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The market turmoil over the past 24 months has made one thing readily apparent which is; there is no safe haven at bulge bracket firms. Being a banker at a major bulge bracket firm was once considered the pinnacle of success in the investment banking world but now it is seen as a monolithic structure where the almighty goal is the aggregation of assets by automatons.
Innovation, talent and an entrepreneurial background are why boutique firms are started in the first place. The best and the brightest talent of these large firms finally get tired of the bureaucratic structure and strike out on their own. These boutique investment banking firms are started by the talented few who have capital, vision and most importantly contacts. The financial landscape generally has a fairly regular cycle of this happening. When larger firms, who have high fixed overheads, fall prey to a weak or disastrous market then that overhead becomes an anchor. Generally, this process takes a while and the cream of these firms leaves to start up their own shops. A classic example of this type of innovation is the Dutch auction, which was really perfected in the equity markets by Bill Hambrecht the founder of Hambrecht & Quist. He left to start WR Hambrecht & Co. to utilize the internet for these, in essence, internet IPO’s. Bill Hambrecht’s foresight in seeing that the internet was going to change the distribution system of the traditional IPO model was truly an innovation. Key boutique investment banks are set up during market turmoil which, I believe, allows for a realignment of capital. This realignment helps smaller companies get financed where large firms are worried more about cutting costs than looking at innovative deals and deal structuring. The cycle is as follows:
• Market turmoil typically causes the best and brightest bankers to leave and form their own specialized boutique investment banks.
• Boutique banks rise through innovation and focus on niche areas, basically specialty banks.
• The niche they carve helps companies procure innovative financing for small businesses or smaller businesses than the larger banking groups will look at.
• These boutiques help speed up the velocity of capital allowing for a sustainable recovery.
• Once the recovery is in full swing and the larger investment banks have stopped the bleeding, they realize that their key talent has fled and are now operating their own flourishing boutiques usually with a focused specialty.
• Big investment banks cannot create talent but literally have to BUY talent.
• So the big IB’s look around and offer fairly obscene amounts of capital for these firms so that they can capture the talent with the specialized focus back.
• This all become extremely evident when the traditional banks like BofA, Citi and JP Morgan were allowed to also acquire and have larger investment banking units.
The cycle of fracturing and then consolidation seems to mirror the markets as they go through bull and bear cycles. This time, the rise of the boutique investment bank may actually prove to be a tour de force. There is no Lehman Brothers anymore, there is no Bear Stearns and there barely is a Merrill Lynch. This past 24 months may have finally shifted the paradigm of the big investment banks rule on the street. The good news will be the charge of this new more agile and focused group of boutiques that will help with clean and green technologies, will fund smaller and more innovative businesses which are traditionally shunned by larger investment banks and they will allow for a more level playing field in terms of pricing and distribution, has been the case in the USA with Evercore, Greenhill, Frank Quattrone's Qatalyst Partners , Europe with players like Close Brothers, Hawckpoint, Liberium Capital as well as Emerging countries like Brazil, where regional players are dominating the market, Estater, BR Partners, G5 Partners, State Capital
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