Wednesday, July 15, 2009

It’s Not the Meat, It’s the Motion

Julie MacIntosh has a nice piece over at the Financial Times today on the resurgence of boutique investment banking. The article is generally pretty even-handed, and she seems to have navigated the treacherous shoals of towering egos and savage self-promotion endemic to the sector pretty well. As one well versed in the difficulties of such, I admire the delicacy and diplomacy she must have employed to interview the self-anointed Grand Old Men of investment banking without getting her nose snapped off.

Either that, or she’s really attractive. That always gets the attention of pompous old geezers with more money and self-regard than self-restraint. (It sure gets my attention, I can tell you.) 1

Anyway, I’m guessing the FT’s editors decided to run the article based on the rather slender premise that boutique advisers have rocketed from the 11 to 12% share of global M&A revenue they have enjoyed for the last six years to an eye-watering 14% in the first half of 2009. Never mind that, as Ms MacIntosh reveals, M&A activity is by its very nature rather lumpy, and hence ill-suited to supporting conclusive projections of long-term trends based on short-term fluctuations. No, missing from the entire premise is the understanding that M&A activity so far this year is so thin on the ground, and so concentrated in a few mammoth transactions mostly centered on resuscitating the moribund financial sector itself, that your Uncle Vanya himself might have shown up on the list had he gone ahead and sold his beet farm outside Lodz.

Missing as well from the analysis is the fact that private equity sponsors—who at their height in the M&A market of 2007 accounted for as much as a third of all transaction volume and who now are so inactive and penurious they would be lucky to get Uncle Vanya to return their phone calls—are clients who almost always use large, integrated investment banks with bulging balance sheets to “advise” on their deals. The PE guys want folding money, not “intellectual capital” from their bankers. (Having mostly been M&A bankers themselves, private equity professionals have a well-founded disdain for the probity, intelligence, and personal hygiene of M&A advisors. Besides, they will tell you unasked they are too smart to need advice. That’s why they left banking.) Any outfit which offers advice unalloyed by mountains of cheap, filthy lucre is unlikely to receive any love from these cowboys when activity picks up. Accordingly, I expect boutiques’ share of the spoils to have reached its zenith for the foreseeable future.

* * *

That being said, I do have a couple of quibbles with Ms MacIntosh’s work. (Did you expect otherwise?)

First, I would note that our charming journatrix makes a repeated to-do about the supposed compulsion for boutique advisory shops to grow, grow, grow; viz., e.g.:

Opinions are mixed on whether these firms will flourish or whether today’s aggressive land-grab mentality will lure some to sow the seeds of their demise through rapid growth.


Growth is vital for those seeking longevity.

But “Why?,” say I.

In fact, I would argue that investment banking’s obsession with growth, as an industry, has contributed immeasurably to the enormity of the systemic clusterfuck in which we currently find ourselves entangled. Growth for growth’s sake has been driven either indirectly by the blind pursuit of market share in an expanding market by ultra-competitive banks intent on sticking it to their hated competitors or directly as a response to the incessant demand for ever-expanding earnings streams from their incontinent public shareholders.

It seems pretty clear in retrospect that the financial markets expanded for all the wrong reasons: excessive financialization, unrestrained asset inflation and increasing velocity of capital driven by over-lax monetary policy and a global savings glut, and a society-wide abandonment of prudence, caution, and common sense when it came to the formerly hoary relationship between risk and return. Without any empirical data whatsoever, I have posited before that investment banking and the financial sector in general grew to such an outsize portion of the total economy in part because the industry required so many more worker bees just to push the damn money inflating the global asset bubble around properly. No-one has yet proved me wrong.

In like vein, others smarter than me have asserted that finance should shrink as a percent of total activity from its current inflated level, and should over time average a relatively steady 7% or so of total GDP. Why, then, should one assume that financial entities of whatever sort should grow at a rate faster than nominal GDP growth anyway?

Of course, the unreconstructed optimists among us—I am looking at you, Mr. Boutique CEO—will assert they can grow at a heady clip simply by taking market share from larger banks and other boutiques. To such as these, I would remind them that the iron laws of economics apply to investment banking services just as much as to Ukranian hookers, vintage champagne, and alluring young journalists: if everybody pursues increased market share, margins, and the means to purchase any of the foregoing, will decline. Quelle horreur!

