Even though Piper Jaffray Cos. is changing its CEO, analysts do not expect the new leader to radically alter the trajectory of the company.
Piper Jaffray announced Dec. 5 that Chad Abraham would take over as CEO effective Jan. 1, 2018, replacing Andrew Duff, who will stay with the company as chairman. In recent years, Piper Jaffray has increased its exposure to the investment banking advisory business, and analysts expect the company to do the same under Abraham, who has been the co-head of investment banking and capital markets.
"Having Chad as the new CEO is a really logical step for them," Keefe Bruyette & Woods Ann Dai said in an interview.
Dai said the CEO change had been in the works internally for a couple of years, but not everyone thought Piper Jaffray would select Abraham.
Company employees expected Duff was going to step down, but many thought Stuart Harvey Jr., who was named president and COO in October 2016, was in line to become the next CEO, according to three sources who asked not to be identified. However, Harvey is resigning at year-end, and CFO Deb Schoneman will become president.
Piper Jaffray's news release announcing the leadership changes noted that Harvey was leaving voluntarily. "Piper Jaffray and Harvey have mutually determined that they have different approaches to strategy and leadership," the company said in the news release.
Since 2011, Piper has worked on a strategic initiative to improve its return on equity by growing higher margin activities such as advisory services, according to the company's Form 10-K filed in February. Piper Jaffray's advisory services business includes M&A, equity private placements, debt advisory and municipal financial advisory transactions.
The company seems to be following through on its goals as advisory services have become a greater revenue driver. Through the first nine months of the year, advisory services made up 52% of the Piper Jaffray's total net revenue, up from 41% in all of 2016 and 31% in all of 2015. As of Sept. 30, Piper Jaffray's 2017 advisory services revenue reached $332.2 million, which tops the $304.7 million the company reported for full year 2016.
Richard Lipstein, managing director in the financial services practice for the recruiting firm Gilbert Tweed International, said it is smart for smaller investment banks such as Piper Jaffray to try and carve out a niche.
"Firms at this level can't be all things to all people," Lipstein said in an interview. "They have to go with their strengths."
Piper Jaffray has focused on growing advisory at a time when the equities and fixed-income trading businesses are facing industrywide headwinds from lower volumes, reduced volatility, flattening of the yield curve and passive managers taking share from active managers.
JMP Securities LLC analyst Devin Ryan said Piper Jaffray still wants to have scale in trading because the company believes it helps drive capital markets and even some advisory business.
"When you think about what areas of the firm are probably going to grow faster or receive more resources, it's the higher multiple advisory area," he said in an interview.
Investors tend to reward the more advisory-focused investment banks with better multiples, because they view that business as higher growth, higher margin and less capital intensive than other investment banking businesses, Ryan said. He added that the increased focus on the less capital-intensive advisory business has put Piper Jaffray in a better position to pay a dividend, something the company initiated in 2017.
In November, Piper Jaffray announced a 20% increase to the dividend, and said the board intends to declare an annual special dividend to return 30% to 50% of its non-GAAP net income from the previous fiscal year. In a news release, Duff said the success of the advisory business made the planned payout increase possible.
The advisory business has been built out thanks to efforts to develop employees, make strategic hires and execute acquisitions that have beefed up certain industry groups, such as energy, consumer, financial institutions and industrials, Duff said, according to a transcript of an October conference call.
Some of those acquisitions have included deals for the energy-focused Simmons & Co. International, FIG-focused River Branch Holdings LLC and Edgeview Partners LP, which provided M&A advisory services to middle-market clients and private equity firms across industries.
During the October conference call, Duff said the company has been reaping the benefits of the investments and seeing different industry groups boost the total results. "In Q1, our energy team produced the highest results," he said. "It was our consumer team in Q2. And [in the third] quarter, health care led the way."
KBW's Dai said Piper Jaffray is strong in certain sectors, but the company can still grow. "They have a lot of room to run," she said.
