Investment banks search for any port in a storm amid City’s dealmaking slump

It has not been a pretty year for London’s small investment banks and brokers. Just two years ago, the likes of Peel Hunt and Numis were making hay as a pent-up post-pandemic deals frenzy ripped across the market. 

A total of 108 firms floated in the capital in London in 2021, more than the previous two years combined, and dealmaking touched near record levels in the City and beyond.

The past two years have been a different story. A drought in IPOs and a muted dealmaking environment have pushed a slew of London’s mid tier investment banks into the red.

Peel Hunt on Tuesday revealed it had swung to a £0.8m loss in the first half of its year due to what chief Steven Fine described as a “challenging market backdrop”.

Numis eked out a £6m profit in the first half of its final year, FinnCap made a £6m loss, and firms like Liberum, Cenkos and Panmure all felt the pain as fees dried up.

As the slowdown continues to squeeze fees, many of those firms have been scouting out deals of their own. And with the market showing little sign of genuine green shoots, analysts reckon another wave of consolidation could be on its way in the year ahead.

“Competition [for clients] is not a bad thing, but it’s going to be brutally competitive right now. It’s hard work to win mandates and win deals,” says Neil Shah, head of research, at investment analysis firm Edison.

“It feels like there’s too much capacity out there. I do see the possibility of more M&A activity, more consolidation in the space.”

The City’s slump

Just 23 companies have IPO’d in London this year, down from 45 in 2022.

Cash raised via fresh listings on London’s bourse fell 36 per cent in Q3 to £360m

M&A deals with any UK involvement have a total value of £144.7bn in the year to date, down 45 per cent on levels seen last year,

London’s smaller end of the stock broking and investment banking market has already been shaken up by two notable tie-ups over the past 12 months.

Peers FinnCap and Cenkos agreed terms of a £43m all-share tie-up earlier this year after revenues and profits at both firms took a dent from lack of activity. 

Numis was then picked off by Deutsche Bank in April after its half-year profits slumped 55 per cent.

They all do largely the same thing. And they’re largely competing for the same business

While many in the market viewed them with some scepticism as defensive plays, they argue there is strategy. Numis, for example, now has a route to sell its services into larger clients and retain firms as they grow. Deutsche now has a specialised and tailored capability to sell into the mid market. Cenkos can tap into FinnCap’s M&A capabilities, and FinnCap has a newly expanded specialty and client base in equities.

The obstacle for those now remaining as standalone players, says Alasdair Steele, a deals lawyer at CMS, is finding a partner that offers more than scale. 

“They all do largely the same thing. And they’re largely competing for the same business,” he tells Morning Wire 

“They will argue that they’re all slightly ahead of the others, but that’s normal. What’s the addition other than one plus one makes two?”

Other than “taking a bit of back-end cost out”, he argues the rationale may in some places be lacking.

Panmure, which did not respond to a request for comment, is the player most rumoured in the City to be on a deal footing. The broking house has been among those hit by the deals and listing slump and already launched a rejected bid for FinnCap last year.

Owned by former Barclays chief Bob Diamond’s vehicle Atlas, Steele says has the financial firepower behind it to go on the hunt as the dominant partner. 

“You could pretty much name any mid sized size broker, and “they’ve been rumoured to be talking to,” he adds.

No deal has has yet been forthcoming. But as markets begin to settle next year, Panmure could be the first to move.

Annual pretax profits/losses (figures in parentheses are negative)