London brokers braced for shake-up as equity market languishes

UK brokers and boutique investment banks are bracing for further consolidation as a stagnant London stock market increases the pressure on an industry whose lifeblood is listings and takeovers.

A dearth of flotations and subdued activity across London’s capital markets has already triggered several deals, including Cenkos and FinnCap, two smaller brokers, striking a £43mn merger in March.

Deutsche Bank then stunned the industry last month by announcing the purchase of Numis, one of London’s largest brokers with more than 150 corporate clients. The acquisition has heightened expectations of further deals and turned the spotlight on the likes of Panmure Gordon, Singer Capital Markets and WH Ireland.

Brokers earn their fees from a range of activities, including trading shares on behalf of clients, selling them research, listing businesses on exchanges and helping companies raise funds.

But the industry has endured a bruising past 12 months, as the combination of rising interest rates, a slowing economy and higher inflation has left the London market short of IPOs. According to data firm Dealogic, the number of initial public offerings in London dropped from 125 in 2021 to 46 in 2022.

As well as the weaker economic backdrop facing the London market, sentiment has also been damaged by UK chipmaker Arm opting to list in New York and CRH, an Irish building materials group, announcing plans to move trading in its shares to Wall Street.

While Deutsche Bank’s deal for Numis was seen as an opportunistic swoop on one of the industry’s stronger players, it has only fanned expectations of more deals. Shares in Numis rival Peel Hunt closed up by more than 15 per cent on the day it was announced.

The takeover came days after a merger between equities research company Redburn, which is owned by investment banking boutique Rothschild, and US-focused broker Atlantic Equities. Redburn said the deal will give clients “broader and deeper research coverage”.

“The small end of the market place is ripe for a roll up,” said the chief executive of one London-based broker. “Combining those brokers with microcap, smaller clients makes sense, you’ve got to have a large mass of them.”

Joshua Maxey, co-founder of research firm Third Bridge, said: “These deals underline the tremendous pressure that cash equities is under at the moment. Deal activity is at a record low and the outlook is uncertain — that is definitely driving more focus on potential M&A. The bet is how long are the acquirers willing to fund a lossmaking business?”

Over the past two decades, previous market downturns have ushered in consolidation. Following the global financial crisis of 2008-09, Belgian bank KBC spun off Peel Hunt, while Middle East 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, notably the ramifications from the Mifid II regulations that were introduced in 2018.

The rules required brokers and bankers to split out the cost of the equity research they produce for clients from the fees they charge for executing trades. As a result, the fees that equity research commands has dropped by more than a third since Mifid II, according to industry body Euro IRP, squeezing brokers’ bottom line.

Although Deutsche Bank’s pursuit of Numis suggests that Germany’s biggest bank expects an eventual recovery in London listings, the dwindling number of IPOs will probably continue for a while, said Lord Howard Leigh, senior partner of advisory firm FinnCap Cavendish.

“In the listings market, that business has dried up and you’ve got very expensive overheads, so there has to be consolidation,” said Leigh. “It’s 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 attempted to get on the front foot by pushing into new business lines and expanding internationally.

Ross Mitchinson, co-chief executive of Numis, said it had made a “concerted effort” to grow a business that provides M&A advice, as well as working on overseas IPOs and helping private businesses with fundraisings. “We’ve definitely done more to diversify our business over the past few years rather than be at the whims of the UK capital markets,” he said.

Earlier this month, Numis said that “capital markets volumes are likely to remain relatively low over the near term” although it noted the second half “may see relatively better conditions”.

Kunal Gandhi, a senior managing director at Fenchurch Advisory Partners, said other struggling brokers will also be working to cut their reliance on the equity market for revenues.

“There’s growing recognition by brokers of the need to have access to more than principally listed equities as the primary product to service clients,” he said.

But pushing beyond equities is unlikely to be a quick fix, paving the way for more deals. As one broker chief executive said: “It’s been a dreadful 18 months and it feels like that’s going to continue for a little bit longer.”