The acquisition of Lehman Brothers' US capital markets and investment banking arm presented Barclays Capital with the ideal circumstances for its return to equities.

The equities build-out at Barclays Capital is proceeding at breakneck speed. Since acquiring Lehman Brothers' US capital markets and investment banking businesses in September last year, BarCap has added a total of 460 people in Europe and Asia, with plans to add at least another 300 before the end of the year. At the beginning of 2009 BarCap did not cover any EMEA (Europe, Middle East and Africa) stocks; it now covers 130 and says that it will cover 400 by the end of the year. A few months after the Lehman deal, the acquisition of Bear Wagner from JPMorgan established BarCap as the biggest trader on the New York Stock Exchange.

Some see the return to equities as a startling U-turn for a bank famously rebuilt as a debt-focused house following the demise of Barclays de Zoete Wedd and the sale of its equities and merger and acquisition business more than a decade ago. For BarCap's senior management, however, the exit from equities was always a pragmatic response to a failing business, not the philosophical rejection of an asset class. The question was always: how and when to re-enter?

"We would only take a step that was strategically relevant for our business model and made economic sense for our investors," says Dixit Joshi, head of equities for Europe and Asia at BarCap, who is leading the cash equities build-out in both of these regions.

Crucial timing

BarCap had pondered whether to build or buy back into equities for several years. Acquisitions are nearly always painful and often destroy more value than they create - a fate narrowly missed by Barclays when it withdrew from the ABN Amro acquisition. Barclays is rumoured to have considered buying agency brokerage Instinet (now owned by Nomura), finally rejecting it as it did not fit all criteria: namely, that any acquisition should have scale, top-ranked research, and a sales and trading offering with both geographic spread and client depth.

However, building an equities business from scratch is enormously difficult, precisely because meeting those criteria is time consuming, complex and expensive.

Lehman provided the solution. "Overnight, we acquired a fully fledged US investment banking platform and a top-ranked research and equities platform at a very good price," says Mr Joshi, formerly the head of equity-linked products at BarCap. "[Lehman] had spent many years building a world-class equities infrastructure. It was an unprecedented opportunity."

Moreover, the deal helps Barclays to crack the notoriously difficult US market, which has traditionally been dominated by a handful of US firms, and where European and other banks have only made headway in limited product areas. The Lehman acquisition has propelled Barclays straight into the top ranks, says Mr Joshi. "We acquired one of the top five firms and completed the integration in an incredibly short time. Within a week we had the lights on; within 100 days we had the vast majority of products up and running."

Now the firm is actively trading with more than 90% of former top Lehman clients and all top 50 Americas cash clients, he says.

Crucial to avoiding integration pain, the Lehman business had relatively little overlap with BarCap's investment banking business and none on the cash equities side. Mr Joshi, himself a veteran of Credit Suisse's traumatic acquisition of Donaldson, Lufkin & Jenrette, says it was "almost a perfect fit". "Barclays' strength in structured products and derivatives is complementary to the substantial Lehman cash equities business. Together we have a complete platform."

The ex-Lehman business is ranked first for US equity research (by the Institutional Investor 2008 All-American Research Team Survey), first overall for sales quality (Greenwich Associates) and first overall for US equity trading quality (Greenwich Associates). Mr Joshi says that having a highly rated US platform is making it easy to build out the rest of the global equities franchise.

"Cross-border equity flows demonstrate that an equities platform has to be global. About one-third of the equity fee pool in Europe comes from international sales of European equities, so having a serious US presence is vital. What we have acquired is therefore a powerful proposition for clients," he says.

Powerful team

Certainly, the list of senior bankers who have jumped ship to join Barclays suggests that others believe it could be creating a powerful platform. The list includes: Sam Dean as co-head of equity capital markets from Deutsche Bank; Jim Renwick as head of corporate broking and UK equity capital markets from UBS; Howard Spooner, a top-rated technology/media/telecoms sector specialist from Goldman Sachs; and Damian Bunce as head of European electronic trading, also from Goldman.

