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Business broker: St Helen’s Capital plc

Friday, September 05, 2008

Tough conditions, depressed markets and investors running for cover. Small-cap companies are facing testing times, with markets still dormant and access to capital more than a little tricky. But for Ruari McGirr, the chief executive of stockbroker and business advisor St Helen’s Capital plc, it all goes with the territory.

“I have to say, we expected a bit of a downturn and to some extent we thought it would be in our interest. It is fair to say that we didn’t expect it to be quite this dramatic,” he says.

“As a newer business with cost bases and structures that were not set up for really buoyant markets, it has been easier for us to be flexible and adapt. I’d say there are now signs that the initial panic by investors is subsiding and as confidence gradually returns people will start to look again. Investors do have quite a bit of money and they need to do something with it.”

McGirr and colleagues Sebastian Wykeham and David Johnson joined St Helen’s Capital in February 2007 from Daniel Stewart & Co after spotting a widening gap in the stockbroker/business advisor market.

He says the team was conscious of a growing band of firms that were gradually moving away from working with micro-cap and small-cap companies towards trading stock and edging further up the market.

“It’s a hard market doing small and micro-caps,” he says. “But equally if you find the right businesses you can make investors an awful lot of money. It doesn’t always work out that way but if you’re looking for opportunities to try and make investors 4x and 5x their money it’s interesting. You work with entrepreneurial, interesting people who have often got a lot to learn about markets – but they’re harder work in that sense.

“There were not that many brokers who could say that those small-caps were their bread and butter. There weren’t firms out there saying “this is what we want to do” and trying to do it in a decent, quality fashion.”

Signs of life

McGirr’s team started looking for an opportunity to capitalise on the space and eventually found St Helen’s, an Ofex/Plus broker which he describes as “frankly fairly sleepy”. The firm had carved a big position working with Plus companies but with flagging institutional support, McGirr says it had been in a tough game.

“We came over with a view to finding small, high-growth companies - we’d done it successfully in the past and we thought we could do it successfully again,” he says. “We started picking up some companies with potential - the obvious issue with small companies is that they are fairly high risk, some go well and some don’t go so well.

“That all went fairly well but obviously in the last six months there hasn’t really been any institutional support for anything. It’s difficult in the sense that companies get punished very hard for things that go wrong but equally it is very hard to go out and raise money for a company in the first place. It has been a difficult six months but the reality is that we’re seeing an awful lot of very good deals and there are some signs of life from the marketplace.

“There is not a shortage of good deals, there is a limited number of people willing to write cheques and they’re understandably being very choosy about what they invest in and at what price.”

The new-look St Helen’s Capital initially toyed with becoming an AIM Nominated Advisor (Nomad) but shelved the idea on two counts. First, at a time when the LSE is trimming the number of Nomads, the application was going to be challenging. Second, was that with so many integrated broking and advisory houses around, the firm found it useful to tout its independent broker status.

“Over a period of time that independence has been very useful for us - to establish ourselves, to get a flow of work and flag-up to institutions that we are purely working as a broker and that there aren’t conflicts of interest between whether we are working for the company or the investor.

“The comfort point at which that independence is less useful is when you get to a stage of critical mass. So we’ll have to look at that over the course of the next year or so – whether or not we become a Nomad, whether by buying or developing as one.”

Deal flow

In it’s brief life, St Helen’s Capital has notched up a number of private deals, perhaps raising between £1m and £4m, combined with a flurry of much larger and interesting deals – a situation that McGirr says works well for the firm.

“The core business pays the bills and the large deals, when they come off, help us to move up the ladder and do more interesting things,” he says. “There is nothing particularly revolutionary about what we are seeking to do, the only thing that is different for us at the moment is that when compared to the last five or six years this year is a particularly bad year. But markets do come back and markets do change.

“We’re slightly agnostic about whether something is off-market or Plus or AIM. What we’re interested in are companies that either are or will be looking for money from investors. Then it is a matter of deciding on the most appropriate place to put the business.

“Historically, most of it has always been done on AIM because the people who were the private equity houses of choice 10 years ago – 3i, Lloyds Development Capital, Barclays Private Equity – have disappeared or moved very much upmarket. So they don’t exist for you if you’re a family company making £1m - £1.5m of profits.

“I think that in the near-term an awful lot of stuff is going to be done off-market rather than on Plus or AIM because investors are looking to be more conservative in the structures. Rather than putting in equity they’re looking at putting in convertibles to protect their position and put more of a force on management to actually perform and protect institutions if they don’t perform.”

McGirr says that despite some investors being less inclined to look at smaller-cap companies, the situation will change over time. “If no-one is looking at those deals then they will become very competitively priced and therefore people will come back,” he says. “And it might be that wealth management firms rather than pension funds and insurance companies are the people who look at those deals.”

As an aside, McGirr’s reason for switching St Helen’s Capital from its listing on Plus to AIM – which happened in March this year – was two-fold. He says the firm’s existing listing meant private ownership was out of the question but that when issuing stock to key staff it was a simple fact that those staff were far more used to dealing with AIM stock rather than Plus stock.

New approaches

In terms of growing the firm, McGirr is cool on the idea of moving into producing independent research but says the drive to familiarise fund managers with St Helen’s Capital means the firm is willing to take new approaches.

“One of the interesting things we do is to get companies in once a week or so – non-house stocks and not necessarily ones that we’re planning to pitch for – that really want to have a second or third broker ring up and make a few phone calls about them,” he says. “We get them in, they give us their pitch, one of the analysts writes a page on the company and then the sales guys get on the phone to their contacts. For the company, it’s another voice making a call about them, for us it’s another reason to ring a fund manager.”

St Helen’s Capital doesn’t yet publish figures because of what McGirr describes as the potential for couple of big deals to “utterly transform the numbers”. Despite that, he says the firm made a profit last year and is set to do the same in 2008.

“The difficulty we have is that we haven’t been around for years – we haven’t got those years of client relationships – and in a market like this the work you do tends to be secondary fundraisings for existing clients. We don’t have that big plethora of clients,” he says.

“The key thing for us at the moment is to bring in new clients. There are a lot of small companies out there, some of which are struggling commercially and some of which are struggling because their broker has stopped paying attention to them. It’s a difficult market, they’re languishing a little bit and they get punished for things that in other times they wouldn’t get quite so punished for.

“There are a lot of companies out there that are a little bit frustrated and would be hard work for the time being but when times are good again they’ve got good management teams and they’ve got good plans for the future. That’s the key thing for us at the moment – getting the core business up to a critical mass in terms of numbers of clients.

“We’d like to win another seven or eight clients before the year end if possible. We’d then like to have a slate of interesting propositions lined up of a range of sizes for when people are interested again. The advantage of this downmarket is that because the deals have a longer gestation period you’ve got more time to get familiar with the companies, to get under their skin.

"I think we’ve got a good competitive space, everybody we have got in the broking and research business is new from when we arrived so we have picked people we know and we like and think are very good at what they do.”

Ben Hobson, SmallCapNews.co.uk