Last year’s tough markets brought a wave of consolidation among London’s independent stockbrokers, and senior brokers say that more groups are likely to fall by the wayside in the coming months.
Recent casualties have included Evolution Group and Collins Stewart Hawkpoint, which accepted takeover bids from larger rivals, while others including Arbuthnot Banking Group and Ambrian Capital offloaded their brokerages. Rumours abound concerning the identity of the next players to leave the stage.
“You need a certain size to be profitable in an environment where there’s not a lot of activity,” says Tom Jenkins, head of corporate broking at Finncap. “There are too many brokerages with not enough market share.”
One reason for the sector’s troubles is its overexpansion in the early part of the last decade. Brokerages hired and invested enthusiastically, as they vied for lucrative advisory work on the flotations of hundreds of mid-sized companies that were eager to access the equity markets.
In 2006, new issues on Aim alone raised a record £9.9bn. But activity slowed in 2007, and last year the exchange hosted only 90 flotations, raising £609m. Mid-cap activity on the London Stock Exchange’s main board has also declined significantly.
Another source of concern for stockbrokers is a squeeze on commission income from secondary trading. Weaker performance among many asset managers has reduced the commission pools they put aside for their brokers, while a growing share of trading takes place in “dark pools”, bypassing brokers altogether.
“Institutional clients are being more selective about how much and who they pay,” says Simon Fine, head of equity capital markets at Shore Capital.
The slowdown has prompted brokers to target each other’s clients more aggressively. Although a corporate broking agreement in itself yields only a modest annual retainer, companies are likely to use their house broker when seeking advice on equity issuance or acquisitions. The broker is also likely to be the first port of call for institutional investors who want to trade in the company’s stock.
“I think it’s got more competitive partly because there’s not a lot of activity,” says David Currie, head of UK investment banking at Investec. “If there aren’t many new businesses coming in through [initial public offerings], then people are left to fight over the existing ones. And there hasn’t been much equity issuance or M&A, which means idle hands.”
As well as fending off their direct peers, the independent brokers have to contend with interest in their larger clients from some of the big investment banks. JPMorgan Cazenove, the biggest broker with 267 corporate clients, has seen an opportunity to pick up clients from struggling smaller rivals. “If anything, we’re investing more in the corporate broking business,” says Laurence Hollingworth, head of investment banking at JPMorgan Cazenove. “We think we have an opportunity to grow market share in a measured way.”
The relentless competition is likely force more brokerages to submit to takeovers this year, senior industry figures believe, naming Cenkos and RBC Capital Markets as possible aggressors. Panmure Gordon - which has one of the most prestigious brands in the sector, but reported a half-year pre-tax loss of £4.2m in its last results – is widely seen as a potential target.
Elsewhere, Seymour Pierce’s reputation was damaged by a £400,000 fine in December for breaching the Aim market’s regulations. Charles Stanley, meanwhile, is widely expected to follow Brewin Dolphin’s example by offloading its securities division to focus on its core wealth management business.
As they seek to stay afloat, some brokers have shed staff while cutting back heavily on bonus payouts and, in at least one case, pension contributions.
Yet some have continued to invest for the future. Oriel Securities increased its headcount by a third last year – a move that some rivals describe as a risky bet that will leave the company exposed if corporate activity does not pick up strongly. But Simon Bragg, chief executive, believes that the move will pay off.
“The world will be better one day...and investing in the business, going out and targeting companies and institutions with a stronger service will hold you in good stead,” he says. “I don’t think reducing your service levels and trying to charge your clients more is necessarily the right way to go about business.”
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