Jefferies eyes top five amid year of dislocation for rivals

When the Italian government picked banks to advise on the landmark sale of its stake in Banca Monte dei Paschi di Siena, a storied institution with a troubled recent past, it faced a conundrum. Not only had its long-standing adviser, Credit Suisse, been acquired by UBS but the team that used to advise it, led by Andrea Donzelli, had joined Jefferies.

Ultimately, the Italian government hedged its bets, appointing Jefferies, a relative newcomer to Rome’s advisory scene, along with Credit Suisse’s new owner, UBS. It is a mark of the faith it has in Donzelli — and the progress that Jefferies has made from scrappy outsider to trusted force in investment banking — that it won such a high-profile mandate. 

It is further vindication of Jefferies’ growth strategy, which has been built on taking advantage of dislocation among European rivals. It is an approach that the bank hopes will take it to its target of being a top five ‘pure-play’ global investment bank, up from its current position of 10th, according to the nine-month rankings from Dealogic. 

Jefferies began poaching Credit Suisse talent two years ago when it recruited the Swiss bank’s global financial institutions (FIG) team, led by Alejandro Przygoda.

The bank followed that up with the recruitment of Donzelli and his Italian team last December. More recently it hired 20 bankers from the Credit Suisse Private Fund Group. Jefferies has taken the team, which included staff from both New York and London, to create its own private funds group, giving it an additional string to its bow in helping financial sponsors to raise funds. The hiring of the team follows that of Erkin Yildiz, another former Credit Suisse banker, to co-head Jefferies’ financial sponsor business in Europe.

The ‘team lift’ has been a hallmark of Jefferies’ expansion in investment banking over the past 15 years and it has served it well. Its rationale is simple: a bank is the sum of its people — so rather than make a costly acquisition, it hires dealmakers instead. It began in 2009, when it embarked on a plan to become a leading ‘pure play’ investment bank after the likes of Goldman Sachs and Morgan Stanley converted to bank holding companies, and Merrill Lynch and Lehman Brothers were rescued by commercial entities Bank of America and Barclays.

The rationale was that it could use its under-development equities platform to develop its capital markets capabilities — and, from that, build an advisory business.

From the outset, Jefferies looked to build out global industry expertise and it began with a flourish, hiring 65 bankers from UBS as part of a ‘team lift’ of its healthcare practice led by Ben Lorello, who became head of investment banking and led the first phase of its aggressive expansion. The move set the blueprint for the bank to take advantage of dislocation at rivals and has seen it grow in market share since, with a breakneck expansion over the past decade or so, before pausing its recruitment drive during the pandemic.

Lorello, who was known for his hard-charging style and habit of holding conference calls with European staff at early hours of the weekend, retired in 2020. Then, at the start of 2022, Jefferies ditched the model of the autocratic figurehead in favour of a more consensual style. The investment banking division is now overseen by three co-heads — long-term Jefferies employees Andrea Lee and Raphael Bejarano as well as former Credit Suisse banker Przygoda, alongside his position atop the bank’s FIG team. 

The management of the investment bank may have changed, but the approach remains the same. “Being a pure-play firm, the management of Jefferies will always make decisions in the best interests of the investment bank and its clients,” says Dominic Lester, head of investment banking for EMEA. 

And emboldened by its past success, Jefferies is once again taking advantage of dislocation at European rivals as it doubles down on its expansion and its ambition to become a top five global pure-play investment bank. In a statement accompanying Jefferies’ recent third quarter results, Richard Handler, CEO, and Brian Friedman, president, said: ‘Our strategy during down-cycles has always been to play offense by investing in our future. This is the main theme for us in 2023, made possible by our strong capital base and solid global brand and platform. The dislocation and changes in strategy among some of our competitors created a distinct opportunity this year.”

As well as exploiting the travails at Credit Suisse, Jefferies has also lifted talent from Barclays, which is undergoing strategic upheaval and is embarking on a cost cutting exercise ahead of a review of its business mix. 

Earlier this year, when Barclays overhauled the US management of its investment bank, Jefferies pounced to attract three of its senior bankers who were part of the storied Lehman Brothers franchise that had put the UK firm on the map. The trio included John Miller, Barclays’ former head of US investment banking. Then, in the summer, Jefferies hired Sven Baumann, who initially joined Barclays as head of its German business just over a year ago. This month it recruited Barclays’ Indian team as part of a big expansion of its Asian investment banking business.

The scale of Jefferies’ recruitment drive in corporate finance is startling. Since 2019, the last year of normalised investment banking revenues before the pandemic-induced deal boom and the interest rate-driven downturn of 2022, Jefferies has added 107 managing directors in investment banking and increased its overall number of corporate financiers by 535 people globally. The hiring splurge has worked. Over the same period, the global fee pools for advisory and capital markets have declined by 15%, while Jefferies has increased revenues by 40%. In a falling market it has risen three positions to eighth in the European corporate finance rankings, and is sixth in the US.

