In a world where investment banks are seeking to capture global capital flows and grab market share in fast-growing emerging markets, investing in corporate broking might seem low down on the priority list. In fact, it remains one of the most competitive areas of banking and is a central plank of every global firms UK strategy.
Corporate broking is the means by which banks fight for supremacy in UK investment banking, which is the biggest fee pool in Europe. It is not just that every big bank has a corporate broking business, but more that it is impossible to break into the top five without a presence in corporate broking.
It is in the throes of its fiercest battle due to a confluence of factors. New entrants are shaking up the established order by targeting their client lists and through aggressive poaching raids. And where they cannot break the hammerlock on the most prestigious broking accounts, they are taking the fight to the middle market, where banks are ploughing resources into fast-growing companies in the hope of locking down relationships with the blue-chips of the future.
At the same time, the boards of FTSE100 companies are changing and the next generation of chief executives and finance directors are reviewing their rosters of advisers. Since January 2010, around one third of the FTSE100 have changed their brokers and more changes are expected in the coming months.
Every UK listed company deploys the services of a corporate broker, whose job is to act as an interface between the company and its shareholders. The company pays an annual retainer but the broker will earn fees when the company looks to raise equity. It is characterised by a stable hierarchy, which serves both to frustrate and encourage new entrants in equal measure. "Corporate broking relationships are probably the stickiest of any and that is what makes the business so attractive to new and established players alike," says Nick Donald, head of UK equity capital markets at HSBC.
It is this stickiness that impressed the management of Bank of America during the tumultuous months that followed its acquisition of Merrill Lynch. As the writedowns continued and Bank of America battled to keep Merrills London-based investment banking operation together, they noticed that one small area of the bank was enjoying a bumper year. Merrill was a top three corporate broker by number of FTSE100 brokerships and was therefore omnipresent on the record number of equity issuance by blue-chip corporates during 2009. "Management and our rivals saw how important those broking clients were," says one managing director. "When business everywhere was as bad as it was, everyone was scrambling to get on these deals and we were at the centre of them because of our business."
The power that a corporate broker can wield was not lost on Barclays Capital, which began building a corporate broking business from scratch in 2009. Its aim is to break into the top three by number of FTSE100 brokerships and since the formal launch of its operation in 2010 it has won seven blue-chip clients. "New entrants in corporate broking have forced incumbent providers to raise their game," says one head of corporate broking. "Once you have built the business, there are no new approaches to corporate broking its about providing a consistently excellent service to clients and ensuring you have the best people to do it."
Personal relationships are central to corporate broking and that is why a new market entrant can build share and damage a rivals business in a short space of time. While banks tend to institutionalise their most important corporate relationships, company chief executives and finance directors forge personal relationships with their corporate brokers and in many cases will switch relationships when the favoured broker switches firms.
Brokers say the last time the sector was in a similar state of flux was 2005, when Morgan Stanley entered the market in dramatic fashion, poaching a four-strong team from Merrill Lynch that triggered a broader recruitment merry-go-round. Merrill hired brokers from Hoare Govett, which was then plundered by another integrated firm, Citigroup, when it took a seven-strong team as it beefed up in corporate broking.
This time, it is Barclays Capital making the recruitment waves, hiring Jim Renwick from UBS and Alisdair Gayne from Morgan Stanley but unlike 2005, there has been little in the way of retaliatory recruitment.
At the same time, JP Morgan forged a joint venture with the UKs leading broker Cazenove precisely because it saw the potential of a client list that included almost half of the UKs biggest companies.
During that period, corporate broking moved from a parochial pursuit and into the mainstream of investment banking, but not always with the best results. "Many banks have turned corporate broking into a UK coverage business, which can mean that clients do not get the best equity market advice," says Gayne, who is now head of corporate broking at Barclays.
The successful broking business will combine personal relationships with institutional coverage. For broking to work, it must be a business in itself, rather than a Trojan horse through which to push other products. Gayne says: "Broking is central to the institutional relationship. Typically our broking clients have an existing relationship in another area of the bank."
Consequently, some banks saw broking as the ultimate tool for cross-selling to UK PLC and got themselves tangled in conflicts. "There were a number of companies which came out of the credit crisis and found that their brokers had not always been there," says Nick Bowers, co-head of UK corporate broking at Deutsche Bank. "Investing in the business is crucial to ensure the same level of service across all clients."
Building a broking operation requires investment and patience, with brokers measuring success in years rather than months, but a banks management and shareholders often want a quicker return. Regardless of the rhetoric that banks employ they are building an institutional relationship rather than cross-selling the end result is often the same. The aim of being a corporate broker is to cement a relationship that will lead to ancillary business. Last year, Barclays Capital was broker, financier and adviser to Resolution on its acquisition of the UK life business of French insurer Axa.
"Since the crisis, some companies have wanted a more integrated relationship with their banks and they would expect to develop a broader relationship with their broker," says Bowers. "Our broking operation is a discrete business but it is part of our integrated coverage effort."
While companies want specialist advice on what moves their share price, they are also looking for balance sheet support. "Chief executives remember the support they received during and after the credit crisis going forward they want to know they have the right group of banks to advise them," Bowers adds.
Tweaking the model
The crisis has had a particular effect on corporate broking because it has forced banks to look at their client lists and prioritise the most lucrative ones, or those that have the most potential to grow. Newcomers have targeted clients that they perceive are being neglected, or where they see a shift in emphasis. The full acquisition last year of Cazenove by JP Morgan could prove a catalyst for those banks that have laboured for years to dislodge the UKs leading broker. "All of those brokerships are institutional relationships held by Cazenove," says one rival. "JP Morgan is developing a corporate banking presence through building its lending relationships so some of those clients could be up for grabs."