Fortunately, a careful reading of Ms MacIntosh’s opus leads me to believe that at least some of the grizzled veterans profiled in the article understand this very well. Many of them argue implicitly or explicitly against the growth-is-all mantra, which gives me some comfort that not all these majordomos had their brains and hormones addled by the charismatic young Scotswoman. In fact, the poobahs who seem to agitate hardest for growth through diversification or the acquisition of comprehensive capital markets capability all seem to come from the publicly-owned, bulge bracket investment banks of the 1980s who started us down this path to perdition. Pompous old fucks.

Lastly, it is important to note that these boutiques’ supposed core market—advising corporate clients on buying and selling other businesses—is not a market which is particularly susceptible to bubble behavior. M&A is cyclical, sure, but a cycle is the furthest thing from a bubble. (For one thing, you never say “It’s different this time” when you believe you’re in a cycle.) I can foresee no fundamental shift in the conditions or underpinnings to the M&A market which will compel a sustained secular change in the volume of companies buying and selling each other. Taxes? Regulation? Technology? Nope. (Of course, I could be wrong. But if I am, I will already be swilling champagne on the barricades by the time you find a pair of suspenders and a garish Hermes tie, so don’t press it.)

* * *

Second, our lovely Caledonian completely fails to mention, in her otherwise comprehensive catalog of the potential pitfalls and bugbears to success in Boutiqueland, the central issue at hand.

This, for those who missed the earlier memo, is the fact that most of these boutiques boil down, at the end, to vanity projects for their excessively well-endowed (Rolodex-wise) founders and principals. With few exceptions, Ms MacIntosh’s catalog of boutique heavyweights reads like a Who’s Who of investment banking circa 1985. These (admittedly impressive) characters first made their names and reputations during the wild, land-grab years of RJR Nabisco, Campeau Stores, Oliver Stone’s Wall Street, and the like, when “M&A” and mysterious, slightly repellent characters called “investment bankers” first came to the attention of society at large.

After milking all they could from the mainline firms, these free agents mostly gravitated toward their own gigs, where they hired a raft of solid B-players to carry their bags and write the pitch books while they monetized their two to three decades of relationships into neatly stacked piles of leafy simoleons. But monetizing a legacy of relationships is far different, and far easier, than building an advisory institution which will outlast your own pathetic mortal coil. I have laid out the dilemma, and the prescription, before:

You may see some independent boutiques grow in size, and become credible competitors to Lazard and the in-house M&A factories of larger banks. But for this to happen, we will need to see an institutionalization of advisory boutiques which has been lacking to date. So far, the named boutiques we read about all depend on one or two serious, named founders who generate all the revenue, and a bunch of lesser-known, competent bankers who carry their bags. For boutiques to truly thrive and prosper, you will need to see firms that can field 10, 20, or even 50 senior partners who can slug it out toe-to-toe with the best that Goldman, Citigroup, or JP Morgan can offer. And you will need to read about them in the pages of Institutional Investor and The Wall Street Journal.

And, pace Ms MacIntosh’s no doubt impressive achievements, I fear that a one-page profile of the whole lot of them in the Financial Times does not quite make the grade.

Anyway, that is a problem for wrinkled old plutocrats trying to seduce a fresh young journalist to work out, not one for me. I have my own strategy and tactics to worry about, and the current environment has given me plenty to think over.

Besides, me ol’ gran always told me Scotswomen were mad as snakes.

UPDATE February 20, 2013: Upon rereading this otherwise interesting and informative article in the context of reviewing my back catalogue, I have come to the conclusion that a certain prickly journalist of the distaff persuasion was correct, and my original embellishments of a sexual nature to this article were puerile, superfluous, and distracting from my underlying argument, which I believe remains worthy and sound. Accordingly, I have bowdlerized my own work under the theory that 1) nobody can remember the original silliness, 2) no-one will miss it, and 3) you can never be sure that you won’t find an angry radical feminist manning the Pearly Gates when you finally arrive there. So go ahead: call me cowardly if you will. I am hedging my bets.

1 Which inspires me to relay a very old investment banking chestnut: A senior Managing Director is interviewing two female candidates for an entry-level Associate position. The first candidate is a nationally-ranked biathlete with a dual degree in Plasma Physics and Macroeconomics and a 4.0 GPA from Harvard undergrad who is graduating from Harvard Business School as a Baker Scholar. The second candidate is a summa cum laude graduate in Political Economy from Yale with an MBA with high distinction from the Wharton School who rows for the US Olympic team in her spare time.

Q: Which candidate gets the job?
A: The one with the best body.

Yes, sad to say, it’s true: we investment bankers really are that awful.

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