18/02/2009 - 22:00

Patersons’ growth curve repositions it on the national stage

18/02/2009 - 22:00

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Recent deals by Patersons draw parallels with Hartley Poynton 10 years ago. Mark Pownall looks at how the market has changed since then.

Patersons’ growth curve repositions it        on the national stage

FOR the past few years, Patersons Securities executive chairman Michael Manford has been beating himself up about the stockbroker's regulatory failure at its Canberra office.

Reading Mr Manford's body language, an outsider could have been forgiven for thinking a rogue broker in the small bureau had dulled the Perth-based company's appetite for eastern states conquest.

Students of Perth's broking history wouldn't be too surprised by that. Former Western Australian broking kingpin, Hartley Poynton, had more than its fair share of such troubles in the late 1990s and earlier this decade, embroiling the firm in an ugly public relations disaster just as it was trying to sell itself to investors in the eastern states.

But far from containing its expansionist tendencies, Patersons has been quietly preparing for more growth. In the past two years, it has recruited former Bell Potter executive Andrew Coppin to lead a national expansion, opened new offices in Queensland, and launched a fund management division.

It even quietly changed its corporate structure to allow outside investors, and says it has steadily improved its compliance systems to cope with a bigger and more geographically diverse operation.

While that steady growth may have been below the radar of many observers, there was nothing subtle about what Patersons has done in the past two months, with three transactions that appear likely to have changed the positioning of the firm considerably.

The first of those, merging with Montagu Stockbrokers to add 25 dealers to its Perth desk, was comparatively minor.

If successful, last month's deal to merge with the broking operations of Tolhurst Group is likely to reposition the firm as one of the nation's leading private client stockbroking networks - with a big investor network that will give it access to product from the bluest of the blue chip end of the market.

According to Mr Manford, the Tolhurst deal puts the group up in the top three private client businesses, with Macquarie and ABN Amro Morgans ahead and Bell Potter Securities behind them.

Backing that up with news of a $12 million investment by sovereign wealth fund Brunei Investment Agency, Patersons also emerged with a stronger balance sheet and the prospect of a wealthy partner at a time when further consolidation was expected.

Mr Manford still plays down all the possibilities, but he's certainly wearing a smile these days.

"It is good to be doing things; it's negative to be sitting around all day doing nothing," he said, acknowledging the effects of the market downturn.

"It has created a can-do attitude in a tough market.

"People want to do positive things in this marketplace."

Mr Manford doesn't pretend that anyone saw the carnage coming, but said the team at Patersons had kept their heads in the boom times.

At a strategic planning session in the middle of last year, management looked at what would need to be done to cater for a 30 per cent downturn in the stock market. They never imagined it could actually get worse than that.

The firm has cut employee numbers in response to the downturn, and the merger with Montagu brought no additional administrative staff, but overall Mr Manford believes Patersons' investment over the past few years have left it in a position to grow revenue rather than being forced to take the axe to dealer support functions.

The expansion of Patersons has led to comparisons with former market leader Hartley Poynton, which was the first WA broker to tread the national stage in a major way with a big expansion in the late 1990s.

From the late 1990s, Hartley Poynton morphed into HP-JDV, a hybrid national retail broker and technology firm, before the tech boom ended its plans. The two businesses were separated and the brokerage remains a significant player in WA, where it trades simply as Hartleys.

Mr Manford believes Hartley Poynton's brokerage strategy was a good one but the cost of developing the technology business, now a success with new owner Commonwealth Bank, hurt the expansion plan.

At around 44 advisers, Hartleys' WA office is almost half the size it was 10 years ago, before the group was split up and the local Perth team bought out the broking operations. Macquarie picked up most of the rest of the national network.

Reflecting on that time, Hartleys managing director Richard Simpson is not as forgiving about the expansionist route that the firm took in the late 1990s.

Mr Simpson said there were many pitfalls with regard to that growth, noting the lack of close connections that makes it difficult to vet new recruits in a business that relies heavily on trust.

"The old firm had regulatory issues and a lot of those come about when you are spread and growing at a rapid rate," he said.

In some ways, he draws a line in the sand back five and half years ago, when the business started afresh in an increasingly regulated environment.

However, Mr Simpson said there were major benefits in the brokerage's lineage going back more than five decades. Underscoring that is the number of staff with 20 years' experience or more.

"There is a long history here, that is what is fantastic about the place," he said.

"That is hard to synthesise."

Interestingly, one of the leading national players in WA can also lay claim to longevity in its workforce.

A decade ago, Macquarie had just registered its intentions on the Perth retail broking scene, buying one of the most successful local operations, Porter Western, in a deal that settled on March 15 1999.

Craig Carter and Tim Lyons, who founded Porter Western in the mid-1980s, still work at Macquarie in key WA roles.

Heading the WA investment banking operations after living in Sydney for several years, Mr Carter reckons the forces that prompted Porter Western to sell out last century continue to reshape the industry.

Porter Western thrived in the 1990s on WA privatisations like SGIO and BankWest, enjoying the fruits of these relatively big equity deals along with other local broking houses, which provided the meat to grow their franchises.

"Where is the next round of privatisations?" Mr Carter asks rhetorically.

"That chapter will never come back again."

Mr Carter sees the broking business as more globally focused, particularly at institutional level, and there are also many more fund managers to service than 10 years ago, though WA itself remains a very private client-driven market.

These fund managers, he said, have become more momentum focused, following market trends more than just company fundamentals.

Brokers have also been forced to operate on lower margins as technology and compliance raise the cost of operating, and the capital required to the fund the business.

At the same time, retail investors have been seeking the security of strong brands.

"We were clearly moving to a more sophisticated, more compliance-orientated market," Mr Carter said of the decision to sell.

Yet the bigger-is-better philosophy, which has driven much of the market, hasn't stopped local players from surviving and thriving.

DJ Carmichael, which is controlled by UK-based stockbroker WH Ireland, has maintained its position as an established full-service broker.

Perhaps the most unique of the local players is Euroz, a listed firm that started just under a decade ago, by several local brokers.

Focused on servicing institutional customers, Euroz's success belies the view that boutique operations in a place like WA can't thrive.

Of course, all this has to be seen in the context of the current environment - the end of a five-year bull market, where WA firms were very well positioned.

Just how these firms perform today might very well reveal the shape of local broking in 10 years from now.

"Some of the big picture stuff is not that hard," Mr Carter said regarding the marketplace.

"What is hard is having the courage to change your business plan or strategy."

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