Both the mood music and regulatory landscape in banking have changed since the crisis and corporate broking has been a beneficiary because it is a client business that does not consume capital or require a firm to take a position. "However, winning corporate broking beauty parades is one thing, but getting to 20 or more brokerships requires consistent investment and a breadth of coverage that not every firm can commit to," says Bowers. For a start, having a fully-fledged equity sales, trading and research division is regarded as a vital component for a firm seeking to establish a leading position in corporate broking.
However, there are some firms that are taking a niche approach to the business by seeking to focus on an area of the market where they have expertise. For example, as part of its expansion in European investment banking RBC Capital Markets has launched a corporate broking operation that will serve its big roster of clients in the metals and mining sectors.
This is an alternative approach to the pursuit of as many corporate brokerships as possible. HSBC is taking a different tack that plays to its strategy of being financing focused. "We offer broking and strategic equity advisory services as part of our equity financing proposition to our global banking clients," says Donald.
This is a similar strategy deployed by Royal Bank of Scotland, which has a deep lending relationship with UK PLC and has been adding broking since its acquisition of Hoare Govett, which came with its purchase of ABN Amro in 2007.
Firms such as Credit Suisse and Goldman Sachs, which have established broking businesses, take a similar franchise view in that they offer an integrated investment banking service that includes broking to their most important clients. In a similar way Morgan Stanley, a leading M&A adviser, seeks to broaden the relationship with its existing advisory clients. "While there is no guarantee that a brokership will lead to a M&A mandate, the broker is in the flow and is arguably best placed to provide defence advice in the event of an unsolicited bid," says Bowers.
The glut of rights issues in 2009 led to tensions between rivals as corporate brokers complained that their clients were being pressured into giving lending banks a seat at the table in equity capital raisings. This aggressive approach may have given some banks visibility in broking, but it does not make for a profitable business. "Being a companys broker means you are the co-ordinator on any rights issue," says one ECM banker. "Forcing your way on to the ticket as a co-manager earns you a fraction of the fee and does not constitute a proper broking presence."
Big corporates are divided over whether they want a broker to offer other services. Some want to do business with a smaller number of banks and run integrated broking pitches on the understanding that the winning bank will be a lender, adviser and broker. Others prefer a more arms-length approach. For example, in 2009, Vodafone replaced UBS and Goldman Sachs with Citigroup and JP Morgan as its long-standing corporate brokers. Since then, both Goldman and UBS have continued as the companys M&A advisers. Meanwhile, oil giant BP prefers to use advisers only when it has to.
The next M&A cycle will decide the winners and losers of the latest shake-up in corporate broking. While being a retained broker more or less guarantees equity business, it does not follow that other business is up for grabs, a point that banks must heed as the M&A recovery kicks in. "Over the last few years, investment banking activity has been very focused around refinancing," says one. "Now that corporate balance sheets have largely been repaired, I would expect M&A to become an increasing focus for corporates."
This goes to the heart of the economics of corporate broking. When deciding on their strategy in corporate broking, banks must ensure their interests are aligned with those of their clients. So if they want a clients M&A business, they should focus on those companies that are open to having an integrated relationship or where they think they have an angle. While corporate broking relationships are long term and involve strategic dialogue with the companys board, they do not guarantee a seat at the table when the board presses ahead with a M&A deal. Equally, if being a broker to one company prevents them from advising a rival in the same sector, they could be shutting off another potentially better revenue stream.
Instead, banks are tempering their reliance on the biggest companies by building out a mid-market broking presence.
"We believe that a balanced approach is the way to build a sustainable broking business," says Gayne. "Fifty percent of our broking clients lie outside the FTSE100 and that is a ratio we would be happy with going forward."
There is a push underway at big banks to capture mid-market broking mandates and many have a dedicated mid-cap broking initiative underway. "The benefit of serving the mid-market is that you are identifying fast-growing companies that have the potential to grow by acquisition and are likely to require access to the equity and debt capital markets," says HSBCs Donald.
This is particularly true in the oil and gas sector, where banks have reaped rewards of nurturing companies in their early days. Bank of America Merrill Lynch started acting as broker to Cairn Energy when it was a £7m company it is now a FTSE100 heavyweight with a market capitalisation of £5.8bn and recently sold its Indian subsidiary to Vedanta. The bank has recently started acting as broker to PetroCeltic and Bowleven.
The scrap for mid-market supremacy is almost a fierce as the battle being played out in the FTSE100 and in many ways it is more important. Trophy blue-chip brokerships bring prestige, but they may no longer pay the big fees and as sophisticated users of investment banking services, might rotate advisers or use in-house M&A teams on deals. By contrast, mid-caps are the revenue generators of the future. Deutsche has 20 mid-cap clients below the FTSE100 and is looking to double that number of the next year, while JP Morgan Cazenove, Bank of America Merrill Lynch and UBS boast dozens of non-blue-chip names between them. At the same time dedicated mid-cap brokers like Numis, Collins Stewart and Investec are beefing up their presence, and broadening their corporate finance offering to include advisory and lending.Since the jumbo rights issues of 2009, corporate brokers have had little to shout about in terms of business. Pitching and winning new brokerships is one thing, but banks will hope that when the next round of upheaval is over, they will have picked the right horse. Simply amassing blue-chip brokerships as a glorified marketing exercise is not an option. "Banks must take a long term view of broking because the model does get questioned if revenues do not come quickly," says Bowers.