And it has no plans to slow down. This year it opened an office in Dubai as part of a push to expand in the Middle East, and has hired Majed Khalifa Al Mesmari from JP Morgan as head of its investment bank in MENA. The bank is relocating some of its bankers from London to staff the office and has plans to open an operation in Saudi Arabia.

In continental Europe it wants to beef up its presence on the ground in France and Germany and continue to build out its sector teams, particularly in industrials and consumer. When it comes to sector coverage, Jefferies starts by recruiting industry groups in North America, then expands into Europe.

“You can’t claim to have global content without a US presence, the European bankers need a US partner when they engage with clients,” said one banker. This is the case in industrials, where Jefferies hired Francis Tucci from Citigroup last month as New York-based chairman.

In addition to strengthening sector muscle, Jefferies wants to improve its country coverage in Europe because corporate relationships often reside on a regional level — such as Donzelli’s ties with the Italian government — rather than in the industry groups sitting in London and New York. In some areas, such as healthcare, Jefferies has more bankers than any of its rivals, while it remains underweight within the EMEA region, where it still sees room to grow.

Over the past decade, Jefferies has moved from being a bank that focuses mainly on the mid-market to one that is no longer defined by size — it sees itself as an adviser to governments, financial sponsors and corporations. “Our franchise and capabilities have grown to the point where we can serve the largest clients. The global reach and offering we have built mean we are not limited by transaction size,” Lester says.

As it has raised its sights, it has had to tweak its offering. “We recognise that for us to grow we have to provide credit to larger companies,” Lester adds. 

The bank now has the firepower to do that through its strengthened partnership with SMBC, which took a 15% stake in Jefferies in March. It builds on an existing alliance and opens SMBC’s balance sheet to Jefferies, which in turn provides advisory and capital markets products. For example, SMBC’s status as a lender to Softbank enabled Jefferies to win a role on the recent IPO of Arm Holdings. 

Another advantage is that rates remain low in Japan, so SMBC can borrow more cheaply. But the challenge for Jefferies is to use its capital in a way that ensures it is not just seen as another lender. Jefferies doesn’t have a deposit base to draw on, so is used to pricing its capital — but is betting that with the 20 year-long era of low rates now over, commercial banks will struggle to make their investment banking models work in an environment of higher interest rates where capital costs. “Some aspects of the fee pool may have changed forever. The business that was generated by lending cheap capital, which has driven fee growth for the last 20 years, may be over,” said one Europe-based banker. 

Credit Suisse was an aggressive lender to financial sponsors and bankers say that UBS is unlikely to match its appetite, while other banks have also scaled back their risk appetite in leveraged finance after losing money on big bets at the peak of the deal boom in 2022.

As a result, there are fewer investment banks that are willing to provide aggressive lending, which provides opportunity for Jefferies. However, more credit funds are providing finance as well. “Credit Suisse has disappeared and with it a big provider of leveraged finance,” said one private equity professional. “UBS does not have the same risk appetite, so it’s entirely feasible that banks like Jefferies can benefit here.”

This year Jefferies ranked fourth by fees earned from advising financial sponsors on asset sales in Europe and it is creating stickier relationships through its new funds coverage team, which advises on fundraisings as well as on the glut of continuation funds.

Jefferies has the added advantage of being a US bank with the biggest institutional equities business in its home market, so it can fund the expansion of its European business. Domestic US scale also means it has an incumbent presence across corporate finance.

Jefferies has been affected by the market downturn like its rivals. In the first nine months of the year, investment banking revenues fell by 26% compared with a year ago, with equity capital markets revenues remaining flat while advisory revenues slumped by 37%.

Jefferies constantly monitors performance and has recently trimmed headcount in the UK, with Tony White and James Thomlinson leaving the firm. White was part of the corporate broking team that Jefferies built after initially acquiring the team and clients from Royal Bank of Scotland in 2015. But it has adapted the team to focus on clients that will generate additional revenues from advisory work and has added talent in the UK that fits with its ethos of being able to originate deals. The entrepreneurial culture is not for everyone, and the onus is on bankers to bring in business, while at rivals mandates may come as a result of a lending relationship.

But while Barclays, Citi and others are braced for further job cuts this year, Jefferies is able to expand at a time of shrinking fee pools because it is growing from a much smaller base than its bigger rivals and did not hire excessively in 2020. Jefferies still has room to grow, particularly in EMEA, where it now has 400 investment bankers, a fifth of whom are managing directors. It is currently hovering around the top 10 but wants to be top five in M&A and ECM. In the long term, its ambition is to generate $1bn in investment banking revenues from the region, although it will settle for half of that in the near term. 

Jefferies has altered perceptions by staying the course and delivering on its targets — and this approach has earned the trust of clients and helped to recruit talent. Its progress has gradually silenced the critics who predicted it would be a flash in the pan. Now it has ambitions to be among the top five both globally and in EMEA, rivals are no longer sceptical.