Investment Banking Boutiques Are on the Rise

Independent advisory firms are flourishing as big investment banks face new post-crisis restraints.


When Christopher Viehbacher began looking for acquisitions to bolster the product pipeline and revive growth at Sanofi-Aventis two years ago, he didn’t immediately turn to the French pharmaceuticals company’s traditional investment banks, such as BNP Paribas and Merrill Lynch & Co., the tandem that had worked on the big 2004 merger that created Sanofi-Aventis. Instead, he relied on the advice of François Maisonrouge, a veteran pharma expert and senior managing director at New York–based boutique bank Evercore Partners. Maisonrouge identified Genzyme Corp. as a target, asserting that the Boston-based biotechnology company’s high-priced drugs for treating rare diseases like enzyme deficiencies were less vulnerable to competition from generics than many of Sanofi-Aventis’s medicines were. In May 2010, Maisonrouge made an initial overture to Genzyme CEO Henri Termeer on Viehbacher’s behalf. When Genzyme rejected the approach, Maisonrouge advised Sanofi on making a hostile bid, working alongside J.P. Morgan, which helped arrange financing. After a bruising six-month battle, Sanofi-Aventis agreed in February to acquire Genzyme for an upwardly revised price of $74 a share, or $20.1 billion.

More companies are getting back on the takeover trail as the economic recovery continues and business confidence improves. The volume of announced mergers and acquisitions jumped 28 percent in the first quarter from the same period a year earlier, to $809 billion globally, according to data provider Dealogic. As they step up their activity, corporations are increasingly turning for advice to boutique firms rather than relying solely on the services of big investment banks. The top 25 boutiques advised on 17 percent of announced transactions in the first quarter, down from 21 percent a year earlier but way up from 2001, when boutiques’ market share was just 6 percent.

Notably, the smaller firms are winning advisory roles on some of the largest and most high-profile deals. The boutique with the hottest hand, Evercore, is advising AT&T on its $39 billion offering for T-Mobile USA, the biggest bid so far this year. Evercore is working alongside another boutique, Greenhill & Co., and J.P. Morgan on the deal. Perella Weinberg Partners, whose 2006 founding signaled the recent revival of boutique banking, is one of four banks advising NYSE Euronext on an agreed-upon $11 billion offer from Deutsche Börse. That mandate puts the firm into direct competition with Evercore, which is one of five banks working with Nasdaq OMX Group and IntercontinentalExchange on their rival $12 billion bid for NYSE Euronext. Moelis & Co., a boutique founded four years ago by former UBS rainmaker Kenneth Moelis, advised Australia’s Centro Properties Group on the $9.4 billion sale of its U.S. strip mall properties to Blackstone Group in February — one of the largest leveraged buyouts since the financial crisis.

“I’ve never seen anything like this before,” says Brad Hintz, a veteran investment banking analyst at Sanford C. Bernstein & Co., about the growing prominence of boutique banks.

Boutiques have waxed and waned over the years. The model for today’s small, independent firms, London-based N.M. Rothschild & Sons, has built a reputation for objective advice over some 200 years. “In many respects, we are competing with integrated houses in terms of  M&A, but we’re different in that we don’t want to marry that advice with any financing,” says Robert Leitao, the firm’s head of  U.K. M&A.

The segment’s newfound popularity seems to have staying power this time because of changes that have rippled through the industry in recent years. The 2008–’09 crisis was the “catalyst that caused the rise of boutiques,” says Hintz. The financial collapse tarnished the reputations of many integrated investment banks and drew fresh attention to the potential conflicts between big firms’ advisory operations and their trading activities. Lehman Brothers Holdings famously went bust; Citigroup and Bank of America Corp. (which rescued Merrill Lynch) needed federal bailouts to survive; Goldman Sachs Group endured a congressional grilling for betting against mortgage securities it had sold to investors, then paid a $500 million fine to settle civil fraud charges. In this climate boutiques’ self-styled reputation for proffering independent, objective advice serves as a powerful calling card with corporate clients. “The best role for a boutique is to be fully advisory,” says Scott Bok, CEO of Greenhill & Co., the boutique founded by former Morgan Stanley president Robert Greenhill in 1996.

The crisis has also sparked an exodus of talent from bulge-bracket houses to smaller upstarts — a vital factor for a business that depends so heavily on personal relationships between bankers and their corporate clients. Many bankers fell victim to cost cuts at major banks or took advantage of the turmoil to swap the hard-sell atmosphere of big global banks for the more entrepreneurial world of boutiques. Maisonrouge, for instance, was a Credit Suisse veteran who led the advisory team for pharmaceuticals and biotech companies, but he left to join Evercore in 2007 because he felt the Swiss bank was emphasizing financing more than M&A advising. “At a big bank a lot of the time you become a salesman of securities and other financial products,” he says. “I really missed spending time with clients.”

