Some smaller broker-dealers are weathering tough times by diversifying into the institutional side of the business. They are adding mergers and acquisitions professionals, as well as institutional brokers, some of whom have lost jobs at the bigger institutional firms.
"I've just grown from six reps to 11, and [the ones] we added are all institutional [brokers]" who sell private deals such as hedge funds to institutional investors, said Lisa Roth, who is chief executive of Keystone Capital Corp. in San Diego and a compliance consultant.
"I've had a lot of calls from reps in that business," she said.
"There are a lot of [investment bankers] who have been displaced," said Morrie Reiff, chief executive of AFA Financial Group LLC in Calabasas, Calif., who is setting up a new M&A business.
In addition, business brokers who work on small transactions are also joining broker-dealers to get securities-licensed. Many of these people aren't registered and are running afoul of securities laws in structuring small-business transactions, observers said.
"In the [small] M&A business, the [financing] contract is increasingly considered to be a security, particularly in California, so the people in that activity are aligning themselves with B-Ds," said Jim Biddle, founder of The Securities Center Inc., a broker-dealer in Chula Vista, Calif.
He just added a banker who does small M&A deals.
The market for smaller transactions, typically less than $50 million, isn't being served, said Joel Blumenschein, president of Freedom Investors Corp. in Hartland, Wis., who has done small banking deals for years.
But "now the quality of deals is getting much better," he said. In the past, one or two deals out of 10 looked good, Mr. Blumenschein said, but now half the proposals he sees look attractive.
The reason is that Wall Street firms and venture capitalists "have pretty much pulled away," he said.
Meanwhile, the demand by small businesses for capital remains reasonably strong, and investor appetite for private placements is holding up.
"M&A is one of the few areas that's showing some possibilities," said Chet Hebert, a Centennial, Colo.-based compliance consultant and owner of Colorado Financial Service Corp., a brokerage firm.
In January, he bought one small B-D that does M&A, and added another last month.
With the market downturn, many of these small M&A firms are struggling, but they can make a go of it if they align with a larger brokerage firm, Mr. Hebert said.
"Businesses still need to raise capital," he said. "I'm amazed how much is coming in through private placements. ... There seems to be an appetite" from investors for equity in small private companies.
One attraction for investors is that companies raising private capital are usually "well-established local companies, local to where the money is being raised," Mr. Hebert said.
Not all small brokerage firms are jumping aboard the institutional express, of course.
Most don't understand that side of the business, observers said, and unless they are approved already, they would have to get the OK from the
Financial Industry Regulatory Authority Inc. of New York and Washington.
Institutional business "is not something a lot of firms have an interest in doing," Mr. Hebert said. "The [M&A] guys we brought on have all been at it for a while [and have] a good book of business."
Ms. Roth said that her compliance work has included a significant amount of due diligence for money managers and private investors.
"For a typical retail B-D, [adding institutional business] would be something that would require some study," she said.
E-mail Dan Jamieson at [email protected].
