Houlihan Lokey and Knight Capital Group Inc. (NITE) will announce a joint marketing alliance Tuesday that will marry the core investment banking and trading businesses of the two firms, but maintain their independence.

The partnership, while it stops short of a joint venture, gives Houlihan a broader reach for its capital markets business and provides Knight with access to companies looking to pursue debt or equity transactions. It also helps Knight, a Jersey City, N.J.-based electronic trader, enhance its fixed-income operations.

The deal comes as Wall Street firms such as Goldman Sachs Group (GS) have come under scrutiny for potential conflicts between their trading and other businesses. Both Houlihan and Knight entered into a fee-sharing agreement, yet will keep their businesses separate.

In an interview with Dow Jones Newswires, Scott Adelson, senior managing director and co-head of corporate finance at Houlihan Lokey, said sales and trading and investment banking have "little interaction."

He said the benefits of combining such businesses have been greatly reduced. Instead, Houlihan recognized a broader distribution network within capital markets was "the missing piece" within its business model and could be obtained from the outside.

Houlihan has already been strengthening its ability to provide debt financing to clients, adding Libra Securities and all of its professionals last November.

While Houlihan provided advice in mergers and acquisitions and restructuring services for clients, "it didn't a offer meaningful amount of capital markets advice," Adelson said.

After considering other partners and options including building up its own sales and trading business, Houlihan ultimately decided such a project would be too expensive. Knight Capital, which already had market access and trade execution services, was a more viable option.

In one such example, Houlihan Lokey co-managed THL Credit Inc.'s (TCRD) common stock offering of 15.3 million shares on April 21. Adelson cites access to Knight's distribution channel as one reason Houlihan assisted with the deal.

"Their accounts are predominantly on the buy side, our accounts are predominantly issuers," Adelson said.

Gary Katcher, head of global fixed income for Knight Capital, said "in the past, [Houlihan] gave advice and couldn't provide the financing capability...We could [provide] the financing capability, but didn't give the advice, when you put them together now, it works quite well."

Knight Capital has been pursuing its own growth in fixed income, adding more than 220 professionals last year. This has become a popular growth area within financial services, boosting banks' profits because of the high margins.

Katcher says the Houlihan deal will help Knight "be more relevant to clients" and allow the firm to provide new issue products.

Houlihan and Knight Capital plans to share fees from potential transactions "where appropriate," Adelson says, but he declined to provide further details.

-By Brett Philbin, Dow Jones Newswires; 212-416-2173; brett.philbin@dowjones.com

(Joe Bel Bruno in New York contributed to this article.)
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