According to market sources, William Tovey is joining as head of equity sales EMEA from UBS, the highly rated banks team is joining from Citi, and the media team is coming from Bank of America Merrill Lynch.

Mr Joshi declined to confirm these last hires, nor would he discuss the rumours of the big packages that Barclays has put together to attract them. He did acknowledge, however, that competition is intensifying for hires and that Barclays has made the most of a short window of opportunity.

Market advantage

With many firms hobbled by the fallout from the crisis or constrained by government ownership, Barclays, which has risked falling out with its investors in order to maintain its independence, hopes to take advantage of unprecedented equity market dislocation.

But, while it may be a good time to build, it has not been a great time to transact. Cash equity commission pools for banks have plummeted. BarCap's data suggests that the fee pool has dropped by 30% this year. Broken down by client group, commissions from long-only funds are down by 25%, pension funds and insurance companies down by 50%, and hedge fund-related commissions by 30%.

Shrinking fee pools notwithstanding, Mr Joshi says that this is still the best environment in which to build a cash equities business. "There's no doubt that we are in a trough right now regarding trading volumes and revenues, but we are 'cautiously optimistic' about recovery. I think the decline in hedge fund assets is slowing, for example."

Mr Joshi believes the bank has a unique opportunity to grab market share. "We aim to be a top five player in the European and Asian cash markets in three years," he says.

While competitors are having to downsize their operations to find the right cost base for the current market conditions, "we have the advantage of being able to build the right sized business for the current market, but to ensure that it can be scaled up as volumes increase", says Mr Joshi.

The ability to achieve this rests on technology, and Lehman's platform was a key part of the firm's attraction. "Lehman built its infrastructure during a period of unprecedented change in the equity markets and it is state of the art," says Mr Joshi. "We can leverage that across our global business."

So far, there are few concrete figures to show whether or not BarCap is on the way to achieving its big ambitions. Mr Joshi declines to discuss BarCap's trading volumes or the number of clients that the bank has already on-boarded in Europe or Asia.

However, the bank is now actively trading US equities for clients in all major European regions. It is also live with agency single stock cash products for Europe to US, and US to Europe, and live with Europe agency portfolio trading to US clients. In Asia, it is live trading Japan agency cash for Japan to Japan clients, US to Japan, and Japan to US, Europe, Canada and Asia developed markets. It is also already covering about 120 companies in Japan equity research.

"We have the advantage that most of the clients we are talking to about the cash equities business already trade with us in fixed income, commodities, foreign exchange and credit. That gives us a running start," says Mr Joshi.

Multiple motives

There are other reasons to re-enter the cash equity business. Falling asset valuations and profits are forcing institutional investors to cut costs; for many, that means slimming down in-house research efforts. As a result, the value of broker research - and top-class sales and trading operations - is on the rise.

"Having a strong research effort is a huge focus for us. Investors are definitely more cost constrained and need more colour on stocks. And in a high volatility environment, the value of a good sales and trading team which understands the flows, understands their clients' needs, and which can commit smart liquidity, is definitely going up," says Mr Joshi.

Delivering on potential is easier said than done. Mr Joshi says that BarCap benefits from its proven ability to grow a business. "I joined as one of the first wave of senior hires in the Alpha Plan, which Bob Diamond introduced in 2003 to double the size of the firm by revenues and by business. In doing that, we put all the right processes in place and proved to the market that we can grow a business organically."

Career history

Dixit Joshi

2008 - Appointed head of equities for EMEA and Asia-Pacific at Barclays Capital.

2008 - Role expanded to head of equity-linked products at BarCap.

2003 - Joined BarCap as head of equity derivatives.

2002 - Returned to Credit Suisse First Boston (CSFB) London as head of equity index arbitrage and quantitative trading for EMEA and Asia-Pacific.

1999 - Moved to CSFB New York, serving as chief risk officer for the global equity derivatives and convertibles unit.

1995 - Joined CSFB in the equity derivatives group at Credit Suisse Financial Products in London.

1992 - Joined Standard Merchant Bank (now Standard Bank) in South Africa as a new debt products, foreign exchange and interest rate option trader.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter