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Jefferies eyes gains from rapid FIG build-out

Jefferies company logo on a website with blurry stock market developments in the background, seen on a computer screen through a magnifying glass.

The US investment bank expanded at pace over the past decade and now has put one of the final building blocks in place in its quest to match its big US rivals, writes David Rothnie

If proof were needed of Jefferies’ transformation from scrappy outlier to mainstream investment bank, it is that its quarterly results are now seen as a bellwether for the industry.

The last remaining US broker-dealer reports a month ahead of rivals, and on June 27 it provided hard evidence to support the narrative of recent weeks, illustrating the strength of trading offset by a slump in capital markets activity.

Net revenues in Jefferies’ investment banking and capital markets business fell by a third to $2.6bn in the first six months. Within that, capital markets revenues across debt and equity were down by 60%, while advisory revenues fell by just 5%. Trading revenues fell 17%, as an increase in equities was offset by a slump in fixed income.

Richard Handler and Brian Friedman, CEO and president of Jefferies, said the results were “reasonable in the face of extremely challenging capital markets” while remaining “optimistic of our long-term growth”, adding: “We have invested heavily in human capital throughout Jefferies over the past decade, and in particular these past two years.”

The bank has added 500 staff globally in the past 12 months as it continued its quest to build a platform to match its big US rivals. Its latest push is in many ways its most ambitious — the build-out of a global financial institutions group (FIG).

Over the past decade, Jefferies’ often breakneck expansion has followed a similar pattern. After successfully exporting its sell-side financial sponsor offering to Europe from the US, it has built out a series of global industry groups by hiring teams of bankers from rivals undergoing strategic upheaval.

A rapid hiring offensive

It deployed that playbook last May in FIG with a swoop on Credit Suisse, which was reeling in the wake of the Archegos trading scandal.

Jefferies began the hiring ofensive by recruiting Alejandro Przygoda, the Swiss bank’s former head of global FIG, along with a number of his New York-based colleagues and European head Armando Rubio-Alvarez. A few weeks later, senior members of Credit Suisse’s FIG team in Europe, led by Rubio-Alvarez, quit to join Jefferies.

Since then, the build-out has been eye-catching, with Jefferies doubling headcount in its global FIG team to more than 70 bankers. In Europe, since Rubio-Alvarez took the helm as head of European FIG in September, he has increased headcount in the region from seven bankers to 37, including the recruitment of seven managing directors.

In headcount terms, it still lags behind leading firms such as Morgan Stanley and Goldman Sachs, which have between 40 and 50 FIG bankers in Europe, according to estimates, but it’s still a significant push from what was virtually a standing start.

FIG is traditionally one of the biggest revenue generators for corporate financiers and accounts for roughly a fifth of the European fee pool, so any bank with bulge-bracket aspirations needs to have a meaningful presence.

Strictly speaking, the FIG expansion is a reboot rather than a new launch — Jefferies had a small FIG team in the region before but it had failed to gain traction. What’s different this time, according to Rubio-Alvarez, is that Jefferies has a much broader offering.

“The European platform at Jefferies has gone from strength to strength in the last three years — and not only in investment banking,” he says. “The fixed income business has become increasingly sophisticated and relevant as a provider of origination, market making and insights to our clients.”

In FIG, collaboration between markets and corporate finance is an important success factor.

“The fixed income offering is relevant to be able to support our FIG clients with DCM activity, asset-backed financing, CLO solutions and other structured financing,” Rubio-Alvarez adds. “This is particularly relevant for the non-bank lending platforms, for fintech platforms that really require a bit more sophisticated financing — whether asset backed securities or other types of financing.”

At the same time, Jefferies has broadened its capability in equities. “From a research standpoint, Jefferies remains a force and there has been increased investment overall in the equities division to increase sales force and research coverage, which is pretty [different from] what others are doing,” he says. “We now also have a global equity derivatives capability.”

Having each other’s backs

Rubio-Alvarez, who combines his role as head of FIG with being country head of Spain and Portugal at Jefferies, says it helps working with a tight group of former colleagues. “We have a mission to create a successful FIG team globally with an aspiration to be competing in the major league and leveraging on the strengths at Jefferies.”

As both co-head of global investment banking and global head of FIG, Przygoda is leading this global effort, complemented by the recent hire of Michael Tan in Asia. In Europe, the team has senior bankers such as George Maddison, who also joined from Credit Suisse last year along with Marco Staccoli and Hugh Man. Meanwhile Graham Davidson, who joined for the initial push in 2017 from Perella Weinberg, is another pivotal member of the team.

“We know where our strong relationships are, so it’s about plugging that team into the platform,” Rubio-Alvarez says.

