Jefferies: focus on investment banking comes amid market retreat

Jefferies Financial Group is slimming down. Nearly a decade after it was acquired by Leucadia National, it has taken another big step towards winding down the merchant banking business it inherited from the conglomerate.

Merchant banking makes direct investments in outside companies. At Jefferies, the division accounted for about 13 per cent of total group revenue last year and the asset portfolio was worth $1.6bn as of May 31.

Under the plan announced on Tuesday, Jefferies will spin off its holdings in oil and gas company Vitesse Energy. It will also sell its wood and lumber products business, Idaho Timber, in two deals for a combined $239mn.

The move would reinforce Jefferies’ self-proclaimed status as “the largest independent, global, full-service investment banking firm” in the US. But there is a good reason why it stands alone.

Bear Stearns, Lehman Brothers and Merrill Lynch collapsed during the financial crisis. Survivors Morgan Stanley and Goldman Sachs have both since diversified their businesses.

As a standalone investment bank with no federally insured deposits, Jefferies is exempt from some regulations imposed on big banks after the financial crisis. That has allowed it to make the most out of the 2021 stock market and dealmaking boom. While its $57bn balance sheet assets are a fraction of those at Goldman and Morgan Stanley, it punches above its weight. It pulled in nearly $6.8bn in revenue from investment banking fees and trading last year — a 36 per cent increase from 2020.

But the ability to trade and lend more aggressively means little if markets are in retreat. Second-quarter results underscored the shift. Revenue from investment banking and capital markets fell nearly a third. Yet expenses — dominated by hefty banker compensations — have only gone down by a fifth. That explains why it trades at just 0.6 times book value, compared with 1.5 times at Morgan Stanley. In times of market upheaval, some business diversification has value.