What does an M&A boutique do when the deals dry up?

The coronavirus pandemic abruptly ended a seven-year mergers and acquisition boom and left boutique investment banks with a challenge: proving they are more than just “deal shops”.

Fees from M&A are falling sharply as cautious corporate clients focus on weathering the recession. That leaves boutiques exposed, as they lack the big trading and capital markets businesses that have picked up the slack at diversified rivals such as Goldman Sachs and JPMorgan Chase.

“When the M&A spigot dries up for a while — and truth be told, we don’t know how long that will be — it will become more apparent how well each business model weathers that,” said Paul Taubman, chief executive of the advisory firm PJT Partners. 

“I got a lot of complicated issues that aren’t necessarily M&A related: it’s capital structures, it’s shareholder engagement, it’s strategy, it’s liquidity,” added Mr Taubman, who founded his firm in 2014 after a long career at Morgan Stanley.

Above all, the fortunes of the independent investment banks — whose founders typically left large institutions to strike out on their own — now depend more than ever on whether they can mitigate the drop in M&A revenues by helping companies to restructure and giving them strategic advice on how to navigate the crisis. 

Shares of PJT and Houlihan Lokey — which have prominent restructuring practices — have risen this year. Evercore, Lazard and Greenhill — which are more vulnerable to a downturn in traditional M&A — are down between 24 per cent and 42 per cent.

Bar chart of Share price change since Jan (%) showing Restructuring specialist investment banks eclipse rivals in the crisis

While deal activity dropped to its lowest levels in more than a decade during the second quarter, a spike in bankruptcies of prominent companies — such as the rental car group Hertz, the department store chain Neiman Marcus and the satellite operator Intelsat — is providing a critical revenue boost for boutiques.

Bankers at firms including Lazard, Moelis, PJT, Perella Weinberg and Centerview have been busy on these transactions since mid-March and are expecting even more activity in the months to come. According to Eqip Global data, bankruptcy filings rose almost 50 per cent year-on-year in May alone.

Houlihan, which is less well-known for big ticket M&A, is home to the largest restructuring practice of any investment bank and arguably the best-positioned for this environment.

In the past, it has advised on the bankruptcies of Enron and Lehman Brothers. Now it is working with lenders to Hertz and Envision Healthcare, a medical staffing firm backed by the private equity group KKR.

Restructuring made up 30 per cent of revenues for the year ended March 2020 and during the coronavirus crisis its market value overtook that of Lazard for the first time.

Paul Taubman, chief executive of PJT Partners: ‘When the M&A spigot dries up for a while — and truth be told, we don’t know how long that will be — it will become more apparent how well each business model weathers that’ © Bloomberg

Chief executive Scott Beiser said his firm would be spared the worst of the contraction because “it’s not like we’re working on the hundred-billion company merging with the other hundred-billion and you hope it goes through . . . and it makes or breaks your quarter or year”.

Ken Moelis, a former UBS banker whose eponymous boutique went public in 2014, said his firm was created amid the 2007-08 financial crisis and as a result always had a big presence in restructuring. Still, he added: “Nobody can replace their whole [M&A] business with just restructuring.”

Over the past decade, boutiques have bolstered their capital markets advisory businesses to help clients raise cash from sources beyond banks, including private equity groups, hedge funds and investment vehicles controlled by sovereigns. 

Effectively, the top rainmakers at the boutiques are trying to turn relationships they have developed with chief executives over deals into all-round consiglieri roles, advising on anything from M&A to picking the best debt provider or how to face a geopolitical crisis. 

The goal is to make themselves essential to clients, who during hard times might be inclined to reward larger Wall Street firms for extending much-needed financing through the crisis. Most of the boutique chiefs said clients need both big firms and their firms, not “one or the other”.

Column chart of Top 15 boutiques as % share of total showing Boutiques have been winning a bigger share of total M&A fees

It is a different world to the aftermath of the 2008 crisis, when boutiques seized market share as bigger rivals such as Citigroup, Bank of America and UBS were hit by tougher regulations, lower profits and began to clamp down on pay for star investment bankers. 

The 2008 crisis heralded a land grab by the top 15 boutiques, who grew their collective share of M&A fees from 11.8 per cent in 2005 to 18.2 per cent five years later, according to data from Refinitiv.

In the first half of this year, with the overall pot shrinking rapidly, they still accounted for 22.6 per cent of the total. That kind of growth is unlikely to happen again, according to Evercore boss Ralph Schlosstein, as the boutiques are now bigger, meaning “it will be harder to gain share in this downturn”. 

Mr Moelis said boutiques benefited from the fact that in 2008 larger banks were at “the heart of the crisis”. That is not true now, though Mr Moelis believes the biggest banks will be ultimately weakened as their borrowers default. 

Big and small investment banks share some problems brought by the pandemic. Widespread working from home and travel restrictions are such that normally-globetrotting dealmakers cannot move around winning business and meeting clients.

Peter Weinberg, head of Perella Weinberg Partners, said the firm had won new clients since the coronavirus outbreak without meeting clients in person — “but it’s hard”, he added. 

Blair Effron, co-founder of Centerview, one of the fastest-growing boutiques, said that there was still an “opportunity to continue to expand and invest” during the crisis. The firm was “selectively trying to figure out” where it could add clients in a world where forging bonds was “harder”. Centerview hired Lazard’s star banker Matthieu Pigasse to launch its Paris operations in April.

Given the uncertainty, most firms have slowed down the hiring at scale that they usually do every year, instead making fewer strategic appointments until there is a clearer sign on where the economy is moving.

Chart showing global M&A volumes gringing to a halt

“Instead of everybody hiring a year in advance we might hire nine months in advance, or six months in advance,” said Mr Beiser of Houlihan’s plans for entry-level hiring. Unlike Perella Weinberg, which is cutting 7 per cent of its workforce amid a slowdown in dealmaking, Houlihan has been growing its business through acquisitions. Last month it acquired the advisory firm MVP Capital to boost its coverage of the telecommunications sector.

Despite all their attempts to adapt to the current world, what will ultimately determine the future of boutiques is the outlook for big-ticket M&A. 

None of their diversification efforts can make up the amount lost by deal fees. Morgan Stanley boss James Gorman told a recent conference that M&A was “basically dead” for the second half of the year. Centerview’s Mr Effron believes the rebound is coming “sooner than people think”. He said: “M&A never dies. It dies for a couple months.”