FT on challenges facing brokers

Tough times for brokers as they face long list of challenges
Groups such as Arden and WH Ireland hit by dire market for new listings and Mifid II

FINANCIAL TIMES, Cat Rutter Pooley, JULY 29 2019

British brokers shepherd companies to market and help them raise more money when they get there. Lately some of the Aim-listed brokers have been as much in need of assistance as any of their clients.

Arden Partners, which reported half-year results this week, is a case in point. It raised £5.1m in June 2017 at 40p a share. The stock now trades around 16p. If Arden is unlucky, it may yet need to go back to investors for more.

The stockbroker says it maintains capital levels significantly in excess of its regulatory requirements. But it has been burning through cash. In the wake of its fundraising, Arden had £9m in cash and equivalents. At the end of April, it had just £2.6m, a little over half the amount it had a year before. Net assets have shrunk from £9.2m last April to £7.4m.

It would not be alone in returning to tap shareholders for more capital. In March, WH Ireland raised money through its third equity placing in 14 months.

The UK’s small brokers have been floundering for some time. Theirs is typically a cyclical business that follows the gyrations of the market cycle. Signs point to a macroeconomic slowdown. The current boom has not yet turned to bust; the decline in Arden’s share price has not been as sharp as during the last crisis when it plunged from 193p to 46p in the space of 18 months between June 2007 and December 2009.

Present industry woes are about more than the approaching end of a record bull market, however. The list of challenges is long.

There is the impact of Mifid II in Europe, which split out payments for research from trading commissions. Commissions had already been falling for years as technology has taken hold. Now revenues for research are falling too. Asset managers have by and large shouldered the cost of research rather than passing it on to clients. Budgets were slashed by an estimated 30 per cent in the first year. Arden’s latest report indicates research spending has fallen further.

…One strategy has been to find someone else to pay for research. Companies have become more willing to cough up to ensure their company gets in front of potential investors as coverage has declined. Though some in the industry are sniffy about the objectivity of company-sponsored analysis, Cenkos and WH Ireland have both long charged corporate clients for coverage; others such as FinnCap have expanded the practice since the Mifid II reforms.

…At least the pool of broking clients on Aim is not shrinking. If only some more wanted to join.

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