Boutiques also enjoy the advantage of flying under the regulatory radar in today’s Dodd-Frank, Basel III world. Small advisory firms did not get or need any government bailouts and have not been the target of public anger for their behavior leading up to the crisis. Crucially, regulators are not imposing limits, clawback provisions or transparency requirements on the pay of boutique bankers. Firms such as Perella Weinberg; Moelis; and Centerview Partners, founded in 2006 by another former UBS banker, Blair Effron, represent “a whole new generation of investment banks outside the regulatory restrictions” governments are imposing on major banks, says Hintz.

The popularity of boutique banks may get a further boost from a recent Delaware court ruling. In February, Chancery Judge J. Travis Laster granted a temporary injunction blocking Kohlberg Kravis Roberts & Co.’s proposed $5.3 billion acquisition of Del Monte Foods Co. because of an alleged conflict of interest at Barclays Capital, which was both advising Del Monte and providing financing to KKR for the deal. “Barclays secretly and selfishly manipulated the sale process to engineer a transaction that would permit Barclays to obtain lucrative buy-side financing fees,” Laster wrote in granting the injunction sought by Del Monte shareholders.

Del Monte hired Perella Weinberg to canvass other potential bidders during the 20-day injunction. The boutique did not find a higher bidder, though, and Del Monte stockholders approved the $19-a-share offer from KKR in early March. For its part, Barclays asserted that it had conducted a thorough sale process that achieved the best possible price. Still, some observers say the case set a precedent that could give a boost to boutiques. “It’s going to encourage boards to have independent advisers to help them keep their eyes on the big guys,” says Roy Smith, a finance professor at New York University’s Leonard N. Stern School of Business.

Not surprisingly, many boutique bankers agree. “Stapled financing can lubricate sell-side processes, but it does create a conflict of interest with respect to advice being provided to the board,” says Peter Weinberg, co-founder of Perella Weinberg and a former co-head of investment banking at Goldman Sachs.

Although boutiques compete with big investment banks, in practice they are just as likely to work in concert with their rivals. That’s especially the case if a deal requires financing, which typically demands the balance-sheet strength of a large lender. Companies that rely on financing from a big universal bank increasingly want boutiques on their advisory teams to ensure they get opinions free of any potential conflicts, says NYU’s Smith. As a result, he adds, “the independent guys get to be included in deals they might not have been included on.”

Take the Sanofi-Genzyme merger. The relationship between Sanofi-Aventis CEO Viehbacher and Evercore’s Maisonrouge was critical in bringing the deal together. The two men first got to know each other a decade ago, when Viehbacher was a senior executive at GlaxoSmithKline and Maisonrouge was at Credit Suisse. Viehbacher was quick to deepen the relationship when he moved to Sanofi-Aventis as chief executive in December 2008. “I included him in talking strategy for our business, so he had a good idea of Sanofi-Aventis,” he says of Maisonrouge, a Frenchman with an engineering degree from the École Centrale de Lyon and a Harvard Business School MBA. “François’ main contribution was in his strategic thinking leading up to the selection of Genzyme as a target.”

Maisonrouge and several colleagues from Evercore worked closely on the deal with a team from J.P. Morgan led by Robert Huffines, head of the bank’s global health care advisory group. “We would think about the issues separately, then get together and form a common analysis and give a joint recommendation” to Sanofi-Aventis, says Maisonrouge. Morgan Stanley and BNP Paribas also joined the company’s advisory team, but Viehbacher says Maisonrouge and Huffines formed the core.

Few understand the symbiotic relationship between big banks and boutiques better than Joseph Perella, who co-founded Perella Weinberg. “Independent firms are complementary to big firms in every way,” he says. Perella developed his skills as an M&A banker for 16 years at the former First Boston Corp., now part of Credit Suisse, before teaming up with colleague Bruce Wasserstein to form Wasserstein Perella & Co., arguably the first star investment banking boutique, in 1988. Five years later he quit to rejoin the bulge bracket, this time at Morgan Stanley as head of M&A and later as chairman of the firm’s institutional securities and investment banking unit. He left Morgan Stanley in the midst of the firm’s management turmoil in 2005 and the following year joined with former Morgan Stanley colleague Tarek Abdel-Meguid and Weinberg to open Perella Weinberg.

The firm’s growth over the past five years exemplifies the resurgence of boutiques. The New York–based outfit boasts 340 employees and offices in the U.S., Europe, the Middle East and, soon, east Asia. The advisory practice, the core of the firm, has about 50 senior partners, including some who focus on corporate restructurings so “revenues don’t fall off when M&A turns down,” Perella says. The firm has diversified into asset management and runs $7.7 billion for institutional investors and wealthy individuals.

“The advisory business is basically not scalable and has a low fixed cost, while the asset management business has a high fixed cost but is very scalable,” explains Weinberg. “The combination of those two businesses is very attractive.” And the firm is determined to keep it that way. Perella and Weinberg have no intention of getting into the securities business or other capital-intensive activities. “Our business model resembles the old firms on Wall Street and the City of   London: advising investors, corporations, governments and families,” says Weinberg. “We are private, do not have any debt and do not take any risk with our capital.”

