Wall Street’s biggest banks watched helplessly as their smaller, more nimble competitors divvied up more than $US100 million in deal fees thanks to Kraft Food’s merger with H.J. Heinz.
Centerview Partners LLC, based in New York, was the exclusive advisor to Kraft Foods, and Lazard was H.J. Heinz’s only bank for their deal, valued at $US36.6 billion.
This wasn’t the first big coup for Centerview, which also advised on last year’s biggest M&A transaction, the yet-to-be-completed Time Warner Cable-Comcast merger.
Boutiques like Centerview have doubled their share of M&A revenue from US clients since 2008, on a percentage basis, from 8% in 2008 to 16% last year. In 2013, boutiques commanded their highest percentage of US M&A, at 18%, according to Dealogic, which tracks industry data. Centerview, which was formed in 2006, has shot up league tables, taking the 12th spot in Dealogic’s M&A revenue table for US banking revenue for last year.
Boutique banks are making a dent in big banks’ transactional revenue, poaching top talent and taking aim at a select handful of companies that can fuel a company’s profits with the single stroke of a pen.
Boutique banks are moving up Wall St. league tables
Banking league tables, used to gauge individual firms’ deal prowess on a quarterly basis vary, in part based on factors like what defines a ’boutique,’ which in turn impacts how the smaller class of banks stacks up against competitors.
Dealogic doesn’t count firms including Jefferies LLC and Lazard as boutiques, though, few would argue they could be classified as bulge-bracket firms, either. Bulge-bracket names include the undisputed giants like Goldman Sachs, Morgan Stanley, and JP Morgan.
Other top boutiques, according to Dealogic’s US M&A revenue table, include Frank Quattrone’s Qatalyst Partners (ranked 18th), Perella Weinberg Partners LP (ranked 27th) and, leading the pack, Evercore Partners Inc. (taking the #11 spot).
Lazard and Jefferies rank ninth and 10th, respectively.
Often, boutiques are launched by senior bankers at publicly-listed firms, and sometimes after power struggles with other top managers.
Power struggles have left top banks smarting after key departures
Paul J. Taubman, who, with Morgan Stanley was thought to be a potential leader of the bank, instead left in 2012 after what was widely reported to be a power struggle between he and other lieutenants there. In 2013, working independently, he ranked 11th on banking league tables, raking in fees from $US175 billion in transactions, including Verizon’s $US130 billion acquisition of Vodafone’s stake in Verizon Wireless that year (2013’s biggest transaction).
It would take until 2014 for Taubman to hire anyone (he poached Morgan Stanley bankers for his shop), and by October of last year, he took his small team to Blackstone’s advisory business in a merger that would provide his team with a whopping 35% stake in the joint unit. An IPO is expected in the second half of this year.
Other times, bankers opt to branch out independently after they become disillusioned with deferred compensation, a post-crisis issue that has grated some on Wall St. Some bankers privately say deferred compensation at bulge bracket banks, instituted thanks to Capitol Hill uproar during the financial crisis’ nadir, is spurring more top bankers to leave, since boutiques can offer payment based exclusively in cash immediately.
“Part of it is talent driven,” said Alvarez & Marsal managing director Paul Aversano, who regularly works with boutique firms. “And there’s significant talent there.”
A tradition as old as Wall St. itself
Taubman’s firm, PJT Partners, is far from the first Wall Street pro to pursue the IPO route.
In the 1990s, a slew of top dealmakers defected from firms like Goldman Sachs and Morgan Stanley for new boutiques like Evercore Partners and Greenhill & Co. Both banks have debuted on public markets, generating positive returns despite each going public on the New York Stock Exchange in years prior to the financial crisis. Moelis & Co., which launched in 2007 and went public last year, has also generated positive returns since its offering.
Others are taking advantage of the opportunity and there are more offerings are on the way in 2015. Houlihan Lokey, a New York advisor founded in 1972, is reportedly prepping a public offering. PJT Partners is doing the same, going public confidentially under the Jobs Act, although, according to a recent filing, despite big wins on the deal scene, its revenue growth slowed from 11.9% in 2013, to just 1% growth last year:
While Morgan Stanley is no doubt smarting from the PR sting of losing out to its former heavyweight, not every bulge bracket bank is feeling the pain being inflicted by boutiques. In its fourth quarter report, Goldman Sachs noted its investment banking revenue had approached nearly $US6.5 billion, its best tally since 2008. UBS, on the other hand, posted banking revenue of 4.54 billion Swiss francs in 2007 — that fell to 1.9 billion francs last year.
UBS did not respond to a request seeking comment for this story.
This issue highlights a bigger problem smaller banks are encountering: many are stocked with talent capable of making high-value transactions in the US, where they both speak the language and have decades’ worth of relationships. But, in terms of generating capital internationally where, for example, Goldman Sachs books the bulk of its banking revenue, smaller firms staffed often with just a few dozen people are at a disadvantage. PJT Partners, for example, draws just a sliver of its earnings internationally, according to its most recent federal filing.