For independent advisory firms, the economic crisis could not have come at a better time.
During the recent mergers and acquisitions boom, many boutique firms were pushed out in favour of full-service investment banks that could use their balance sheets to finance deals. But now the smaller firms are winning high-profile mandates from some of the world’s biggest companies, taking instrumental advisory roles in everything from advising Kraft on its $11.6bn (£7.7bn. €8.5bn) takeover of Cadbury to restructuring Dubai World’s debt.
So far this year, independent advisory firms have advised on deals worth $122.2bn, representing 29.6 per cent of total announced M&A, according to data from Dealogic. That compares with all of last year when boutiques advised on $612bn-worth of deals, accounting for 26 per cent of total announced M&A volume.
Bankers say the instability that has rocked the investment banking industry over the past two years has created a “sweet spot” for independent firms, led by senior figures who have built decades-long relationships with their key clients.
Malik Karim, founder and head of Fenchurch Advisory Partners, which focuses on the financial services sector, says investment banking boutiques are entering a new phase in their development, as there is a clear stratification in the eyes of clients about relative strengths and capabilities. “While some have trod water, others have taken advantage of the recent dislocation and emerged stronger in terms of quality hires and participation in key transactions,” Mr Karim says. “Certain boutiques are seen as being much more credible on transactions that are in the grey area between bulge bracket banks and boutiques.”
Many independent firms have exploited unrest at larger banks to pick up M&A rainmakers and tap into industry areas they have not previously covered, such as energy, financial institutions or pharma.
Last year, Moelis & Co appointed Mark Aedy, one of the most senior bankers to leave Merrill Lynch following its takeover by Bank of America, to lead a European hiring drive at the US advisory firm. Richard Girling, a former Merrill Lynch healthcare banker, is building up the European operations of boutique advisory Centerview Partners.
The moves are reminiscent of the aftermath of the 2001-03 dotcom crash, when boutiques capitalised on boardroom worries after a series of US accounting scandals and regulatory investigations revealed conflicts of interest. Then, the independents claimed that while their larger rivals were trying to cross-sell an almost limitless range of products, they could concentrate on providing high-calibre, impartial advice.
Today, those same arguments have given independent firms an edge as companies search for trusted advisers. Andrew Sibbald, managing director and founder of investment advisory boutique Lexicon Partners, says the fallout from the credit crunch has hardly increased the level of trust in investment banks. “More and more, we find that large companies are seeking independent advice as a natural complement to their existing integrated banking relationships,” he says. “With strong personal relationships and a long-term perspective, independent advisers are often able to provide objective counsel and support for clients that benefit from not being uniquely tied to the outcome of any short-term transaction.”
Evidence of this can be found by looking at recent deals where boutiques have featured prominently. Centerview Partners acted for Kraft, alongside Lazard, Citigroup and Deutsche Bank, on its hostile bid for Cadbury. Perella Weinberg was lead adviser to Merck on the German pharmaceuticals and chemicals company’s $6bn cash bid for Millipore, the US supplier of drug-development equipment for biotechnology companies.
Even Warren Buffett, the billionaire investor, turned to veteran banker Roger Altman’s boutique firm Evercore, along with Goldman Sachs, to help him with his $26bn takeover of Burlington Northern Santa Fe Corp. The two banks will share an estimated $50m-$55m in fees, according to Thomson Reuters and Freeman Consulting.
Independent firms have also been scooping up restructuring assignments, such as Blackstone’s mandate as lead adviser to the government of Ukraine on how to manage its $16.5bn standby loan from the International Monetary Fund.
Large investment banks have traditionally steered clear of the restructuring business because of the potential conflicts of interest, and bylaws in the US prevent banks that have underwritten securities for a company in the previous two years from advising that company in bankruptcy. Although that law was changed in 2005 to allow investment banks to work as advisers if approved by a bankruptcy court judge, many banks are still wary of creating conflicts with their corporate and institutional clients.
But, with capital constrained, many companies still choose to reward their lending banks with high-margin M&A mandates in return for the use of their balance sheets.
To try to loosen this hold by the bulge brackets, a number of smaller firms have managed to muscle in on some high-profile initial public offerings.
For example, Ondra Partners, an advisory firm set up by Michael Tory and other former Lehman Brothers bankers, completed its first significant IPO mandate with the listing of Gartmore, the UK fund manager, in December last year. Hawkpoint, an advisory house linked with Collins Stewart, the stockbroker, is advising Fairfield Energy on its planned London IPO.
However, boutiques are unlikely to focus much on capital markets because they do not have the large distribution and sales-force networks needed to make markets as efficiently as their larger rivals do.
Ironically, the trend for bankers to leave large institutions for smaller, independent boutiques was recently reversed when Nomura, the Japanese investment bank, acquired Tricorn Partners, the London-based corporate finance advisory firm. The deal saw Guy Dawson and Justin Dowley, founders of Tricorn, join Nomura as vice-chairmen of Europe, Middle East and Africa investment banking with a mandate to build the Japanese bank’s relationships with UK boardrooms.
When M&A stages a full recovery, investors could see more deals such as these as banks try to buy back the expertise they lost during the economic crisis.