In an industry dominated by large, full-service investment banks, smaller players are capitalizing on waves of new regulation and bureaucracy. The push by these “boutique” investment banks to siphon-off more and more market share is decades old, but post-crisis dynamics are making the proposition of smaller shops more attractive for many of the most prolific dealmakers.
The “universal” investment banks have been bolstered by
financial deregulation over the last thirty years, starting in the early 1980s when two significant legislative mandates brought back banking activities that were previously banned. Riskier and more lucrative businesses like proprietary trading and highly leveraged loans became staples at firms that could support larger balance sheets, providing artificial revenue streams that increased the ability to offer employees better pay. As this shift in profitability grew, pay scales tilted favorably towards bigger banks and hurt pure advisory firms.
Even in this environment, some seasoned bankers fled their
perches at bigger firms to create leaner, more agile advisory shops. Although they brought with them their portfolio of clients, senior dealmakers at firms like Evercore Partners and Greenhill & Company, which were started in the last decade of the 20th century, fought hard to convince big companies to trust them with prominent deals. They were successful in taking market share by offering advice without the conflicts that arise when banks are also harboring large trading and lending arms. Additionally, this model offered a more attractive risk profile, in which partners could be expected to be more prudent now that they had their own money on the line.
The investment banks that were forged in this period set the
stage for the recent resurgence of the boutique. In light of the most recent financial crisis and the recession that followed, financial regulators have focused on restricting the riskier practices that gave the bigger banks an edge. Unable to bolt-on as many tangential products to a deal, leveraging a large balance sheet is becoming less relevant during the advisor selection process. This leveling of the playing field has refocused clients back to the original question that brought about the advisory business: who can offer the best advice?
It is now common to see big names at bulge bracket banks breaking loose from the shackles of increased regulatory pressures and the ensuing bureaucracy to establish smaller shops. Firms like Moelis & Co and Centerview Partners, now elite independent banks, were started no more than nine years ago by bankers from Morgan Stanley and UBS. With such renowned talent siding with the boutiques, the advantage of housing advisory businesses within full-service banks is being called into question.
This momentum shift can be framed as intellectual capital coming back into vogue now that financial capital is more even amongst the investment banks. And boutiques are not simply holding their own in the fight. Small advisory-only firms claimed 16% of mergers and acquisitions deals in 2014, up two-fold from 2008.
This performance is no doubt riding on the current M&A frenzy, so it will be interesting to watch how the boutiques fair when the tide recedes and tests their staying power. For now though, it’s safe to say that many of the most trusted names in advisory are buying into the boutique model, so it’s likely to stick around at least in the short term.