The few remaining mid-market brokers are locked in a fight for clients and investors – just ask Michael Lee, general counsel at Numis Securities
Cuts, consolidation, a squeeze on deals and fees: Michael Lee must have hoped he had seen the back of these things after his move in-house to a capital markets broker, but he seems to have ended up in a sector with remarkable similarities to the one he left.
Indeed, the former Linklaters and Latham & Watkins associate could hardly have chosen a more cutting-edge industry to be in. As general counsel at mid-market broker Numis Securities he is running the legal team for one of the few surviving players in a changing environment.
RBS’ scaling back of its investment banking business and the sale of its broking business, Hoare Govett, is the highest-profile case in a City market that is seeing turmoil. But it does not stop there.
“Evolution has been bought out by Investec, Matrix has decreased headcount quite significantly, Ambrian has sold its securities business and Altium has shut its,” says Lee. “Companies are downsizing or exiting the market, which gives Numis an opportunity to expand its client base.”
South African insurer Sanlam bought the bulk of London’s Merchant Securities late last year, while the FSA has just approved the sale of UK broker Arbuthnot Securities to Westhouse Holdings. Last year also saw Collins Stewart Hawkpoint taken over by Canada’s Canaccord.
The rejig in the market, leaving roughly 12 brokers in the mid-cap space, lets some 40 brokerage clients on the loose. Numis, like its competitors, is keen to snap up the best. And it is Numis, Cenkos Securities and Oriel Securities that are in the best position to do that.
“Winners in difficult markets will emerge with more clients and more transactions,” Lee predicts. “Losing firms will fall by the wayside and you’ll see ourselves, Cenkos and Oriel beefing up our teams to be able to do more deals.”
Lee joined Numis at the beginning of 2011 from Latham, where he was a senior associate in the Dubai office focusing on M&A, corporate finance and equity capital markets (ECM), after a period as a corporate managing associate at Linklaters. He moved to Dubai in 2008, just as the financial crisis was kicking off.
The downturn is still taking its toll: the spate of cuts and takeovers is a reaction to the debt crisis that has squeezed potential investors in IPOs. Brokers are scrambling for fewer deals paying lower fees, although there are still some players out there with the potential to throw their cash at listings.
“The thing markets don’t like is uncertainty,” Lee points out. “The European crisis is causing all sorts of problems for financial institutions. Big institutional investors are reluctant to buy into IPOs when they don’t know where the market’s going to over the coming period. Volatility is causing a great deal of concern.”
The nature of deals and their advisers has changed as a result. ECM deals are no longer UK-centric, and dealmakers can no longer be blinkered to the potential of foreign funding.
“What we’re finding a great deal is that because there is a reduced appetite at the moment for IPOs, to get one away we’re having to broaden the net in terms of the investors we bring in,” Lee remarks.
Fundraisers will often find that the investment book is lighter than expected, forcing them to rely on US investors. In some deals, US investment can be expected right from the start, but in many it will only arise at a later stage.
All this has implications for lawyers, both in-house and external. Dealmakers in the UK have to be more aware of US investment laws, with an increasing number of deals involving private placements under Section 4(2) of the US Securities
Act, which covers exemptions from securities rules.
“We’re finding that our [external legal] advisers [that do not have US lawyers] are increasingly having to bring in US advisers,” says Lee. “For example, if I’m doing an IPO that doesn’t necessarily have a US component I’m mindful that it might at some stage.”
Law firms have responded to this by bulking up their US securities teams. The magic circle has had US capability for the best part of a decade, but the silver circle and other competitors have only taken the plunge in the past three years or so.
Ashurst, Norton Rose, Simmons & Simmons and Travers Smith – all of which advised Numis on deals between 2008 and 2011 (The Lawyer, 2 January) – as well as Hogan Lovells have all hired US securities lawyers, while in-house legal teams at large-cap brokers such as Goldman Sachs tend to have a small team of London-based US lawyers.
Numis has a dedicated non-lawyer ECM compliance officer focusing on US securities, former Jefferies and UBS compliance officer David O’Sullivan, but US-qualified lawyers are still rare at mid-market brokers.
Numis uses outside lawyers for all deals and has no permanent legal staff other than Lee. It relies on secondees from Simmons and, previously, Macfarlanes, but Lee intends to add full team members when the markets recover.
Title: General counsel
Industry: Capital markets
Reporting to: Head of corporate finance Etienne Bottari and CEO Oliver Hemsley
Annual revenue: £54.2m
Annual legal spend: £2m
Legal capability: One, plus one secondee
Pauline Bearblock, compliance officer, head of legal, Oriel Securities
The mid-market corporate broking sector provides corporate broking, corporate finance, equity trading, market-making and research services to both corporate and investor clients.
It has not been immune from the changes sweeping through the broader financial industry, with a number of mergers (Investec/ Evolution Securities, Cannacord/ Collins Stewart) and closures (Altium).
However, these changes provide even greater opportunities for the brokers remaining, whose business models and cost bases are appropriate for the needs of clients. Interestingly, the 2001-02 recession generated a flow of new entrants to the sector.
The success of this subset of the market is attributable to the independent view such brokers can provide, without the expectation to cross-sell products. Independent corporate brokers can typically offer a focused offering.
Nevertheless, such firms must have a broad-based business that looks after both corporate and investor clients.
Often, corporates appoint such brokers alongside a larger house to access the broader product offering while taking advantage of the expertise and independent status of the broker.
I suspect this will remain a competitive and active sector, which once the market recovers will continue to offer good prospects to those who focus on the needs of their corporate and investor clients.
Phil Adams, chief executive officer, Altium Capital
Altium Capital closed its securities business last November. The main reason was that the market has changed dramatically. Fund managers are increasingly trading electronically, so they have far less need for brokers and there is far less IPO activity.
It is also a more costly business to operate in, which means that for all brokers it has become less attractive economically, and firms such as ours, with expertise in other areas, have withdrawn from the sector.
We are in a situation where costs are very high and there is far less incentive for fund managers to reward you for the research you do. There is now a small number of guys in the industry with more than 100 clients. They are the likeliest winners in the long term if they can address their cost bases.
We went through an internal strategic review that led us to focus on our international advisory business. We entered into a 30-day consultation period with the securities team, during which we negotiated with the employees, resulting in early closure.
The biggest change for us recently has been the introduction of new rules under the Takeover Code. The most important issue for lawyers servicing the financial services industry is knowing the FSA issues inside out and being able to advise on the regulatory aspects.
One of the most interesting deals we have done recently was leading the public-to-private of Spice, a sizeable deal funded by Cinven. Our knowledge of the public-to-private process and Cinven’s quick decision-making ensured that the process ran smoothly.