Lifting the bonnet on Marex's London IPO

But brokers have been lifting the bonnet on Marex (formerly Marex Spectron) as it heads for a London IPO and premium listing on the LSE with conditional trading expected to begin this week. Supporters say even a cursory glance tells you this isn't simply another company looking to ride the commodities boom.Perhaps take that with a pinch of salt, but the more one assesses Marex and its prospects, the more one sits up and takes notice. Glencore, for instance, emerges as one of its largest and highest-profile clients, along with the likes of JP Morgan, Total, BP, Macquarie and Vitol, the Dutch commodities trader based in Rotterdam.Marex is one of the largest dealers on the London Metal Exchange, and headed by a former team of heavyweight Lehman bankers. Step forward Jeremy Isaacs, the former head of Lehman's European operations, and Roger Nagioff, the bank's ex-head of global fixed income. The CEO is Ian Lowitt, the American bank's former chief financial officer.Marex is controlled by JRJ Group, a private equity firm founded by Isaacs and Nagioff, and which has a 41% indirect economic interest in the firm. JRJ will reduce that stake through the London IPO, although it will remain a large shareholder.Accepted, Marex will share a sector with languishing rival TP ICAP, the interdealer broker that got itself massively over-leveraged. ICAP's shares have been hit hard as it has also been slow to move into specialised areas that focus more on electronic trading.There are worries voice brokerage in commodities trading could be replaced by computers but that hasn't happened yet. Just as well, as Marex derives a sizeable proportion of sales from this side of its business, but there's no reason to think it can't adapt.It has already shown its mettle, diversifying via mergers and acquisitions. In November, it acquired Chicago-based equity derivatives firm XFA. Marex has developed a service that trades in sustainable products, such as carbon credits, renewable power, biofuels and recycled metals. This market should grow strongly "in the light of the growing trend of decarbonisation and focus on ESG matters".Marex's move away from its core commodity-broking heritage has provided a catalyst for growth, pushing net revenue to $414 million last year from less than $250 million in 2017. Pre-tax profits of $55 million in the year to December were up from $46.6 million a year earlier. Bolt-on purchases have expanded the group's reach into derivatives markets such as equity futures and options.Marex's strengths, said Fitch Ratings two weeks ago, are "principally in niche segments requiring specialist knowledge as opposed to dealing in more widely traded instruments". "These are smaller markets in volume terms but they also offer Marex wider margins; the company is progressively expanding its geographic reach and product suite".Fitch added Marex had more than doubled operating profits over 2017-20, through organic volume growth and acquisitions, achieved without reliance on advantageous market conditions, as the Bloomberg Commodity Index declined over that period.Marex is on the warpath, with its LSE registration document saying there was "substantial opportunity for consolidation in the relatively fragmented markets in which Marex operates, with many smaller players lacking scale and struggling with an increasing regulatory and technology burden".There are about 3,400 commodity dealers in the US as at September 2020 and about 1,800 commodity and security dealers and brokers in the UK as at November 2020. "This fragmented market contains a large number of sub-scale participants that lack the resources or expertise to compete effectively on an independent basis."Companies such as Marex have plugged a gap in the market as large investment banks have retrenched from commodities trading since the financial crash of 2008/9 as their cost of capital has increased. So, there is plenty of scope for continued growth both organically and through acquisitions," with data and analytics, a primary target.Does all the above mean Marex is home and dry? Hardly. The usual caveats apply with the registration document listing risk factors as long as your arm. Don't panic, this isn't unusual as every company that seeks a listing must outline possible risks for potential investors. Best not to forget about them, though. The commodities sector, as we know, is highly cyclical and sometimes things go wrong.In April 2020, for instance, there was a scare when Marex temporarily restricted customers from taking new positions in oil futures contracts as well as raising its margin requirements, in a move to insulate itself and its clients from huge swings in prices. The move reflected the strain oil markets were under after US crude prices crashed into negative territory. The Financial Times reported that a rival, Interactive Brokers, faced an $88m loss, although Marex stated its balance sheet remained strong.That said, Marex warned in its registration document any decrease in trading volumes or pricing levels could "significantly" reduce the commissions the group earns and the spreads the group makes from facilitating and executing client orders."[That would] have a material adverse effect on the group's business, financial condition, results of operations and prospects."Marex is certainly an interesting company but - as always - be prepared to take the rough with the smooth.

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