How Boutique Investment Banks Maintain Appeal

By Marc Cooper

Over the last 30 years, through boom, bust, consolidation, catastrophic dislocation and subsequent recovery – the investment banking industry has evolved into a split universe.

On one side are the large, money center institutions dependent on trading and other financial products to generate profits. This model contrasts with smaller boutique investment banks, operating as partnerships and led by individuals who specialize in niche areas of banking, relying more on pure advisory services rather than a collection of capital driven products.

Boutiques have also evolved as they have proliferated and differentiated themselves from their larger competitors. A handful of “boutiques” today have become large and diversified and in some cases are public, which may result in suffering similar issues that bigger banks face.

Regardless of size, gone are the days when mastering deal execution meant mastering investment banking. Now, you not only need to be an expert at pricing, negotiating and structuring engagements, but also need to know the intricacy of the industries and companies that banks represent.

The rise of boutiques is also a result of the migration of senior quality bankers from financing-based banks to industry focused advisory firms.

Deep Industry Knowledge

This next wave of boutiques, including Solomon Partners, have differentiated themselves from the big banks and many of the “big boutiques” by becoming industry focused, subject-matter experts.

For example, within media services, a true subject-matter expert will understand how mobile technology and streaming media will impact content distribution and advertising.

In the retail sector, bankers must recognize the need for innovation, to keep up with consumers’ rapidly changing purchasing behavior.

Experts in the power space will see an increasing divergence by market in the risks and value drivers generators face, as regulators adopt different programs to achieve their reliability and renewable goals.

These boutiques employ bankers who live and breathe the sectors they advise on, providing unparalleled analysis, understanding and access, further positioning themselves to secure top talent and make a strong case to corporations in need of investment banking services.

Client-Focused Strategic Advice 

Larger banks typically sell a suite of services to corporations and are not necessarily purely focused on giving those companies just their best strategic advice.

Within large financial institutions, banks often prioritize financing or other products that may have higher revenue or other associated fees at the expense of pure advisory services.

Proprietary ideas, customized advice and creative solutions to complex issues are what clients truly need and value.

Benefitting From Booming M&A Activity

Record megadeals have pushed global takeovers beyond $1.2 trillion in the first quarter of 2018, as US tax reform and faster economic growth in Europe unleashed many companies’ deal making instincts.

Hiring boutiques for prominent M&A deals has certainly increased since the financial crisis as companies rely on them to resolve perceived conflicts of interest at the bulge bracket banks.

Even in the last five years, boutiques have taken major strides in catching up to the transaction volume captured by bulge brackets.

According to FactSet, in 2012, the top 10 boutiques represented 24% of the total transaction value of the top 10 big banks. By 2017, that number had risen to 36%. We see this trend continuing this year up to 42%, as of May 8.

Career Advancement

Compared to larger platforms, boutiques continue to provide more lucrative compensation packages to investment bankers who have relationships.

Additionally, at big investment banks, it will be about a broader suite of services that the firm will be bringing to bear, which may not necessarily put the advisor in the spotlight.

In my opinion, these individuals are finding boutiques to be far better environments for them to do what they enjoy most and what they do best in providing strategic advice.

Boutique firms have become a formidable force in investment banking by offering deep industry expertise, the individualized focus of senior bankers and a heightened sense of discretion.

For these reasons, I believe you will see a continued migration of seasoned bankers to boutique platforms, in addition to more corporations turning to boutiques for strategic advice over the coming years.

Marc Cooper is the Chief Executive Officer of Solomon Partners