The Jefferies platform may not suit everyone — bankers survive on their ability to originate deals and pay is skewed heavily towards performance. Tales abound of bankers who leave early having to pay back a portion of their upfront cash bonuses. But it has proved a magnet for entrepreneurial souls and the incentives to succeed are there, not least in the fact that Jefferies’ corporate finance business generates 60% of group revenues, while sales and trading account for just under 40%, with asset management making up the rest.

In other words, Jefferies has no option but to make this work. Rubio-Alvarez says Jefferies’ overall strategy in FIG remains unaffected by the current market dislocation. “The plan has not changed but the tactics to achieve it are shifting and that’s where the agility of Jefferies is an advantage. In a large bank the IB may only be 20% of the overall business but here it’s all about the IB.”

That agility is clear from rapid build-out of the FIG DCM business which Rubio-Alvarez oversaw from scratch after spotting an opportunity in hybrid bank capital; in November he hired former Credit Suisse colleague Samir Dhanani as head of the new team, called FIG solutions and debt capital markets.

M&A to the fore

While Jefferies is building the broad platform to make FIG work, Rubio is adamant that M&A is the most important product. “We are advisory-driven and we are focused on sponsor-driven M&A and also on selected large clients which are active from a M&A standpoint,” he says. “M&A drives the ancillary activity. Another product which is relevant is private capital. We have a strong private capital practice that allows us to create synergies as well with our team. FIG clients own or have ambitions to grow in fintechs, private equity funds, venture capital funds, etc, so there is a whole ecosystem that we are focused on.”

FIG is a counter-cyclical business when it comes to M&A. Rubio-Alvarez sees that the current market dislocation and the way it is affecting valuations could spark activity. “The world is changing: what didn’t make sense eight months ago maybe makes sense now. Certain situations may get unlocked.

“Sponsors have become a lot more relevant in FIG. It’s still a quarter of total FIG revenues but it’s increasing and they are becoming more and more relevant, particularly in fintech and diversified financials. Our collaboration with the technology team is seamless.”

But when it comes to the question of cross-border banking consolidation in Europe, Rubio-Alvarez is more circumspect. FIG bankers at rival firms agree that Royal Bank of Scotland’s disastrous acquisition of ABN Amro, combined with the steps taken by regulators since the financial crisis, mean that the creation of a European banking champion remains a distant prospect — notwithstanding the recent rumours concerning State Street making a possible bid for Rubio-Alvarez’s former employer.

Rubio-Alvarez, who wouldn’t be drawn on that, says: “I still see large-cap bank consolidation as extremely difficult. These banks are clean, well-capitalised and protected by recent fiscal policies. There will not be much distress there — and even if there were the prospect of deals, it remains a very jurisdictional political debate. Any cross-border activity in Europe is always going to be a big challenge for regulated institutions.”

Instead, FIG bankers say that the next wave of deals in the sector will be based around banks building scale in certain geographies and products, often with smaller transactions, such as Barclays’ acquisition of Kensington Mortgages, announced last week.

Even in the absence of big-ticket deals, there is plenty of white space for Jefferies to aim for. “We continue to invest in our business and have clear strategic ambitions. The European FIG space is big and if we can grow the pie further, then we will.”

Early signs of progress

Sceptics might point out that matching bulge brackets in terms of headcount is one thing, but going toe-to-toe on deals is another.

Rubio-Alvarez can point to early progress, such as Jefferies’ role as a bookrunner on the $800m capital increase by Israel’s Bank Leumi as indicative of the type and size of business Jefferies is looking to do. That deal also reflects the current market environment where banks such as Bank Leumi and Italy’s Banca Monte dei Paschi di Siena, which announced plans to raise €2.5bn by the end of the year to underpin a new strategic plan, are looking to bolster balance sheets if, as many predict, a recession bites later in the year. Jefferies also acted as sole adviser to Athens-based payments fintech Viva Wallet on the sale of a 49% stake to JP Morgan at the start of the year.

Over the past decade, critics have learned to write Jefferies off at their peril as it has established itself as a top 10 player in corporate finance by fees globally and in the US, according to Dealogic. It has yet to achieve similar standing in Europe but it is in better shape in the region than ever before. It finished fifth last year in the UK investment banking rankings, a statement of intent in the region’s biggest corporate finance fee pool.

“In terms of being measured over the next five years, it is about our FIG team becoming a consistent, visible adviser in Europe on transactions that matter,” says Rubio-Alvarez. “We care about delivering a differentiated service with passion and care about our clients, helping them achieve their most important strategic ambitions. If we do that, success will follow.”

The FIG build-out might just prove to be the final piece in the Jefferies jigsaw.

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