Piper Jaffray Companies Chairman’S Letter
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2015 Annual Report Piper Jaffray Companies Chairman’s Letter Fellow Shareholders — As we reflect on the year just completed, we find significant progress and accomplishment. The firm produced record revenues in 2015. Since 2011, we have increased operating profits by 150%, and tripled our return on equity. We also advanced our strategy of moving the firm toward higher margin, less volatile businesses. None of this would have been possible without the commitment and drive to succeed of my 1,100 partners in the firm. It is on the back of our strong internal partnership that we produced solid results for you, our shareholders. Partnership at Piper Jaffray, however, means more than this. We also partner with our clients to understand their businesses and what they need to meet their goals. We help them with advice they trust and securing funds to achieve their goals. Partnership at Piper Jaffray also extends beyond our corporate clients, as we partner with communities that want to improve educational opportunities or expand care for their senior citizens. Our partnership with communities is deep and personal, as both the firm and our employees contribute time and money to address special challenges faced by our communities. From our shareholders, to our clients, to our communities, we demonstrate every day what can be accomplished working together as partners towards a common goal. This was the impetus for creating a new brand which embodies the Piper Jaffray partnership culture: Realize the Power of Partnership℠. Our brand speaks to the strength of the partnership that is interwoven throughout Piper Jaffray, and that extends to our clients and communities. It embodies our belief that the greatest success comes from working in partnership. 2015 Highlights As your fellow shareholder, I know that sometimes it is difficult to see beyond the financial results and look to the underlying quality of the firm and its people to understand what drives these results. Certainly, market conditions influence our results. And while we cannot control the markets, we do control our commitment to high performance. For 2015, you will see examples of this commitment prominent in every part of the firm. Firm Highlights We made significant strides to build value for our shareholders, the results of which can be seen in a number of areas. First, we purposely remixed the business over the past few years to higher margin, less volatile businesses that require less capital. With the remix, we believe that our shareholders should derive the dual benefits of increased earnings plus an expansion of the multiple on those earnings. In 2015, building on a multi-year effort, asset management, advisory and public finance represented 56% of our revenue versus 29% prior to the acquisition of Advisory Research in 2010, our last major asset management investment. Market share gains across several businesses mark another sign of our commitment to high performance. We outperformed the market across our public finance, advisory and equity capital raising businesses as we gained market share in each of these areas in 2015. Chairman’s Letter Equity Investment Banking Our goals for equity investment banking have remained consistent over the past few years: remix our business to include a greater portion of advisory services (mergers and acquisitions) and enter the two industry sectors where we previously did not compete—financial institutions and energy. Relative to advisory, we reaped the rewards of multi-year investments and development efforts. Advisory revenue in 2015 topped $200 million and averaged about $200 million over the past two years. In the five years prior to 2014, revenue in our advisory business averaged about $75 million. Internal development of our people, coupled with selective hiring and acquisitions, have contributed to the significant market share gains for this business. Our patient approach to expanding into financial institutions and energy paid off this year. We executed on a major hiring effort in our financial institutions group (“FIG”), supplemented by the acquisition of River Branch. In addition, we announced the acquisition of Simmons & Company International (“Simmons”) to compete in the energy sector. These initiatives solidly position us in two major economic sectors where we heretofore had no presence, contribute to our goal of remixing the business to advisory, and represent growth opportunities as we bring our broader set of products to bear for our new clients. In equity capital raising, we grew market share as we increased revenue by 4% for the year, compared to a flat fee pool for the market within our focus sectors. We were book runner on 70% of our deals in 2015, compared to 52% in 2014, which reflects the strength of our capital markets franchise. Public Finance and Fixed Income Revenue for our public finance group also reached a new record, while our fixed income business generated impressive performance on the strength of our longstanding leadership in municipals together with solid risk management. In public finance, market share gains driven by geographic, sector and product diversification led to strong results in 2015. We completed more than 700 municipal negotiated transactions, which moved us up to #2 in the overall rankings (in terms of number of deals). Our public finance revenues increased 45% in 2015 compared to an 18% increase market-wide in municipal-negotiated issuance, reflecting our market share gains. Our fixed income business also took a major step forward in 2015 with the acquisition of BMO Capital Markets’ GKST Inc. subsidiary. This expanded our middle market sales force by over 25%, strengthened our trading desks and enhanced our strategic analytic capabilities. The additional flow from the larger sales force enables us to manage our capital more efficiently through increased turnover and improved trading capabilities. Chairman’s Letter Asset Management We produced strong performance in a number of our key products including Small Cap Value and Japan Value, which exceeded their benchmarks by 700 basis points and 300 basis points, respectively, in 2015. Moreover, we achieved neutral asset flows for the year in the context of market headwinds caused by a persistent migration of funds to passive strategies. Undoubtedly, declining market valuations were tough for our asset management business this year. These declines particularly were acute due to our exposure to the energy sector through one of our flagship strategies, MLPs. Nevertheless, we still saw positive net inflows into this product throughout the year. Corporate Support The skill and dedication of our corporate support group is a key differentiator for the firm, and a major contributor to our strategic initiatives. In 2015, we completed two acquisitions and agreed to a third acquisition, which closes in the first quarter of 2016. The group’s planning and execution for converting the acquired firms to the Piper Jaffray platform help us capture, and often exceed, targeted cost synergies. Between the organic initiatives of the past few years, and the acquisitions, our corporate support group now supports over 20% more revenue producers with essentially the same level of resources, producing meaningful returns for our shareholders. Capital Management We have consistently demonstrated our commitment to returning capital to shareholders through aggressive repurchasing of shares over the past few years, including 2015. Also, we conveyed to our shareholders that a critical aspect of our strategy involved improving the strength, competitiveness and performance of our firm. With these improvements we would enjoy the dual benefits of attracting opportunities and having the management and financial capacity to execute on these opportunities. Our discipline in effectively managing capital over the past few years has allowed us to make significant strides in both returning capital to shareholders and investing in future growth. During the year, we repurchased 2.7 million shares. Over the past four years, we have reduced our shares outstanding by 3.9 million shares, or 21%. This does not mean we aren’t investing in the long-term—we are. But we are doing so prudently, as our three recent acquisitions were essentially cash transactions. This includes Simmons, where we have already repurchased a substantial amount of the equity issued and are on our way to repurchasing all of the equity. Chairman’s Letter 2016 Outlook As we contemplate the outlook for 2016, the markets certainly have presented us with a challenging start to the year. The range and number of initiatives we have underway position us to build on our strong performance of the last several years irrespective of market conditions. These include the investments we have made last year and in prior years, highlighted by our three recent acquisitions. The strength and diversity of our franchise should help us weather adverse market conditions. Our overall momentum in advisory, which we expect to continue into 2016, is a solid foundation for our investment banking division. The acquisition of Simmons and continued seasoning of our FIG hires should have a favorable impact on our investment banking group over the long-term. Our demonstrated strength in equity capital raising, and our expanded set of products including debt advisory and restructuring capabilities provide Simmons with more avenues to generate revenue despite difficult market conditions. We are devoting considerable efforts to realize these opportunities. We also intend to maintain and improve on our market share gains in public finance. This will complement the improved productivity in our fixed income sales group attributable to the GKST addition, and will increase our operating leverage which should help us achieve our goal of higher returns on capital used in this business. Based on our progress and strong results, we have emerged as one of the leading franchises serving middle market clients. Our primary focus in 2016 is to execute on 2015’s major initiatives to ensure our shareholders reap the benefits of these investments.