Paternoster Square from above

A new era of corporate broking

There has been, if not a wave, then at least a steady trickle of consolidation in the broking sector in recent times with finnCap and Cenkos (together now rebranded as Cavendish) tying the knot last summer, Deutsche Bank acquiring Numis soon after and as announced last month Panmure Gordon and Liberum confirming their merger, subject to the usual approvals.  Not so long ago Altium was bought by GCA which was bought by Houlihan Lokey and there are others besides.  And, according to the rumour mill, we haven’t seen the end of it.  For example, Bloomberg (January 2024), amongst others, has reported rumours of Peel Hunt becoming a takeover target.

Arguably the City was overbroked anyway. It is roughly 6 years ago (January 2018) that the EU implemented the regulatory directive Mifid II with the aims of increasing competition and investor protection, but the journey has not been smooth and naturally there have been unintended consequences.

Mifid II, requiring the unbundling of research costs from transaction costs, meant brokers and investment firms had to explicitly charge their clients for research. This in turn led to changes in the way research was consumed and indeed valued, impacting the business models of research providers and ultimately reducing the overall quantity and quality of research available.

The directive has placed a disproportionate burden on smaller and mid-sized brokers and their equity research analysts, hindering their ability to compete with larger institutions.  Indeed, the shift in the pricing model for research has greatly resulted in reduced coverage of smaller companies.

Whilst Mifid II has not exactly given the much-needed boost the smaller end of the market needed, the challenges have now been exacerbated by the dearth of IPOs and the plethora of take privates.  Brokers are having to work doubly hard to maintain a healthy pipeline of corporate clients.

Throughout this drought of fundraising activity, some of the smaller brokers have expanded internationally or diversified into areas such as debt advisory or private growth capital but it’s consolidation that is proving a popular option. 

So what does it mean for corporates? On the one hand, assuming these mergers and acquisitions are executed well, they ought to result in stronger brands with greater toolkits and, after the initial and inevitable bloodletting, a better quality of people and advice. On the other hand, it means a smaller market with less competition and less research. A smaller pool could potentially result in increased fees. Small caps may also find it harder to attract independent research coverage, essential for raising visibility and attracting attention of investors. Less research will consequently result in lower liquidity, making it more difficult for investors to buy or sell at a suitable time and reasonable price – a vicious cycle.

The changing regulation has indeed prompted companies to take charge of their own affairs, employing IR specialists to develop engagement plans, be more transparent and increasingly more creative with communicating their investment cases. Digital IR strategies are becoming more commonplace, as well as cost effective ways of reaching investor audiences.

This is inherently good news for the IR industry – both the in-house IR function and external agencies like Hudson Sandler who can act as either an outsourced role or offer that external perspective.  A shrinking broking universe will only serve to continue this trend.