 2010), and half a dozen or so had migrated to the small/microcap space, leaving no more than six to eight firms competing for the spoils in the mid-market proper.
UK IPO LEAGUE tables for 2015 and 2016 YTD show the command of the US$50m to US$200m IPO space and the encroachment onto the big-ticket deals of a fairly tight group of Numis Securities, Peel Hunt, Liberum Capital and Zeus Capital; with the likes of Cenkos Securities (founded by Andy Stewart of Collins Stewart fame), Investec (which entered the UK market by acquiring Evolution Beeson Gregory), Canaccord Genuity (which bought into the UK market via the acquisition of Collins Stewart Hawkpoint) and maybe Panmure Gordon sporting more sporadic successes.
There’s an active cycle of senior executive talent and team poaching going back and forth, and firms are also seeking to fast-track expansion via acquisition. Panmure Gordon acquired Charles Stanley’s securities business last year while Australia’s Fidante Partners bought Dexion Capital. US investment bank Stifel Nicolaus acquired Oriel Securities in 2014 (though it has yet to make its mark in UK cash ECM), while US investment bank Stephens Inc’s European business is effectively a takeover-by-proxy of Hawkpoint’s corporate finance team.
Zeus’s takeover of broker Novum Securities appears to have fallen by the wayside, but its overture nonetheless underlines the scale of its ambitions. Peel Hunt is making a concerted effort to close the gap with larger rival Numis (whose CEO Oliver Hemsley steps down later this year) in terms of on-boarding UK corporate clients. The count is probably around 190 at Numis to Peel Hunt’s 130, but the latter is pushing aggressively to narrow the gap.
To my point about fluidity, there have been casualties. A ton of talent has been plundered from Canaccord Genuity as the firm takes the axe to 12% of its capital markets and infrastructure staff worldwide. With so many talented individuals having left of late, the question is what’s going to be left?
Something’s clearly afoot at Jefferies. The US firm, which acquired UK broker Hoare Govett in 2012, has fallen off the UK IPO map this year and hasn’t been on a single docket. That’s got to hurt. (It was sole books on the Healthcare Royalty Trust that was pulled in April). I’m assuming this is linked to the departures of Mark Connelly and Reinout Koopmans last year and a hiatus until new European ECM head Rob Leach gets his feet under the table in the move back to the sellside from BlackRock.
You could argue that this year’s market has played to the strengths of the UK firms. But the fact that many are ambitiously and aggressively looking to expand even in a MAR/FEMR/Mifid II-tinged world and one beset by EU referendum volatility and uncertain outcomes speaks volumes. The UK vote is unlikely to derail the train.
