This article presents a short summary of trends in investment banking (pre-and-post credit crisis), and also highlights key features of boutique investment banks, its differentiators, and some key challenges. This article is based on author’s live work experience with global investment banking firms.
During the golden days of the global investment banking (IB) industry, prior to the subprime mortgage crisis, large firms pursued multiple multi-billion-dollar deals across capital-raising, mergers and acquisition, and advisory functions.
Undoubtedly, during this time, individuals in senior leadership roles would have witnessed:
- The availability of multi-billion dollar deals across sectors and regions,
- Relatively shorter deal closure periods,
- Deal exclusivity,
- Reasonably higher retainer fees during the deal cycle,
- Attractive commissions,
- Hefty bonuses and the resulting flashy lifestyles,
- Little to no work-life balance – not that anyone cared.
Large, mid-sized, and small IB firms alike benefited proportionately from this golden era. Even newly established IB firms enjoyed rapid success at that time, growing nearly 100 percent with every deal they closed, courtesy bull market.
Fast-forward approximately 11 years, and the IB world is vastly different. To suit the current market situation, large IB firms have restructured their businesses and cleaned up the balance sheets. However, for the small and mid-sized firms who survived, it’s still a struggle to adjust to a more dynamic, challenging, and relatively less glamorous IB world. At this time, most mid-sized and boutique investment bankers would agree that:
- There are relatively fewer deals,
- The industry boasts rising competition,
- Declining commissions are more commonplace,
- There is no exclusivity and little to no retainer fees,
- Deal closure periods range from 6 to 24 months, with huge uncertainty,
- There are low to no salary and bonus hikes, rising attrition, and corporate restructuring.
Yet, interestingly there has been a spurt in small or boutique IB firms across the globe! Most of these firms (particularly those I’ve come across) are founded by senior investment bankers with around 15-20 years of core IB experience. These founders have often spent extended periods in senior leadership roles with large global investment banks, featuring strong client relationships and professional trust. A good example is, Dyal Co., set up by Gordon Dyal, a former Goldman Sachs investment banker (1998-2015). For the $43 billion sale to ChemChina in 2017, Dyal Co. emerged as the lead advisor to Switzerland’s Syngenta.
How Do These Boutique Investment Banks Make a Difference in This Market?
Strong, extended relationships open doors for these founder-bankers to pitch for potential deals and compete with large players, including their former employers. Although it’s never easy to break into the deal, as multiple stakeholders need to be convinced, relationships cushion that difficulty and facilitate deals. This clearly indicates that for clients, their banker matters even more than their IB firms, and the relationships move when the banker moves to the other IB firm.
Flexible and Creative Solutions
These boutique investment banks are blessed with some of the sharpest minds in the industry, thus offering clients a great value by executing creative solutions in a cost-effective manner. The creative solutions offered may include:
- faster and better access to potential investors,
- high-speed, flawless execution,
- creative deal structures, and
- strong negotiation skills and deal closures
Due to the lean structure of these firms, they can offer aggressively competitive fees and keep their costs under control. Some smart IB firms also maintain an optimal onshore and offshore team mix, utilizing low-cost countries like India, Egypt, Lebanon, Sri Lanka, Costa Rica, and Argentina, for outsourcing deal-specific research support or entire deal execution support. This cost- arbitrage-driven outsourcing model which is well-adopted by large banks including Deutsche Bank, Credit Suisse, HSBC, and Barclays, is gradually gaining approval among boutique IB firms too.
Specialization is the Unique Sales Proposition (USP)
The boutique investment banks with expertise in any niche a) area/function (e.g. Lazard Investment Bank is focused mainly on M&A advisory), b) sector (e.g. Cain Brothers specialized in healthcare sector) or c) geography (e.g. Crasner Capital is focused on emerging markets), tend to win more mandates, as they can easily distinguish themselves in this highly commoditized market. Clients prefer to work with a ‘specialist’ to execute the deals over a ‘generalist’.
Execution is Key
At the end of the day, what matters is smooth, successful execution. A firm’s track record and current ability to execute a deal successfully weighs more than all the above characteristics when it comes to awarding deals. Hence, the banker has to ensure a 100 percent hit rate, good reference-ready clients, and smart, reliable execution team. As they say, “the proof is in the pudding”!
What are Some of the Key Current Challenges of These Firms?
During the peak season when there are multiple deals, these firms face an acute bandwidth shortage, and may resort to outsourcing solutions to optimize revenue. One cannot afford to say ‘No’ to any business today!
Relatively Weaker Deal Pipeline:
In a good market, a strong firm may have a healthy deal pipeline. However, not all firms are always lucky. The deal pipeline could dry up for protracted periods due to micro or/and macro reasons – a phenomenon that can hit some firms hard, especially when they’re sitting on a high fixed cost.
Uncertainty of Deal Closures:
Deal closures are dependent on many internal and external variables; and at times may range from 6 to 24 months. In some cases, the IB firm may not earn any fees if the deal ends up becoming a no-go, leading to cash-burn, heartburn and an irrecoverable opportunity cost. This happened when Zaoui spent close to a year working on Go Scale’s bid to buy LED business from Philips in 2015, and the efforts went down the drain when the deal failed to materialize. The deal would have seen Go Scale buy 80.1 percent interest in Lumileds but failed to receive approval from the Committee on Foreign Investment in the United States (CFIUS) as the parties were unable to resolve CFIUS’ unspecified concerns. There is a distance between the lips and the glass!
Achieving the Scalability Is Important:
Mr. Effron, ex-UBS banker, co-founder of Centerview Partners, stated “It’s very hard to build a firm beyond just two bankers. But you then have to possess an operational expertise to manage the growth of the firm, while still executing for clients!”. This is so true! Not every boutique investment banker turns out a good entrepreneur. They may bag million-dollar deals, but fail to:
- decentralize the decision-making,
- implement apt systems and processes, and
- develop a good corporate professional culture.
Failure to adequately implement these steps above may impact the scalability of the business, as the scalability potential is hugely dependent on excellent entrepreneurial skills.
This reminds me of the quote by Michael Zaoui, a former Morgan Stanley executive who founded Zaoui & Co with his brother Yoel in 2013, “The question is not, can you grow? it’s, do you want to?”. The question facing most upstarts is how to grow from working on a few assignments to creating a firm which can provide founders with liquidity for their stakes while striving for longevity and scalability.
Despite all the challenges, these boutique investment banks are geared to gain significant mind share and market share in this competitive market. A good leadership team, niche expertise, smooth and fast deal execution platform, consistent track record, value-additions, competitive pricing, and perseverance is the recipe for success!
Note: Some reputed boutique and mid-sized investment banking clients of ValueAdd Research and Analytics Solutions (ValueAdd) are the best fit examples to quote, however, we have not used our clients’ names to comply with the confidentiality terms of the executed NDAs.
Sources: Seeking Alpha, Financial Times, Reuters, Investopedia, Business Insider, CNBC, Divestopedia, DeSantis Breindel, LEDs Magazine, LEDinside.
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