The New Capital of Capital

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London's surging financial-sector fortunes go beyond just its booming stock markets. For evidence of that, take a look down the plush streets of Mayfair. Across town from the city's traditional financial quarter, and nestling between the art dealers and high-end jewelers, London's hedge-fund industry is quietly putting down roots. The city's share of the $1.23 trillion global industry had climbed to around 26% by June last year, up from 21% a year earlier. (In France, Europe's next largest market, assets came in at just 1.7% of the world total.) By clustering close to clients, rivals, support services (London is home to three of the world's top four law firms) and all the resources of the City itself, London finance firms like hedge funds can pull in more business and squeeze costs further than if they were located outside that network. The economies of scale, scope and agglomeration, as these perks are known, are particularly acute in London. Without them, says the cebr, the E.U. would have lost out on $44 billion in investment banking-related business in 2003.

Agglomeration applies to labor talent as well. In a survey of international financial services execs published in 2005 by Z/Yen, a London consultancy, almost a third of those polled rated the availability of skilled labor in Paris and Frankfurt as poor. Three-quarters thought London's was excellent. Hourly productivity among the U.K.'s financial-services workers is estimated to have climbed 3.6% per year between 1997 and 2001, according to a 2005 report, well above the 2% growth in the British economy as a whole over that period. No doubt, London's captains of capital are handsomely paid for their efforts. City workers racked up $17.2 billion in bonuses last year, according to the cebr, 18% more than the previous year. (The windfalls have sent London house prices skyrocketing. Property valuations in the capital soared by around 10% in 2006.)

That's not the end to London's advantages. Not only does London have a "deep pool of talent," says William J. Mills, ceo of Citigroup's Corporate and Investment Banking division for Europe, the Middle East and Africa. But compared with its Continental rivals, it offers "the most flexible labor laws." While the number of financial-sector staff in London rose 4.3% to 318,000 between 2002 and 2005, tough U.S. immigration rules applying to foreign talent helped New York's head count slide by 0.7% over the same period, according to a report published late last month by McKinsey. London's geographic position also allows it to start the day trading with Tokyo and end it trading with New York City.

London's continued rise is by no means assured, of course. Efforts to unclog its congested transport network are long overdue, and Wall Street may be reenergized when proposals aimed at making it cheaper for firms to comply with Sarbanes-Oxley come into force, perhaps as early as this year. And consolidation among other exchanges — the New York Stock Exchange's $14.3 billion deal with pan-European operator Euronext is just one of a string of mergers in recent months — could make it tougher for the lse to stay ahead. For now, though, with two dozen of Broadgate Tower's floors already taking shape, it seems there's little to spoil the view.