UK brokers and smaller investment banks brace for further consolidation as stagnant london stock market increases pressure on an industry driven by listings and buyouts.
A dearth of issues and subdued activity in London’s capital markets has already sparked several deals, including Cenkos and FinnCap, two smaller brokers, hitting a £43million merger in March.
Deutsche Bank then stunned the industry last month by announcing the acquisition of Numis, one of London’s largest brokers with over 150 corporate clients. The acquisition raised expectations for new deals and shone a spotlight on Panmure Gordon, Singer Capital Markets and WH Ireland.
Brokers earn their fees from a range of activities, including trading stocks on behalf of clients, selling their research, listing companies on stock exchanges and helping companies raise equity. funds.
But the industry has been bruised over the past 12 months as the combination of rising interest rates, a slowing economy and rising inflation has left the London market short of cash. IPOs. According to data firm Dealogic, the number of IPOs in London has fallen from 125 in 2021 to 46 in 2022.
In addition to the weaker economic backdrop facing the London market, sentiment was also shaken by British chipmaker arms choose to enroll in New York and CRH, an Irish building materials group, announcing its intention to transfer trading of its shares to Wall Street.
Although Deutsche Bank’s Numis deal was seen as an opportunistic attack on one of the strongest players in the industry, it only raised expectations for further deals. Shares of Numis rival Peel Hunt closed more than 15% on the day of the announcement.
The takeover came days after a merger between equity research firm Redburn, which is owned by investment banking boutique Rothschild, and US broker Atlantic Equities. Redburn said the agreement will provide customers with “broader and deeper search coverage.”
“The small end of the market is ripe for deployment,” said the managing director of a London-based brokerage. “Combining these brokers with micro cap, smaller clients makes sense, you need to have a large mass of them.”
Joshua Maxey, co-founder of research firm Third Bridge, said: “These deals underscore the enormous pressure cash equities are currently under. Deal activity is at an all time high and the outlook is uncertain, this which certainly incentivizes more focus on potential M&As. The bet is how long are acquirers willing to fund a loss-making company?”
Over the past two decades, previous market downturns have led to consolidation. Following the 2008-09 global financial crisis, Belgian bank KBC spun off Peel Hunt, while Middle Eastern investor QInvest took a stake in Panmure Gordon, one of the oldest brokers with a history dating back to 1876.
However, industry executives, bankers and analysts say structural factors are also at play this time around, including the ramifications of the Mifid II regulations introduced in 2018.
The rules required brokers and bankers to separate the cost of stock research they produce for clients from the fees they charge for executing trades. As a result, fees charged for equity research have fallen by more than a third since Mifid II, according to industry body Euro IRP, which has weighed on brokers’ bottom lines.
Although Deutsche Bank’s pursuit of Numis suggests Germany’s biggest bank is expecting an eventual recovery in London listings, the decline in the number of IPOs is likely to continue for some time, Lord Howard said Leigh, senior partner at consultancy firm FinnCap Cavendish.
“In the listing market, that business has dried up and you have very high overhead, so there has to be some consolidation,” Leigh said. “It has always been cyclical, but this one is much more severe. The big change now is the growth of private equity, which people see as an alternative [to listing].”
Some brokers have tried to take the lead in branching out into new lines of business and expanding internationally.
Ross Mitchinson, co-chief executive of Numis, said he had made a “concerted effort” to build a business that provides M&A advice, as well as working on overseas IPOs and help private companies raise funds. “We have certainly done more to diversify our business in recent years rather than being at the whim of UK financial markets,” he said.
Earlier this month, Numis said “capital markets volumes are expected to remain relatively weak in the near term”, although it noted that the second half of the year “could see relatively better conditions”.
Kunal Gandhi, senior managing director of Fenchurch Advisory Partners, said other struggling brokers would also work to reduce their reliance on the stock market for income.
“Brokers are increasingly recognizing the need to have access to more than primarily listed stocks as their primary product to serve clients,” he said.
But going beyond stocks is unlikely to be a quick fix, paving the way for other deals. As one managing director of a brokerage put it, “It’s been a terrible 18 months and I feel like it’s going to go on for a bit longer.”
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