Evercore, founded in 1996 by former Lehman Brothers partner and deputy U.S. Treasury secretary Roger Altman, is one of the oldest and largest boutiques, publicly listed since its $95 million initial public offering in 2006. The core of the firm, as with Perella Weinberg, consists of offering M&A and restructuring advice. Evercore has taken advantage of industry flux during the crisis to build the business by attracting a number of rainmakers, such as Maisonrouge, from bulge-bracket houses. The firm has 58 senior managing directors, up from 28 at the start of 2007.

Altman and vice chairman Eduardo Mestre are leading the team advising AT&T on its offer for T-Mobile USA, while Altman and senior managing director Jane Gladstone are the lead bankers advising Nasdaq OMX on its joint bid with ICE for NYSE Euronext. Those deals are the latest in a string of big mandates that Evercore has captured in recent years. It advised Wyeth on its $64.5 billion takeover by Pfizer in 2009 and worked with Burlington Northern Santa Fe on its $35.6 billion acquisition by Berkshire Hathaway that year.

“We want to do something a bit more interesting than just throwing capital around,” says Mestre, who was chairman of Citigroup’s global investment bank before joining Evercore in 2004. “It’s about being an adviser to the most-relevant companies in the world.”

Not only was Evercore the leading boutique in M&A advisory this year, the firm’s $71.9 billion worth of announced deals between January 1 and April 26 put it in 11th place in the overall league table, according to Dealogic. (Greenhill and Perella Weinberg were the only other boutiques in the top 20, at 15th and 16th, respectively.) The increase in M&A activity helped Evercore boost revenues by 20.5 percent in 2010, to $378.9 million; the firm had net income of $9 million, compared with a loss of $1.6 million a year earlier.

In addition to its advisory business, Evercore manages $17 billion in assets in an investment division. And in a rare move for a boutique, the firm last year launched an institutional equities division complete with research and a sales and trading operation. Altman’s timing was deft: Evercore snagged a mandate as sole financial adviser to General Motors Co. on its $23.1 billion IPO in November and co-managed BlackRock’s $9.2 billion secondary stock offering that month.

The other major publicly listed boutique, Greenhill, has eschewed diversification and stuck closely to its advisory roots. Two years ago the New York–based outfit sold off its $1.7 billion private equity arm, GCP Capital Partners, to focus exclusively on advising on mergers, restructurings and capital raising. CEO Bok believes the firm’s narrow profile is a competitive advantage. “Others are underwriting research and getting into capital markets, but we’ll see who’s right in five years,” he says. “We’re really all competing against each other and the big banks. There’s no denying there’s a battle for market share and no denying the bulge bracket is losing market share.”

Greenhill has aggressively expanded its roster of bankers. The firm more than doubled its number of managing directors between 2008 and 2010, to 70, and has nearly tripled its overall head count, to 323. One recent hire is Kirk Wilson, who was previously vice chairman of investment banking at Morgan Stanley. Wilson says he joined Greenhill in 2009 to work under a business model that is “simple and not being questioned by regulations.”

Greenhill’s expansion carries risks of its own, though. With payroll expenses rising 12.4 percent in the first quarter of this year even as revenues dipped slightly, the firm’s compensation ratio jumped to 75 percent of revenues, from 66 percent; Greenhill posted a net loss of $1.6 million for the quarter, compared with a $500,000 profit a year earlier.

Few boutiques have grown as fast as Moelis & Co. Founder Moelis started his career working under Michael Milken at the former Drexel Burnham Lambert and later rose to become president of UBS Investment Bank before quitting in 2007 — in part, ironically, over financing. He complained that UBS wasn’t providing sufficient lending to support his team’s deal making.

Since founding his own firm four years ago, Moelis has built one of the largest and most diverse boutiques. The firm has 470 employees scattered across eight offices in the U.S., Europe, the Middle East and Asia. It offers a full range of advisory services, including M&A and restructuring, and runs a private equity business, Moelis Capital Partners, that manages $1.9 billion in assets.

Unlike most other boutiques, Moelis has been working to build a capital markets business that offers advisory and underwriting services. Christopher Ryan, the bank’s global head of capital markets and risk advisory, came to the firm in 2009 from UBS, where he had been global head of fixed income. The market for independent capital markets advice has long been strong in Europe, and it’s gaining traction in the U.S. because the markets are “more complex, and fewer transactions are vanilla,” Ryan says.

Last September, Moelis was sole adviser to Newport Beach, California–based homebuilder TRI Pointe Homes on a $150 million private equity investment from Starwood Capital Group. TRI Pointe CEO Doug Bauer praises the careful attention the company got from Moelis himself and from Robert Crowley, a managing director who was previously global head of high yield at UBS. “Moelis was in constant interaction with the principals at Starwood,” which restrained the private equity firm from dictating the terms of the deal, says Bauer. “What separates Moelis starts with the leadership of Ken. You’re only as good as the people you pick.”

Considering the influx of talent at boutiques like Moelis, the growth of independent investment banks may be set for a long run.