Boutique Banking in M&A
“Senior bankers with long careers behind them started to set up their own shops. Free from conflicts that can be found at larger banks and able to offer their experience with a specialized, personal service, these boutiques started to win business and take share. The big banks’ dominance in the market slipped.” - Lucille Jones
Boutique investment banks are non-full service, small-medium sized investment banks that specialize in specific aspects of investment banking, the primary of them being centered on corporate finance such as capital raising, mergers and acquisitions (buy and sell side engagements), and restructuring and reorganization.
Key features are:
· Specialization on the basis of particular industries, transactions or even geographical areas, which acts as their unique selling proposition (USP).
· Lower fees than bulge bracket investment banks
· Attention to the clients resulting in long-term relationships as opposed to transaction-based ones
· A usually smaller network of contacts compared to a larger firm when finding the best prospective buyers
In essence, niche expertise, smooth and fast deal execution platform, consistent track record, value-additions, competitive pricing, and perseverance build up a competitive advantage able to outweigh the drawbacks brought about by the limited network size, yielding a business model able to produce ever-growing revenues and conquer growing market shares vis-à-vis bulge brackets investment banks.
Since any bank that offers at least one type of financial service can be classified as a “boutique”, there are thousands of boutiques out there. Thus, boutiques can be classified into three further major categories:
1) Elite Boutique Investment Banks (EBs): many founders of these elite boutiques are senior bankers from bulge banks, so they can leverage their expansive network and great expertise to focus on the areas of their strengths.
2) Industry-specific Boutique Investment Banks (ISBs): Industry-specific boutiques are simply banks that work on multiple deal types but specialize in a specific industry (technology, media, energy, healthcare…).
3) Regional Boutique Investment Banks (RBs): When experts talk about “boutique”, most of the time they mean “regional”. If industry-specific boutiques (ISBs) operate industry-wise, then regional boutiques (RBs) operate region-wise (like Mediobanca in Italy or Société Générale in France and Europe).
Figure 1: Performance among Boutique Banks
Global M&A Market
Global merger and acquisition (M&A) activity has breached new highs, building on the record-breaking deal making streak from the beginning of the year that has been aided by low interest rates, fostered by the accommodative stance of monetary policies, and soaring stock prices.
According to Refinitiv data, the total value of pending and completed deals announced in 2021 has already touched $3.6 trillion year-to-date, surpassing the full-year tally of $3.59 trillion in 2020. So far this year, 35,128 deals have been announced, a 24% jump over last year. The United States alone accounted for $2.14 trillion worth of M&A deals this year, while Europe and the Asia-Pacific raked in $657 billion and $620 billion, respectively.
The technology sector, which typically accounts for the majority of deal volume every quarter, continued to lead the way -- deals worth $799 billion were announced from the sector. Financial services M&A volumes stood at $442 billion, while industrials accounted for $438 billion. Sectors which are still struggling from the pandemic, such as consumer retail and travel firms, have lagged other acquisitive sectors such as technology and healthcare on M&A activity this year. The renewable energy sector has raked in about $18 billion worth of deals so far this year, more than twice the M&A volume that was generated last year.
Graph 1: Sectoral overview M&A projections
Impact of Boutiques
The first signs of a strong presence in the M&A of boutique banks were shown in 2015. In that year alone, 16% of the USA’s merger and acquisition sector was captured by these upcoming institutions.
Graph 2: Market Share Post-2008
As can be seen in Graph 2, boutique banks have slowly become a more and more important actor in the United States market, afte r the financial crisis of 2008. Since then, those institutions have been growing in this sector, due to the fact that many new boutiques were launched in the last decade, many of which were founded by people who were already working in Wall Street.
In recent times, however, the whole M&A market has suffered tremendously from the economic disruption caused by COVID-19. The pandemic has led most financial sectors to make structural changes to their businesses. One of the biggest changes can be described by one word: “deglobalization”. Global companies have started exiting some foreign markets and the investments, which were once made in consumer sectors, were moved to new highly technological niches, focusing more on Technology and Media in general.
All these changes, as aforementioned, have impacted the M&A market as well. Advisors in this sector were the actors who have been damaged the most since the sudden changes in the market have caught them off guard. Some banks were able to regain their losses in consulting fees, by focusing on other investment sectors. However, among these institutions, boutique banks have been trying to obtain more and more M&A revenues by offering new types of services, putting high attention on restructuring, and giving consultations on specific, special, and newly born opportunities.
Moreover, since bigger banks have had to reduce their investments in most business sectors, boutique banks have been able to take advantage of this. This has led the latter to gain even higher shares of revenue in the M&A environment. In this segment, the best performing boutiques have been those focusing on fundraising firms and restructuring practices, especially in the IT sector, which has been among the best growing ones in the last years.
If all signs seem promising, we must remember that the boutique bank model has some clear limitations. Most of these institutions lack the ability to help their customers with international transactions and they are typically not able to provide financing directly. Taking Rothschild as an example, this boutique bank cannot lend money. However, the advantage gained from this is that it helps them to sell a service, which is free of conflict of interests.
No matter their great performances in the merger and acquisitions sector, their size and their limited offers of services do not allow them to capture huge business opportunities in the M&A sector. As a matter of fact, in terms of broad opportunities with the large range of services provided, boutique banks can be beaten in the sector we are analyzing. However, new approaches are being considered, in order to satisfy the needs of investors, or anyone interested in working with boutiques. A possible solution to solve all the above-mentioned issues could be the creation of partnerships between the biggest players in the market and boutique banks.
In this very peculiar segment of the market, overall, boutique banks have seen their revenues rise for a long time. They firstly started gaining competitive advantages following the economic crisis of 2008, and since then their growth has not stopped.
Graph 3: Percentage of M&A market share owned by boutiques
In particular, the period of the post-COVID-19 pandemic has been very prolific for our main focus actors. The drivers of this rise can be identified in the great expertise of senior bankers in niche bank sectors, who deal with complicated and non-typical situations in mergers and acquisitions. Moreover, boutique banks have shown to be very capable of creating durable customer relationships, which has usually inevitably led to clients’ loyalty toward these institutions. This characterizing trait has already proven to be critical for our subjects, as it both grants higher revenues, and it also allows them to have lower operating cost. However, some structural limitations of these firms’ model will likely act as future constraints for boutiques to become actual market leaders, at least in this sector of the market.