The Liberal Democrats can move forward in "leaps and bounds" by taking advantage of divisions within the Tories and Labour, Sir Vince Cable said.
The formation of The Independent Group (TIG) of breakaway MPs from the two main parties has created a potential rival to the Lib Dems, but Sir Vince said they offered nothing yet beyond Westminster.
The Lib Dem leader said the local elections in May, after which he will stand down, would offer the opportunity to shake off the legacy of the coalition era.
The former cabinet minister told the party's spring conference in York: "This year's local elections must be the place where we finally shake off the set-back of two damaging general elections, and regain confidence, building on the advances of the last year. We can and will.
"The environment in which we do so has now changed. We are seeing early signs of some realignment. The breakaway group of independent MPs is a sign of that.
"I have been very clear that we must welcome a realignment of British politics and the opportunities it presents.
"I have also been clear that we should offer the hand of friendship to those who want to work with us rather than against us. "
The creation of TIG, which is holding talks about becoming a fully-fledged party, poses a headache for the Lib Dems by competing for similar voters.
Sir Vince acknowledged that many of their policies and views could have been "cut and pasted" from the Lib Dems.
"The new group has a following wind from people who are curious about something new, and who admire their decision to break with their parties. But there is nothing yet beyond Westminster," he said.
"No local infrastructure. No local base.
"They are very exposed to a wipe-out in an early election. We aren't. "
Referring to former leader Tim Farron's description of the party as "cockroaches" which would survive a nuclear war, Sir Vince said: "I think we can do more than survive."
He added: "If, as I sense, the two old, tired and increasingly discredited major parties are to fracture, we shall move forward not in small steps, but in leaps and bounds."
On Brexit, where the Lib Dems have strongly backed a second referendum to overturn the Leave vote, Sir Vince said: "I remain astounded that some people claim a new referendum would be undemocratic.
"What is democracy if it is not the right for a country to change its mind?"