A Reckoning for the “Mega-Boutiques”?
Large-cap focused advisory firms – which we deem the “mega-boutiques” – have been investment banking success stories for much of the last decade. In the aftermath of the 2008-09 global financial crisis, firms like Centerview, Moelis, Evercore and Perella Weinberg began accumulating market share and talent from beleaguered bulge-bracket banks. Since then, they’ve enjoyed a nearly uninterrupted growth trajectory. Share prices of publicly-listed mega-boutiques Evercore, Moelis, Lazard, and PJT all reached record highs within the last few weeks. Mega-boutiques have established themselves so thoroughly in the large-cap M&A market, that today, it’s rare to see a $5b+ transaction without a mega-boutique attached.
However, as you can see in the “Growth Scorecard” in this week’s FCS Intelligence, mega-boutiques are now the worst-performing competitive segment in U.S. investment banking. What’s happening? The current challenges facing the group are two-fold. First, the mega-merger wave of 2015-16 has given way to a middle-market oriented M&A landscape. The number of advisory mandates worth $20+ in fees doubled from 2014 to 2016, but is now in decline. Second, mega-boutiques now take lead roles on almost 40% of these high-value mandates, and we need to consider how much higher it’s possible for this figure to rise. Large, full-service banks will never completely cede their roles in M&A. Lenders will always hold clout with their borrower clients, and moreover, the regulatory and profitability environment for bulge-bracket banks is now improving.
Mega-boutiques will likely adapt by diversifying outside their core large-cap corporate M&A market. Lazard and Moelis are already active in the middle-market, but others are almost certain to follow. For firms still centered on specific industry verticals, sector expansion could provide an avenue for growth. Product diversification is another potential path. Mega-boutiques have already added capabilities in the “capital-light” advisory areas adjacent to M&A, such as restructuring, activism, and capital advisory. Some may now decide to follow the lead of Evercore and Guggenheim, and plunge into the capital markets / underwriting business. Given the challenges now facing mega-boutiques, 2018 is likely to be the year that these advisors become dealmakers themselves.