Updated: Mar 13
The exit of one of the main superpowers in the EU. A loss of about 2.4 trillion in GDP. Repercussions ranging from disrupted migration movements to possible economic shocks to countries such as Belgium, Ireland, Germany and The Netherlands. Britain holds the title of having the largest financial sector in Europe, relative to its economic size, and, in this market category, investment banks of all sizes reign supreme. Barclays, Credit Suisse, Morgan Stanley, and also smaller boutique investment banks such as Evercore and Rothschild&Co, have long ago begun to establish new strategies to tackle this new era - one of revisited trade and legislative policies, different government regulations and shifts in investment agreements. But what exactly are these new strategies, and, most importantly, to what extent will Boutique Banks and the financial sector be affected by these post-Brexit times?
After the Brexit vote, particular attention has been given to trade, with investors still uncertain on whether European customers will move out of London and concentrate on trading within the EU area. By being relatively smaller market players, boutique investment banks are the ones facing most of this uncertainty, as they would indeed struggle to sell their financial services outside the UK. In fact, there is talk about banks relocating to other European cities such as Amsterdam and Paris, and the creation of additional subsidiaries in order to retain their former market reach within the EU. These ideas raise concerns, however, when considering increased costs. The creation of new subsidiary offices, the dispatch of managers abroad for international deals, and the relocation of headquarters in other cities, all require substantial amounts of capital to cover the related transaction and infrastructure costs. This might be feasible for the bulge bracket investment banks, that handle billions of dollars worth of transactions each year. However, for the more reserved market of boutiques, these investments will be harder to realize.
Other arguments against the idea of relocation range from the lack of infrastructure and housing in other European cities, to the more stringent policies that investment banks try to avoid. One such example is employee protection in France, which has a more lengthy procedure for the dismissal of personnel, compared to the UK where these procedures are less interpretative, thus facilitating lay-offs. Despite these downsides, a minority of investment banks such as Société Générale (SocGen) plan to move their divisions from London to other EU economic capitals. In particular, SocGen has already communicated to its clientele that it will soon forego its back to middle - office administrative services in Britain. Without these departments in London, the investment banking giant will be limited to working in sales and trading, whilst leaving risk management, IT security or administrative duties for offices based in other European cities.
“We can’t sell our products into Europe from our UK HQ. We can’t call investors and there is a big grey area around what we’re legally allowed to do.” - Sales Exec at London-based boutique fund management
It therefore seems like relocation is contemplated under multiple points of view. On the one side, there are a minority of the investment banking giants moving part of their office branches outside the Brexit countries. And on the other, we have smaller players, such as boutique banks, that are struggling to integrate this solution within their game-plans due to its share of disadvantages. Furthermore, most bulge bracket banks don’t side with the idea of relocation, as the costs to bear will still impact their statements of income. The key lies in the hypothesis itself - will people truly move out of the UK to continue trading and making investment agreements? After the approval of a cooperation agreement for trade between the EU and the UK in January 2021, and a potential free trade area between the two in the future, it seems not.
The extent to which this post-Brexit crisis will persist could also affect Merger and Acquisition deals. M&A deals are an extremely important function in boutiques banks, as shown by one of the latest Evercore advisory on the acquisition of Alexion from AstraZeneca. Despite the aforementioned developments between the EU and UK, experts are still not convinced by the different economic policies being put into play by these counterparts. Finding more policy agreements that will benefit both sides of the dispute could allow the UK’s main investment hubs – such as London, Dublin and Edinburgh – to lay a more certain path, so that financial markets can start regaining confidence. Until then, however, the unknown future of these international deals forces investors to be more risk averse in the short-term.
This bears the question: What company would risk trying to merge or buy-off another company, without knowing with certainty if it will be cost-effective? Surely, it makes perfect sense that without clear governmental guidelines, more companies will cut back on such risks. Despite this logic however, M&A deals are expected to rise. The key lies in the time-stamp we take; in the short-term, with increased uncertainty, M&A deals are already decreasing. Nevertheless, in the long-term, when agreements are made between the EU and UK and less uncertain sentiment in investors grows, Britain is expected to strike more M&A deals. Furthermore, other factors such as a freer market economy, and a depreciated sterling, are both contributing to creating a more profitable, future outlook for British firms.
Brexit for Boutique Banks
So, what’s in it for boutique banks? Based on the above arguments, we can almost definitely guarantee, despite some turbulence, the continued growth of this sector in the United Kingdom. Even though they are mostly unable to relocate or create subsidiaries, boutiques will still be able to strike foreign deals. In fact, most big investment banks will not start moving away from London en masse, allowing London to keep its foreign customers and businesses running, and keeping its title as the financial capital of Europe. Secondly, a long - term expected growth in M&A deals is surely going to benefit English boutiques, due to their prevalence in this area of investment banking. Overall, Brexit will hit the financial sector hard in its beginning phase, but shows promising signs of more stable future markets. The complicated nature of mutual interests both the UK and the EU have in keeping their relationship healthy will surely benefit London’s investment banking sector, for players of all sizes.
Written by Lorenzo Amadei