Liberum’s quest to borrow a big balance sheet

David Hellier
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THERE can be no doubting that the long-expected consolidation in the small to mid-cap broker market has well and truly begun. In the past few weeks there have been deals to buy Ambrian (RFC), Arbuthnot Securities (Westhouse), Evolution (Investec) and Merchant Securities (Sanlam). Such deals follow an earlier transaction in February of last year when the Portuguese Bank Espirito Santo bought a 50 per cent stake in Execution Noble, one of the City’s larger mid-cap brokers, for £50m.

As the deals progress, uncertainty hangs over many of the employees in the sector. Evolution employees, for example, have several more weeks to wait to hear their fate as a result of Investec’s recent £200m deal to buy the broker. Evo was considered prestigious enough to be on the ticket advising Nat Rothschild, Tony Hayward and Julian Metherell in their money-raising exercise for their blank cheque company Vallares.

In such an environment, all the major players in the industry are examining their options. One such is Liberum Capital, the well-respected independent broking house that managed to win itself a seat in the room for one of London’s biggest IPO of all time, the recent flotation of Glencore.

Liberum, whose chief executive is former Collins Stewart and Beeson Gregory stalwart Simon Stilwell, walked off with a sizeable fee for its advisory and research work on Glencore – the firm possesses one of the best respected experts in the commodities trading sector in former Cazenove star Michael Rawlinson – but did not maximise its potential, by being unable to participate in the underwriting for the issue.

Hence, Liberum, I have been told, has in recent weeks been holding tentative talks about “borrowing a balance sheet”, which would mean coming to an agreement with a third party bank that could provide it with the balance sheet presence it might need in future Glencore-type situations.

Such agreements are not unknown. Oriel Securities, for example, has had tie-ups with the likes of Scotia Bank and Standard Bank, to help it offer clients the kind of financial firepower on underwritings and fund-raisings it can not offer off its own back.

And Peel Hunt, which was bought out from KBC by its management, has an agreement with Credit Suisse, whereby the Swiss bank provides a credit line to the broker’s trading side.

Then there’s the famous example of JP Morgan and Cazenove, where JP took a big stake in the blue-blooded broker in a move that later heralded a fully fledged takeover when the two had gotten to know each other better. Liberum is adamant that this is not the kind of thing it has in mind, but has its heart set on something more along the lines of the Oriel or Peel Hunt model, I am told.

Some in the City, however, are intolerant of the “borrowing” of a balance sheet idea, and are quick to write it off as a means of going forward. “I’m incredibly sceptical of the idea,” one banker told me. “In real life it doesn’t work because the client wants to know that you’ve got the go-ahead for an underwriting but in reality the bank you’re partnering with will want to assess the situation for itself and may well reject it – and the whole process could take some time.”

Liberum, which is growing strongly in its current guise as a fully independent employee-owned broker with revenues around £47m last year, stresses that it doesn’t need to do any deal with its balance sheet to grow further. It is in any case keen on organic growth in regions where it sees huge potential, such as in the China and Hong Kong region. But there will clearly be some interesting conversations in the weeks ahead.
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