October 2023

Playing Smart Offense At a Time Hiding on Defense Wouldn’t Be Criticized

Dear Clients, Employee-Partners, and Friends of Jefferies,

Similar to 2022, 2023 has been a challenging year as the transition from free money to a real interest rate approaches its conclusion.  This has meaningfully curtailed, if not foreclosed, capital markets activity, as well as mergers and acquisitions.  While this could have led us at Jefferies to simply sit back in defense, we felt secure enough to choose instead to play smart offense, so that when things improve, Jefferies will be in a better position than ever to serve our clients in the capital markets and to drive strategic growth.

For the past three decades, we have tried to live up to a very important, yet simple principle:  Do our best to avoid arrogance that leads to doing something stupid during good times so that, when times are most challenging, we can aggressively play offense.  While this trite saying may seem like incredible common sense, in practice it is very hard to consistently live by.  During good times, it is easy to get lulled into a false sense of invincibility, since everything one does seems to work, and let’s face it, it is human nature to quickly believe your success is more about your capabilities than the overall market environment.  Conversely, when times are challenging, it is easy to assume things will always be this way, and human nature has a way of making us roll into a defensive protective ball so that we may best protect ourselves from the onslaught. 

We have found that the best ways to deal with these natural human tendencies while working to help build a firm are to:

1. Force yourself and everyone in your organization to prioritize the long term, consistently
2. Make sure you always have a super strong and structurally reinforced capital foundation supporting your business
3. Never forget that the sun does always come out and things eventually do get better
4. Have a consistent strategy that is well communicated and universally embraced by the entire team
5. Diversify as much as is sensible
6. Have alignment and support from every critical constituency, including shareholders, bondholders, directors, and co-workers 

We have found over the decades that when you have these themes embedded throughout your organization and you have a plan and a team capable of executing, magic can happen.  The magic might not be visible or apparent until a time in the future when the environment returns to some form of “normalcy,” but the magic is capable of transforming your firm. 

Despite having lackluster recent financial results, we at Jefferies have been aggressive in hiring additional world class investment banking talent across the globe and bonding these new partners with our incredible existing team.  Our culture at Jefferies is strong and this allows us to identify the right new partners, convince them to join us, and then integrate them into one unified team determined to best serve our clients.  The fact that the rest of our businesses are holding up in a very respectable way is another key reason why we are able to employ this strategy. 

Specifically, since interest rates started rising at the beginning of last year, we have added and will continue to add, from other firms and through internal promotion, 111 Investment Banking Managing Directors, bringing our total senior IB team up 45%. We expect to enter next year with about 360 IB MDs at Jefferies, up 70% in four years. Conventional thinking and human nature could easily have led one to conclude that senior headcount should change by a significant amount, but in the opposite direction from where we went.  Our investment has been on a global basis, as we have expanded throughout Europe, Asia, South America, Canada, and the Middle East, as well as in the United States.  While our investment is largely in Investment Banking, there has also been significant additional investment in Equities, Fixed Income, Research, Support and Alternative Asset Management.  Our investment in human capital is significant and, while investing smartly in one’s business is always a challenge, doing it during a market slowdown is even more difficult.  What we are doing is neither easy nor without risk.  If we are not able to blend our teams in a unified manner, we will create many of the problems some of our competitors are currently suffering. Nobody knows for sure when the return of more normalized capital markets will actually occur.  There is no doubt that there will be some pressure on margins and profitability as the lag time between investment and payback gets flushed out.  Investment must be made incrementally in technology, new offices, and support.  Nothing is for certain other than any endeavor like the one we are currently undertaking will cost more than we plan and take longer than we hope.  This is what we have learned over the past three decades as we have worked with all of our other partners to build Jefferies from a very small stock trading boutique into one of the largest global and full-service Investment Banking firms in the world. 

We do not have a monopoly on the best ways to build a business.  There are many who have done it quicker, in much larger scale, and in even more competitive industries.  Our purpose in sharing this note with our clients is to offer you some insight into how and when we make investments at Jefferies, and our commitment to you.  Our hope is that our strategy might trigger some thoughts you might have in regards to making exceptional (and perhaps countercyclical) investments in your own businesses.  Our goal in sharing these thoughts with our own employee-partners is because we know that this strategy will not be successful without the support, teamwork, energy, and passion of each of you.  We have employed this long-term contrarian investment strategy at Jefferies in 1990, 1994, 1998, 2001-02, 2008-10 and now 2022-23.  The plan and execution never feel perfect at the time, but when people ask some time in the future, “how did Jefferies get to this new level?” hopefully we will be proud to say we were fortunate to be in a position to play offense.

Stridently moving forward in the face of a strong wind, knowing we are all marching together,