Independent advisory groups have continued to gain market share this year, indicating how more than five years of financial crisis have shaken up competition in the investment banking world.
Such advisory groups, which are unattached to commercial banking operations, have increased their share in mergers and acquisitions advisory fees by another 3 percentage points to 17 per cent in the first nine months of this year, according to data by Thomson Reuters.
Groups such as Lazard, Greenhill and Evercore have taken a much larger part of the fee pool than at the onset of the financial crisis in 2007, when they only took a tenth of the overall business.
By contrast, the nine bulge bracket companies have been losing market share in M&A advisory. Over the past five years, their share has dropped from 43 per cent to 35 per cent.
Bankers say boutiques not only offer independent advice but also have the advantage of operating below the regulatory radar screen, allowing them to avoid pay restrictions and other regulatory roadblocks that have been set up for larger banks.
“There’s a long-term shift occurring in terms of deals and fees,” says Roger Altman, chairman of Evercore, an independent investment bank that is advising EADS on its proposed deal with BAE Systems. “Independents are taking share compared with universal banks. It has quite a bit of momentum, and I expect it to continue.”
Many boutique advisory groups still have a traditional pay system with a smaller base salary and highly flexible bonuses that are paid out in full each year. Their larger rivals have succumbed to public and regulatory pressure by handing out bonuses staggered over several years and sometimes not to even pay them at all if previous profits later turn into losses.
“You have long-term and continued drain on intellectual talent from the large firms to the independent firms,” says Mr Altman. “You have increased interest from clients for independence.”
But what is true for M&A advice – a relatively small part of investment banks’ overall revenues – does not apply to other parts of the business, where large banks seem to be gaining market share.
The world’s largest five investment banks have increased their share of overall revenues across fixed income, equities and advisory businesses from 36 per cent at the start of the financial crisis in 2007 to 40 per cent in 2011, according to a recent Deutsche Bank investor presentation.
“A declining profit margin, increasing investments in technology and enhanced capital requirements all play into the hands of the biggest banks. Scale and market share will be much more important and it is really hard to see how the fringe banks will survive,” says Dan Ryan, a regulatory partner at PwC.
“We are experiencing a global super league emerging, which will only be made up of four or five firms,” says Christian Meissner, global head of corporate and investment banking at Bank of America.
The result is a barbell structure, where the largest global banks as well as highly specialised niche operators benefit, while those in the middle struggle to make profits.
This article is subject to a correction and has been amended.
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