Why We Like JMP Group

For some time now we've been bullish on boutique investment banks.  In the fall of 2007, as the current crisis began to unfold, we predicted a shake-up in the highly concentrated investment banking model.  The crisis of the past 2 years has only served to underscore our belief (a belief shared by others) that the conglomerate model of investment banking cannot stand, and that smaller, more nimble, research-driven shops will be the winners.

One of the shining examples in this regard is JMP Group (JMP), a San Francisco-based boutique founded in 2000 by Montgomery Securities alumni Joe Jolson and Carter Mack.  JMP went public in 2007, and as a result has had to build its business in one of the worst market environments of the past century.  Nevertheless, JMP has survived, and in fact has thrived, capitalizing on the distress of its larger competitors, capturing talented managers fleeing ailing bulge bracket firms, and partnering with Qatalyst Group, a technology boutique founded by veteran tech banker Frank Quattrone.

JMP's recent financials are impressive.  Having posted a net loss in Q4 of 2008, the company returned to profitability in the first quarter of this year with EPS of $.03.  In the most recent quarter, the company posted record revenues, nearly doubling from $25.02 million to $49.63 million.  Revenues increased in all core business areas with the exception of asset management, which actually fell by 50%.  Quarterly EPS increased 667% to $.20.  JMP's balance sheet is strong, with $55.7 million in non-deposit cash and marketable securities, and minimal debt (8.5% d/e ratio).

But can the company continue to post such numbers?  We believe it can.  Management has clearly proven itself by building and sustaining a viable investment banking franchise in the midst of utter turmoil and uncertainty in the global economy.  In addition to being a beneficiary of the bulge bracket meltdown, we believe JMP stands to benefit greatly from increased M&A activity and, yes, the eventual return of the IPO market.  The universe of venture and private equity-backed companies continues to grow with no end in sight, and will provide a healthy stream of dealflow by mid-2010.