Jefferies' European IB engine starts to purr
Jefferies has enjoyed a record year in European investment banking, powered by equity capital markets, writes David Rothnie.
Jefferies has been affected more deeply than a lot of other financial institutions by the Covid-19 crisis — its long-standing and much-revered chief financial officer Peg Broadbent died in March from coronavirus complications. The firm's tight-knit staff donated $9.2m in trading revenues to charity in his memory.
Broadbent was a central figure in the global expansion of Jefferies over the last decade and, alongside the charitable donation, a fitting tribute is that the bank is on course for record revenues in 2020 on the back of the successful expansion of its European investment banking division, led by its work on capital raisings for clients.
“From an equity capital markets perspective, it’s been a foundational and break-out year. We have been active with clients in technology and healthcare, capitalising on their strong stock prices and raising capital opportunistically. And we’ve also helped companies raise capital to offset challenging circumstances arising from the pandemic,” said Dominic Lester, head of European investment banking.
It has worked on marquee trades in the region like a convertible deal for Delivery Hero, the listing of The Hut Group and a rights issue for troubled UK engine maker Rolls Royce. “These three deals demonstrated our total commitment to our clients in ensuring they get the outcome they want and earning the trust they place in our capabilities,” added Lester.
Proof of concept
Trying to establish an ECM business is a bit like a catch-22 situation: to win a lead role on deal you need a track record of success, but you cannot gain a track record without winning a lead role.
Jefferies has been talking up its capabilities for a while, but the work it did as a bookrunner on the Hut IPO, when it arranged 237 pre-deal investor education meetings, proved to be a breakthrough moment in terms of proof of concept.
The starting point was Rob Leach, the bank’s head of capital markets for Europe, the Middle East and Africa. Leach knew The Hut Group from his previous role running capital markets at BlackRock, which invested in Hut as a start-up. Once Leach had established contact, Jefferies was able to bring in California-based industry specialist Shaun Westfall, who heads the bank’s global coverage efforts in the beauty, personal care and wellness sector. This is one of 40 sub-sectors the bank covers, more than many of its bulge-bracket rivals.
Its track record in the luxury and consumer goods sectors meant it was invited to work alongside Goldman Sachs to advise Charlotte Tilbury on the sale of a majority stake to Spanish fashion group Puig.
Rolling with Royce
Meanwhile, the arrival of Chris Squire from RBC Capital Markets 18 months ago added expertise in the industrials sector and helped Jefferies on the rights issue of Rolls Royce, which it serves as a long-standing corporate broker.
Jefferies worked on the deal with Morgan Stanley and Goldman Sachs, and as one company insider said, it outshone its rivals, which are understood to have scaled back their underwriting commitment, prompting Rolls to bring a string of lending banks on board to shore up the deal. “Jefferies was the only one of the original bank group to stick to its commitment,” said one market source.
The original relationship with Rolls Royce dates back to Hoare Govett, the broker it purchased from Royal Bank of Scotland eight years ago. That acquisition has proved to be a milestone in its ascent to the mainstream of UK investment banking. Another pivotal moment was the recruitment in 2018 of Philip Noblet to run UK investment banking, as well as the hires of managing directors Paul Bundred and Tony White.
“In the UK we are working as global coordinator on six IPOs in excess of $1bn,” said Noblet. “We’ve added 34 clients since January 2019. That momentum has led us to get enquiries from companies that weren’t previously on our target list. Our last three RFPs [requests for proposals] came from companies that Jefferies did not research.”
This run has propelled Jefferies to eighth in the UK corporate finance fee rankings during the first nine months of 2020, according to Dealogic. It was also ranked ninth by ECM fees in EMEA and fourth in the region’s IPO bookrunner rankings in the first nine months of the year, up from 28th in the same period a year ago.
Jefferies has built on the broking list it inherited from Hoare Govett, maintaining a sprinkling of FTSE clients but doubling down on its mid-cap heartland. “We have taken on 15 clients during lockdown,” said Noblet, adding: “It’s fair to say during the intensity of March, April and May mid-cap companies wanted a broker that was 100% all in and totally focused on them. Some companies felt they weren’t getting that and that’s what led them to make changes in their broking line-up.
"High-touch client service is what we do, from having the high-quality research, from having Europe’s largest sales team, from having sector teams and having experienced brokers who are not just chasing the biggest deals because the fees are higher.”
Jefferies hopes it is an approach that will enable it to maintain its position even as bigger banks target the mid-market. HSBC has a dedicated mid-cap UK advisory push, while Goldman Sachs is trying to win growth companies with its cross markets initiative.
