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Complete package: Dowgate Capital plc

Friday, August 22, 2008

Tony Rawlinson is a calm figure in a stormy market. For many AIM company chairmen tough conditions and sliding share prices mean shelving plans and taking shelter. But the head of Dowgate Capital plc is taking advantage of the market downturn to prepare his advisory and broking business for brighter times ahead.

City veteran and business advisor Rawlinson left Strand Partners for Dowgate’s predecessor firm City Financial Associates in 2001. Since becoming chairman in 2005 he has orchestrated a brand building and expansion programme that has elevated Dowgate several notches above many of its City peers.

During 2007 City Financial was rebranded Dowgate Capital Advisors and the newly acquired Crawley-based broking business, Ellis Stockbrokers was renamed Dowgate Capital Stockbrokers. Rawlinson is now presenting the two business under the Dowgate Capital umbrella as a united advisory and broking offering that he hopes will appeal to new and existing clients –particular those with an AIM flavour.

In his biggest statement of intent yet, Rawlinson last year hired Dru Edmonstone and Philip Dumas to head up a big-hitting City-based broking team. And despite a pronounced market downturn, Rawlinson is confident that the group will ultimately benefit when the markets rebound.

“Things are significantly quieter than last year because of the much lower level of activity on AIM particularly, which is where we have centred ourselves over the last few years,” Rawlinson says.

“But if companies go wrong and run into difficulty then that can involve more work for us. Obviously there is a lot of M&A and takeover code work going on at the moment that can benefit us, but it may not always involve fundraising. The two markets are different but generally speaking we work together on most things.

“It’s definitely a good time to build the business, which is what we’ve done this year. We’ve been saying for the last year that we wanted to have a City-based corporate broking team. We’re now looking to bring in private client brokers to complement the operation in Crawley, so we are looking to build the business but not radically and expensively.

According to Edmonstone, despite fundraising for clients proving to be very difficult at the moment, the new team has made strides since it was set up in spring last year.

“We have picked up new mandates as fast as we can - and these clients are hard won,” he says. “There is also the matter of retaining the existing client base, getting to know them and taking them around to institutional investors. So we haven’t sat on our hands. Dowgate is a new brand so it is a matter of getting out there.”

Edmonstone reckons that with banks walking away from deals and cutting off funding options, many companies that need cash are simply left trying to raise cash through the equity markets.

“A lot of them still have the walking wounded attitude of ‘we’re not going to raise money at this price, it’s far too cheap’,” he says. “But we’re feeling a pick up in the market now, in the sense that certainly the IPO market is beginning to come back.

“We have got two IPOs that we know of in September -they are profitable and as long as the management are realistic in their attitude to the valuations then we’ll get them away. It’s the ones that aren’t realistic that have got a cat in hell’s chance. But there is certainly money out there.”

On the advisory side, Rawlinson’s corporate finance advisory team is also enjoying some healthy work flow. “We are looking at a couple of floats, with broking, a couple of reverses, which are being managed by other brokers and three or four takeover code transactions where we’re acting on bid situations,” he says.

“We’re also doing a whole raft of transactions like related-party deals, disposals, smaller acquisitions, share issues for clients – all of which are fee earning for us, so that’s pretty good.”

New opportunities

In building the business, Rawlinson has been keen to mitigate against depressed market conditions by bolstering the number of retained clients in an effort to cover as much of Dowgate’s fixed costs as possible. And this strategy is paying off.

“We’ve now got to the stage where we don’t need to have many transactions each year to actually breakeven in cash terms,” he says. “We’ve got such a diversified retained client base that even if one or two disappear we’ll take on two or three more, so overall we’re gradually increasing the numbers.

“We’ve got 44 AIM clients and probably about 48 in all on the corporate finance side and over 60 on the broking side, but there is some cross-selling.”

It was with the introduction on Edmonstone that the cross-selling model really took off and he is now co-ordinating efforts to cross-fertilise brokerships and nomadships between the Crawley and City operations.

“It has been difficult to achieve,” Rawlinson admits, as great care was needed not to upset the relationships that were already in place. Nevertheless the efforts secured between 10 and 15 successes over 18 months.

“Since Dru has been here the synergies have been much more in evidence,” he says. “They talk to Crawley a lot more, they are coming up with ideas all the time, they are looking at new client opportunities and it really has put some meat in the sandwich, if you like. Even though it has been difficult to do fundraisings this year, from that point of view it has been very successful so far.

“Obviously we’ve invested a lot in terms of bringing in the City broking team. I’m viewing those as exceptional costs this year until the market improves and Dru and his team are bedded down. Next year obviously all three divisions – corporate finance, the old Ellis business and the new City broking offering – have got to perform as strongly as possible and carry their weight. But this year the existing two divisions are supporting the new division, as you’d expect them to do. So that’s really what this year’s results will show.”

But despite it being early days, Rawlinson says the integrated offering is already finding favour in the City, with indications that the firm is beginning to be regarded as a step ahead of some mainstream advisory firms.

“We’re in a middle layer in the market and there are not that many people actually occupying the space that we’re in,” he says. “We are also one of very few quoted, small-cap brokers and nomads. We’ve got no regulatory issues, we haven’t been slated by the FSA or by AIM, we’re a good quality business and believe in quality of service.”

And with the corporate finance and broking operations now beginning to work together, the Dowgate team is now considering its options for developing the business. Rawlinson says the firm will readily consider ideas which complement the firm’s core offering, including fund management and possibly research.

“I’ve been doing this for twenty five years and I’ve done every sort of transaction, big and small,” he says. “So we do a hell of a lot here and frankly the share price is cheap at the moment and other people can see that, which is why they come in to us. They say, ‘well actually if we merge with you and we get some shares it’s a damn good platform for us to build on or if we come in and we get share options, the share options are actually very cheap at the moment and we can see a lot of upside’.

“We’re looking at all these different ideas but we’re not going to rush into anything,” he says. “The main thing is to get our heads down at the moment and do some deals and bring in some cash, which we’re pretty good at. It’s a very experienced team on the corporate finance and broking side. We know exactly what we’ve got to do to get deals done and rather than spending my life on group stuff, I’m on corporate finance making sure deals happen and bringing in cash.”

But while Rawlinson’s team continues to build on its offering, he concedes that despite building a “very solid” business, the firm’s share price isn’t reflecting what he’d call a fair value. It is currently trading at around 10.25p, valuing the company at around £4.1 million.

But while general market confidence has played a part, the Dowgate team is also making moves to tighten things up. That includes paying dividends and initiating a share buy-back programme in an effort to reduce the dizzying 1,200 shareholders down to a more manageable number.

He continues: “We’ve now got to a stage where we’re not distracted by a lot of stuff and we can concentrate on the work and given that we know the markets are difficult, even when we get a mandate there is no certainty that it’s going to complete, so it’s very important that all the experience that we’ve got is placed into making sure it happens.

“In terms of developing the business we’ve got one or two things that we are looking at; if they come together in a way that’s acceptable to us then we’ll pursue them. There is no issue with that at all. In this downtime, if you like, there are people being made available and businesses looking for new homes, so it’s a good time for us to be exploring and trying to get those people on board.

Ben Hobson, SmallCapNews.co.uk