Survival of the fittest: Evolution is back on track

The brokerage was on its knees a few years ago – now it's in a prime position to mop up some ailing competitors. Simon Evans reports

Three years ago Alex Snow, the former Harlequins rugby player and chief executive of the Square Mile brokerage Evolution Group, was being written off as a failure.

Snow's company, founded in 2001, which grew spectacularly following its purchase of private client group Christows and bank Beeson Gregory, was mired in controversy and corporate scandal.

First, one of its analysts was fined for insider trading; then the company was forced to pay £500,000 to the City regulator, the Financial Services Authority, for market abuse, while coming under siege for its handling of the Regal Petroleum debacle, which cost its investors millions.

His co-founder, Richard Griffiths, has departed but three years on Snow, now chairman, is very much alive and kicking. And with one of the healthiest balance sheets in the business – around £125m in cash to play with at the last count – he is in the unaccustomed position of being envied by his peers, who are struggling in the wake of the credit crunch.

Business is tough for the City's smaller brokers – there are too many mouths too feed and not enough clients. Last week, figures from London's junior Alternative Investment Market (AIM) showed that only £275m was raised in the first quarter of the year. Compare that with the same period last year, when the 80 or so brokers with AIM licences raised more than £1bn for corporate clients.

Analysts reckon that some will have to go out of business – that there is about 40 per cent overcapacity in the stockbroker arena. "It's going to mean that people will have to get very cosy, very soon or they'll be in real trouble," warned one senior executive.

Snow has already mulled getting cosy with Panmure Gordon, the once-revered brokerage that has struggled in recent times. Project Watson, as the talks were christened, stalled

in February, with concerns about Panmure's American operation, ThinkEquity, which it bought for a hefty price last year, cited as the main reason for Snow walking away from the table. However, it was thought that Panmure's management were the ones to walk first, not Snow.

It was also heavily rumoured last year that Snow had spoken with Stefan Allesch-Taylor, the feisty founder of rival Fairfax, although suggestions that an offer had been made were denied. But Snow is under no pressure – at least he has claimed not to be in the past – to do a deal any time soon. The company is in a relatively enviable position and, having founded it in a bear market, Snow should know what he's doing. Of course, that isn't always the case.

"There are a lot of people with their heads in the sand out there – [but] I don't think Evo's is in this position any more," said a City source. "It's a good time to be sitting on cash."

Last year, angry shareholders demanded Snow pay back his cash pile in the form of a special dividend. He smartly resisted.

Those disgruntled activists have since been replaced by a more pliant Banco Espirito Santo (BES), the Portuguese powerhouse, which enjoys a near 10 per cent stake.

BES has denied that the position is a precursor to a full takeover but it seems likely the group will inevitably beef up its stake in the months to come.

"They're bound to increase their stake," said a source close to Evolution. "It's still early days, so everyone is seeing how things work out. But it seems to be working for both sides at present."

At 103p Evolution shares are now cheaper than in January, when BES took its stake.

Snow, who claims to be a friend of the shadow Chancellor, George Osborne, is thought to be keen to use his relationship with the bank to leverage his contacts in new regions – in particular, East Africa, where it could plug into the opportunities afforded by commodity-rich states such as Angola. Sources close to the group suggest that a pipeline of business from the region is being laid down.

If the relationship with BES is paying off, the decision to buy blue-blooded broker Williams de Broë in 2006 from ING, for around a modest £20m, also looks to have been a shrewd one. De Broë might have enjoyed the cachet of a good name but it was slowly dying under the guidance of the giant Dutch bank. Since it came to Evolution, its assets have swelled hugely, with the steady, if unspectacular, fees coming from asset management underpinning the rest of the business.

Asset management sales account for around 35 per cent of overall revenue at Evolution, underlying the relative importance this work has for the firm.

Snow clearly has a mixed reputation in the City. Viewed as brash – "I've always found him a bit spivvy" was one take – often opinionated and at times arrogant, he has, in the past, rubbed more than his fair share of people up the wrong way.

"The downturn is one hell of a great leveller, so the stink that surrounded Evolution in the past maybe isn't of as much importance as it once was," says a City source. "People are prepared to ignore minor irritants if the fundamentals look OK."

Conditions in the City are tough – they probably couldn't be tougher for mid-market firms. But after three years of rebuilding a business in freefall, Snow might have more to smile about than his competitors in the coming months.

DOWNTURN IN THE CITY

It's a jungle out there for brokers

Nobody is escaping the credit crunch in the middle to small-cap advisory space. But some are better placed than others. We assess the runners and riders.

Numis

Under the stewardship of Oliver Helmsley, Numis isn't in bad shape. Helmsley, who recently upped his personal stake to nearly 13 per cent, has presided over a strategy to diversify away from reliance on the junior market AIM, which is largely working, leaving the broker in a position to mop up disaffected staff from rivals. Share price fall in the past year: 41.04 per cent.

Close Brothers

Chief executive Colin Keogh is under siege. Rumours suggest disgruntled staff are keen to walk, while leading investors want a shake-up following the company's botched attempts at a sell-off earlier in the year. The indicative share price of £10.25p offered by Cenkos's Andy Stewart now looks a distant memory. Share price fall in the past year: 26.95 per cent.

Panmure Gordon

Led by Tim Linacre, Panmure is having a tough time. The acquisition of ThinkEquity in San Francisco is proving hard to digest. Has so far seen little in the way of benefit from the 10 per cent stake taken by tycoon Farhad Moshiri. Don't rule out Evolution taking another shot at Panmure if its share price remains so depressed. Share price fall in the past year: 61.12 per cent.

Cenkos

After his failure to seize Close Brothers, many City pundits believe founder Andy Stewart has to do a deal this year. Cenkos's latest set of results show a modest up-tick in pre-tax profits to £23.8m, while its client base has increased to 72 from 53. Claims to be "in a better position than most" to deal with a downturn. Share price increase in the past year: 8.66 per cent.

Blue Oar

Formerly known as Corporate Synergy, the company revealed last week the extent to which its corporate finance revenues, the largest contributor to profits, were sliding. Under the guidance of Andrew Monks, Blue Oar is reshaping to have a wider earnings spread. Claims to have "raised the standard tremendously and put in top people in management positions". Share price fall in the past year: 41.89 per cent.

Collins Stewart

Despite the wily leadership of chairman Terry Stewart, a City stalwart, Collins Stewart has seen its share price tumble. It was rumoured to have been the subject of a bid from Japanese bank Nomura at the end of last year, and has denied speculation that it could go for a management buyout. Rumblings that all is not well with staff at Hawkpoint, the corporate adviser bought by Collins Stewart in 2006, continue. Share price fall in the past year: 50.1 per cent.

Oriel Securities

With several respected analysts and a relatively healthy deal flow in 2008, Oriel, led by chief executive Simon Bragg, is doing rather well. The company saw its profits climb to more than £5m last year on the back of revenue of £21m, and is thought to be on the shopping list of a number of bigger rivals. But seeing the plight of listed firms, Bragg is likely to be keen to stay in the private shade. Privately listed.

Others in the shake-up

Seymour Pierce, Fairfax, Daniel Stewart, KBC Peel Hunt, Hoare Govett are all seen as potential takeover targets.