Lester says Jefferies has maintained its focus on strong research and sector capability even as other firms like Nomura or Deutsche Bank have retrenched. “We’ve never cut back on our sales and distribution platform. We’ve never believed you can sell new issues of equities through a call centre or electronically. We’ve always believed you have to cover the long tail of institutional investors. Equities has always been a profitable business for us, probably because of our sector expertise.”
He has overseen Jefferies' European push for the last decade, hiring dozens of bankers along the way as he has built out sector teams and geographic coverage. The bank has 277 investment bankers in EMEA, of which 54 are managing directors, 45% of which have joined in the last three years. These investments are starting to pay off.
This is the case in Germany, where Jefferies has enjoyed a revival. It has had an investment banking presence in Germany for more than a decade, but progress was initially fitful and in the early days it struggled by trying to compete head-on with bulge bracket rivals for the biggest deals.
When Lester took over Europe, he initially refocused the business with Alex Hofmann focusing on mid-cap sell-side M&A, then last year he recruited a team of capital markets bankers from Berenberg under Oliver Diehl, who Lester knew from his time at UBS. The bank also hired Ulrich Boeckmann — a sponsor specialist — from Barclays as head of investment banking coverage for Germany, Austria and Switzerland, and Berthold Müller, a former senior banker at BNP Paribas with strong relationships with industrial companies among the German Mittelstand.
“We have assembled a cohesive group of complementary individuals. Many of our team have long-standing experience at other bulge-bracket banks where they no longer felt they could work closely with clients,” said Lester.
This is a common theme at Jefferies: it attracts investment bankers with an entrepreneurial bent who have meaningful relationships. The bank’s investment in its German operation is starting to pay off, with a role advising Siemens on the sale of its power generation business, while it also worked as global co-ordinator on the €115m listing of Brockhaus Capital Management in Frankfurt.
The bank has also pressed on in France, where it hired Muriel Petit, a well-known luxury goods and consumer banker from BNP Paribas. “Our French office will be focused mostly on execution of consumer, health and tech M&A deals. Our effort in ECM will primarily be on growth companies that want to access global investors,” said Lester.
The bank has also been winning business from sponsors in France, and is understood to be advising PAI Partners' ELITechGroup, a manufacturer of temperature and humidity monitoring products in the healthcare and food sectors, on the sale of its molecular unit.
Jefferies sees an opportunity in France from the global expansion of domestic private equity firms like PAI, Eurazeo and Astorg. “A lot of the French sponsors are becoming very global and many of them have approached us because they want to do business in the US,” said Lester.
Jefferies could use this as a platform to fill in the missing piece of its investment banking jigsaw in Europe: leveraged finance. In the US, it has established a top 10 presence in the provision of leveraged loans to financial sponsors on the back of its M&A business, but it has been more cautious in Europe, where the market is crowded.
Lester says: “In Europe, there are more providers of leveraged finance than there are in M&A or equity capital markets. Each country has its own banks that will provide leveraged finance, so there’s a lot of competition and the returns are less lucrative than in the US.
"From a pricing perspective it’s difficult to be competitive unless there’s a specific situation where we’re involved in the M&A. So our leveraged finance business is focused on clients where we are truly an insider on the transactions and the financing is a facilitator of M&A.”
Jefferies will enter the next phase of its development without Ben Lorello, who is stepping down as global head of investment banking to look after his family. After joining in 2009, Lorello has led the firm’s global expansion and established a reputation for his hard-charging style. Lester has known Lorello since 1991 and they worked together at UBS from 2000 to 2009. “He deserves a lot of the credit for achieving scale and success in Europe in such a short period of time," he says.
Lorello’s retirement means that Chris Kanoff takes interim charge, with sources saying a permanent appointment will be made in the coming months. It is a mark of the progress Jefferies has made under Lorello that it can consider appointing a less autocratic successor.
Jefferies is playing to its strengths — it is looking to dominate the mid-market as a traditional investment bank. It is, after all, the last broker-dealer left on Wall Street after Goldman and Morgan Stanley changed their regulatory status following the financial crisis of 2008.
It has also got an eye on moving up the transaction food chain, targeting more deals in the $1bn to $5bn size bracket across both ECM and M&A. In the past, this is the point at which pushes by other firms have foundered, as they end up competing head-to-head with bulge bracket investment banks. In 2020, Jefferies has proved to be on a par with these names when it comes to execution and balance sheet commitment.