A recurring theme in the most recent slate of multibillion dollar M&A transactions were the lack of advisory services from the investment banking juggernauts. Centerview, Moelis, Evercore, Guggenheim, Lazard, Greenhill, Perella and Zaoui to list a but few, were at the hearth and core of many of the complex deals, complementing if not supplanting altogether the much better known major players including Morgan Stanley and Goldman Sachs.
Numbers don’t lie
M&A advisory boutiques accounted for 27% of M&A fees for the first quarter of 2015, compared with around 15% percent in 2007. So far this year, the slice of the pie captured by boutiques has slightly decreased with respect to the 30% peak of 2013, however the overall size of the pie has increased substantially, with deal volume in 2014 up 47% year on year, the highest level from 2007, and fees consequently increasing too.
These findings further confirm that boutiques, beyond faring better than bulge bracket firms during the post 2008 financial turmoil, have also been able to consolidate their market share now that the industry is picking up steam again, greater size of the deals notwithstanding. In fact, despite the ballooning in the value and number of deals (worth more than $5 billion) fuelled by the somewhat loose credit markets, boutiques, usually more apt to smaller transactions, have held their ground.
But what, exactly, are these firms, who is behind them and what is fueling their extraordinary growth?
Often the brainchild of a star rainmaker from a bulge bracket bank, boutique investment banks are financial advisors who are independent and focus solely on providing advisory services, forgoing benefits and constraints of being a full service bank. Plying their trade in an industry beleaguered by regulations, crowded by infamously “too big to fail” institutions whose ability to compete has been hampered by regulations, these so called “elite boutiques” have managed to carve a niche, leveraging personal relationships and the much greater freedom arising from a less regulated, more flexible structure. After all, banking is a relationship driven industry where image plays a big role, and bulge brackets banks, along with their financing and trading businesses, bring to the table a wide array of conflicts, as stressed also by Blackstone’s CEO letter to shareholders when explaining the decision to spinoff their advisory business to PJT, an up and coming boutique.
Technically being not banks, boutiques are not subject to capital rules nor regulatory supervision, making them more nimble than their bigger brethren and at the same time facilitating them in attracting top talent, lured by the broader exposure, more flexible structure and virtually unlimited paychecks. Just to give an idea, Moelis & Co paid out 64% of its net revenues in form of compensation, while Goldman Sachs fell short at 37%. This is without taking into account the fact that most of it is also deferred or stock based; this in turns leads to another issue in big institutions, where the value of stock options and bonuses is subject to the overall performance of the company, giving rise to free riding problems and a general feeling of lack of connection between individual performance and firm profitability.
Another issue has to be factored to understand this phenomenon: regardless of the situation, the top rainmakers in the business have always been tempted to jump the (sinking) ship and hang their own shingle, and now that capital controls, pay restrictions, deferrals and claw backs are taking their toll taking the big leap looks more attractive than ever.
On top of all this, by working for boutiques deal makers are able to further develop their prestige by focusing on doing what they love – deals – without having to deal with as much bureaucracy. According to a bulge-bracket banker who eventually shifted to a boutique in 2007:
“At a big bank a lot of time you become a salesman of securities and other financial products. I really missed spending time with clients”
From a client’s perspective, boutiques are becoming more and more entailing for all the aforementioned reasons, as they are seen as providers of superior independent advice rather than just big balance sheets to finance deals, and their more flexible structure makes them nimbler players that can be more attentive to clients needs.
Additionally, the smaller the bank, the greater the so-called “key man risk”, where the reputation, and therefore earnings, of the business are tied to the one or two big names associated with the bank. This is clearly great from a client’s perspective, as it ensures an optimal alignment of interests between the two parties, as every major deal is of capital importance for the boutique and therefore it will receive the best possible treatment. In a bulge bracket on the other hand this might not be the same, as teams might have to spare their time between several contemporary projects, meaning that there’s no guarantee for clients to have the best people advising them at all the time.
Are we therefore witnessing the beginning of the end of the bulge bracket bank, the one stop shop that looks after every aspect of a deal from start to finish? Not at all.
“The boutiques should have a meaningful share of the M&A market, but not half, or even close. The big firms have a critical role to play, particularly on the financing side”
Peter Weinberg, Co-Founder, Perella Weinberg Partners
This statement is supported by the never more common practice of hiring multiple banks for a single deal, pairing a boutique with a larger bank that can look after the financing side, as bulge brackets still are the only ones to have the depth and balance sheet capacity to shoulder large underwritings.
“Independents or boutiques are now often at the heart of the strategic debate with the bulge bracket firms frequently seen more as product providers”
Andrew Sibbald, Chief Executive of Evercore Europe
On a speculative side note…
In an intriguing twist, after the IPO of Moelis & Co., other firms are whispered to be thinking about making the same move to cash in their reputation: Houlihan Lokey has recently been rumoured to be considering a sale, and the same is believed about Sterne Agee and FBR & Co.
The last time several boutiques went public was around a decade ago, when Greenhill (2004), Lazard (2005) and Evercore (2006) listed in successive years, and we all know what happened in 2007. The people running these firms are undoubtedly clever, are they simply enjoying the ride while they can or jumping the ship before it sinks – would it be too far fetched to insinuate that they are trying to cash out before everything starts tumbling down again?
After all, what we are witnessing is one of the longest recoveries in modern economic history.
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