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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Small- and mid-cap brokers in the UK, like boozy lunches, are an imperilled breed. No surprise then to see Peel Hunt, itself a vocal doomsayer, say this week that it had slid into the red last year.
Playing comprador to companies on a shrinking stock market is a tough task. Peel Hunt advises companies on their strategy, publishes equity research and acts as a market-maker for investors. But small companies pay small retainers — Peel Hunt averages under £60,000 per client. Subsequent deal fees are thin on the ground in a market characterised more by exits than entrances. European rules known as Mifid, designed to eliminate conflicts of interest between research and share trading, have crushed research commissions.
Brokers do nonetheless have something of a niche left. While there are fewer of them than there were, owing in part to mergers, UK companies still need their services — especially those that do not have Wall Street’s top advisers clamouring for mandates. Masters of the universe don’t go chasing after retainers of sub-£100,000.
Smaller brokers don’t need a full hand of winners. If 30 clients of a 100-strong list carry out M&A and another third raise funds, the typical firm can afford for the balance of its clients to tread water, assuming it can take a cut from facilitating trades in their shares. Old hands reckon a more proactive broking community would help too, generating ideas to pull in trading income rather than waiting for investors to take the initiative.
So much for revenue. Cost-cutting has proved tougher — especially for those who want to preserve the quality of their coverage. Peel Hunt boss Steven Fine has a rule of 15: any sales person, banker or analyst becomes too stretched if coverage extends beyond 15 tier one clients or public companies. The group’s headcount is much the same as it was in 2022.
The industry was among those that boomed during the pandemic, with volatility and armies of homebound day traders sending volumes higher. That encouraged brokers to ramp up staff and other costs. External influences also make it harder to prune the overall cost: inflation and added national insurance burdens swell the base.
Consolidation is part of the answer. Look at last year’s coupling of Panmure Gordon and Liberum. The merged entity is on track to meet targeted revenue of about £100mn — roughly matching their combined tally during the 2021 peak — with about three-quarters of the overheads. This is despite the overall client list falling by roughly a fifth to around 200, driven by companies being taken over or going private.
Consolidation has further to go and there may well be another casualty or two. But it’s easy to overstate the extent to which corporate broking, a peculiarly British industry, is going the way of the dodo. There’s room in finance for a little UK exceptionalism yet.
