Power change leaves Caz stranded

AS WE move into the latter stages of summer, the event of the last few months that most illustrates the changing seasons of the City was the decision by Cazenove to slash by 30% the asking price for shares in Umbro in order to get that company floated on the stock market.

The messed-up flotation of the sportswear firm throws light on two of the most fundamental shifts under way in the City - the decline of Cazenove and the changing nature of the investing institutions. These changes will be with us long after we have forgotten the current sick state of the new-issues market.

Take Cazenove first. The reason that firm was the most powerful stockbroker in London was its placing power - its ability to persuade investing institutions to take shares in a company even when they did not want to.

Investors always bought the rubbish because that was the price they had to pay to stay on the good side of the City's most powerful broker and ensure that they would be offered a chance to buy into the many quality issues the firm would also bring to market. Being a friend of Cazenove meant not complaining.

It is worth noting, too, that this was a great lure for corporate clients. What a company wants more than anything from its broker is certainty - the knowledge that when the company decides to go for a fund-raising the broker will get the business done. Nothing harms a broker more than failure to deliver its side of the bargain.

In the Umbro debacle, the institutions said no to the offer and the flotation price had to be cut. That seminal moment was the tolling bell to mark the end of Cazenove's reign.

The second strand is the light it throws on the investing institutions.

The insurance companies and pension funds' money used to be run by long-serving employees who bought shares on a five-to-10-year view. They bought more when the price of their favourites fell and did not worry overly about short-term performance. Not only have the old-timers gone but ever fewer of even the big insurance companies and pension funds manage their own money.

Many have spun off their investment arms into separate companies, such as Threadneedle, Morley or Isis, in the belief that they will flourish better as semi or wholly autonomous units separated out from under the heavy hand of the parent.

This, they hope, will enable them to attract and retain good fund managers. Unfortunately, at Hermes last week, two of its leading staff presented financial demands that led instead to their departure. It does not always work.

All are more short-term in their thinking than ever in their history. In the last decade, the average time a share is held in a pension fund has fallen from 10 years to two years.

From the Cazenove perspective, however, it means that the old relationships with the big moneyed institutions have broken down as the insurers and pension providers have struggled to cope with change.

Today's fund managers spend their days going overweight in one stock, underweight in another in the hope that they will nose ahead of the index quarter by quarter. As the world has moved from investment to gambling, Cazenove has been left stranded.

The institutions began to lose their power when they lost their willingness to be long-term investors. When they lost their power, they crippled Cazenove.

Now the power in the stock market lies with hedge funds. They in turn are beholden to the new breed of prime brokers such as Goldman Sachs and Morgan Stanley which often gave them the funds and kit to get started in the first place and expect to be rewarded by a regular flow of business. They don't need Cazenove either.

The whole affair has a symmetry that is ironic. Cazenove had been looking to sell itself before its business was seen by all to be withering, but its efforts have been stymied by the success of its last great placing - when it sold shares in itself to its institutional friends.

The price it got then is perhaps 50% more than the business is currently worth, but the broker has been insisting that any potential buyer of the whole business has to match the price at which this minority holding was placed. It is not an ignoble sentiment but it underlines how the firm's past gets in the way of its future.

It makes it all the more tempting to believe that the Cazenove torch is passing to a new generation of firms - the likes of Collins Stewart and Evolution Beeson Gregory - which will never have Cazenove's cachet but don't need it. They have what matters.

In today's City they are the ones who know the institutions and get the business done.

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