When LON-listed independent financial advisory group, Collins Stewart Hawkpoint plc announced that it was teaming up with the middle-market investment banking firm, Morgan Joseph TriArtisan on Nov. 14, 2011, the pair joined a growing list of research advisory and investment firms partnering with boutique investment banks.

Collins Stewart took its US securities arm and paired it with Morgan Joseph, creating a 50/50 joint venture and naming it CSMJ Capital Markets. The partnership will allow the two firms to improve their chances of carrying out domestic U.S. public and private equity offerings and placements.

Morgan Joseph co-president Gerald Cromack and Collins Stewart president Mark Whaling will serve as co-chairs of CSMJ Capital Markets. The deal is in the midst of regulatory approval but will function as if they were together from day one.

The deal is a “reasonably unique structure that combines the relative strengths of the two organizations into a joint venture where the partners’ interests are completely aligned, and that will enable us each to best serve our respective clients and do so in a profitable manner,” Cromack tells Mergers & Acquisitions.

Similar partnerships have been struck. For example, in 2008, Revolution Partners and Morgan Keegan came together to form Morgan Keegan Technology Group. Last year, Signal Hill Capital Group merged with information technology M&A specialists Updata Advisors to form Signal Hill Updata.

Over the years, industry professionals have seen middle-market investment banks go head to head with the evolution of billboard electronic trading. Electronic trading has become more pervasive, and it has become more difficult for the classic broker dealer to make money. Today, institutions try to avoid trading shares to the investment banks if they can and they will only pay where they believe there is value added.

Large firms can handle huge volumes at low commission rates, and brokers will be able to make some cash. However, it's much more difficult for the mid-sized investment banks to do the same in the equity business because the margins have all been squeezed out by the giant firms and electronic trading.

On the research side, Collins Stewart’s Whaling said firms are backing away from middle market tier accounts. As a result, subscale players in the investment banking arena have decided to get out of the equity business.

After taking a stab at the equity world, Gleacher & Co decided to get out of the business altogether in the latter part of August. There have been several other smaller firms that got out of the business and a handful of mid-sized firms, with the likes of Cowen Group and FBR Capital Markets, have also realized that it’s difficult to make things work in the equity capital business.  

Roughly two weeks ago, Cowen reported a net loss of $48 million on $63 million of revenue in its Q3 2011. The company stated in its financial report that the volatility in the global equity and corporate credit markets affected its investment portfolio performance and created a drag on overall results.

As for FBR, the boutique investment bank announced that it will have to lay off 30-35% of its workforce because deal opportunities were dwindling.

“In light of the shift, there’s been less focus on up and coming growth companies, both small and middle market corporations,” said Whaling adding that those companies have exciting prospects but don’t have the voice due to lack of sell-side coverage.

Collins Stewart and Morgan Joseph clients will benefit from the expertise of the firms, whether is through advice or the ability to raise money across a variety of markets.

The joint venture comes nearly a year after Morgan Joseph announced its merger with TriArtisan. The firm provides mergers, acquisitions and restructuring advice, as well as private placements and public offerings of equity and debt. It also provides research and trading services for institutional customers. 

Cromack said that two of the main attractions to the partnering with Collins Stewart were first the fact that it was aligned and focused on similar industry groups to the firm. Morgan Joseph connected with four verticals of Collins--TMT, healthcare, consumer and industrial.

At the same time of the JV announcement, Collins Stewart added the consumer and industrial sectors to its research. "Those were expansions we were looking to do anyway," said Whaling. "This joint venture made it smarter to do sooner versus later."

The second attraction to Collin Stewart was that it was in the beginning of building out its investment banking origination capabilities. Cromack said there would be "very little, if any, overlap" with the existing origination efforts at the firm.  He added that the key to the success of the joint venture would be the two firms working together in aligned fashion to execute on their shared equity capital markets origination and execution business plan.

Going forward, Collins Stewart’s U.S. equity sales and trading employees will collaborate with Morgan Joseph’s investment and merchant bankers.

In addition to securities, Collins Stewart offers corporate advisory, brokerage and wealth management services. The four divisions all runs under its research tool, Quest. The firm currently has 15 research analysts in the US who works directly with 20 analysts in the UK. The firm keeps tabs on 300 companies stemming across 10 sectors including energy, financial, internet, media, telecom, technology.

The corporate clients of Collins Stewart and Morgan Joseph will have access to a variety of advisory and financing services as well as distribution capability which is supported by 50 sales and trading executives covering more than 1,000 institutional investors.