Jefferies Streamlined to Support Growth, but Expanding Beyond the Middle Market Is a Challenge

Jefferies has organized its business around two segments: investment banking and capital markets; and asset management, which are responsible for 90% and 10% of net revenue, respectively. This represents quite an evolution from a diversified conglomerate that generated over two-thirds of its net revenue from beef processing a decade ago, though the asset management segment retains a few legacy business stakes. We see value in diverting less-effective parts of its legacy portfolio to its main investment banking and trading operations. However, its weaker brand compared with larger banks limits Jefferies to serving the middle market (market capitalizations of $100 million-$1 billion), which has an impact on its operating-margin potential and makes it harder to attract top bankers.