Quitting Wall Street jobs to start boutique firms?

Came across an interesting article on Wall Street’s top executives who walk away from their coveted jobs to start their own boutique firms, citing increasing regulations post-crisis as the main reason for their departures:

“Between regulatory compliance and internal bureaucracy I found myself spending 80 per cent of my time on non-client activities, which is really not fun,” says Mr McGee, a top dealmaker at Lehman Brothers before its collapse. But Mr McGee, 56, has not given up on investment banking. Instead, he has returned to his native Texas to set up Intrepid Financial Partners, a merchant bank that advises energy companies.

Even though leaving a “relatively safe” job on Wall Street may be considered as super risky, many are making banks, helped by the resurgence in deals activities, with M&A volume to reach the highest level since the financial crisis in 2015. The pitch for boutique firms are usually centered around their single/specialized product offering and free-from-conflict advice.

For now, though, the upstarts are enjoying the rising tide. Michael and Yoel Zaoui, brothers who founded Zaoui & Co after leaving senior roles at Morgan Stanley and Goldman Sachs, bagged $22m for their firm by advising Dresser-Rand, a US oilfield equipment maker, on its $7.6bn sale to Germany’s Siemens last year. That nearly matched the $29m that Morgan Stanley earned working with Dresser-Rand. But with only a handful of junior bankers and support staff and no public shareholders, a bigger slice of the fees will go to the Zaouis.

Thoughts monkeys? Are your jobs at bulge bracket banks getting more cumbersome due to regulations? Anyone ever thought of starting your own investment bank, just like Ken Moelis with Moelis & Co in 2007?

ft.com/intl/cms/s/0/d99d271c-5545-11e5-8642-453585f2cfcd.html#axzz3lJ7P0dSp">Link to the original article

 

Similar to this idea, I don't see why it doesn't happen more often.

I would be under the belief that a VP or early MD would be able to make more by being the principal at a small boutique even if its a 3 man shop. Risky, yes, but isn't finance all about risk and reward?

"It is better to have a friendship based on business, than a business based on friendship." - Rockefeller. "Live fast, die hard. Leave a good looking body." - Navy SEAL
 
Best Response

It doesn't happen often for a variety of reasons. You have to be supremely confident and a big enough rainmaker to know that your clients (stress the plural of client) will come with you and you'll be able to attract new clients. That means not only an incredible relationship with those clients, but your name has to carry enough swag that the CEO and CFO will be willing to go to their board and say we should go with John Just Hung His Own Shingle LLC rather than Morgan Stanley or Goldman and that's not going to be a VP or a newer MD. Some of that goes to the old saying "no one gets fired for hiring IBM." It's a CYA game even at the upper levels so that banker's name has to carry enough weight that the CEO feels like he won't get fired because a deal goes sideways and he hired John instead of Goldman. When a deal gets fucked up and GS was the banker, the CEO can say to the board "I hired Goldman, what else could I do?" rather than "I hired John and I fucked up in doing that. What's my severance package look like?"

It also costs a lot of money to set up a new firm. A banker at a BB is used to having lots of resources at his fingertips, a nice office in a gleaming skyscraper in NYC and an existing staff-from analysts to VP's to secretaries and a printing department-and all of those things cost a lot of money to set up. Senior bankers make decent money but they're used to steady paychecks and bonuses and outside of a few really BSD's they typically don't make the 10's of millions annually that would put enough in the bank to open their own shop and feel comfortable taking that risk. And there's little overall risk in a banker staying at a big shop while starting up your own shop is a big financial risk in the money you put out to start it and the risk that it works and works well and doesn't hurt their rep. Not too many people would feel especially great having worked their entire lives to be leading big WSJ front page deals at GS/MS/JPM to hanging their own shingles and scraping to get small mid-market deals. If you're a top notch MD in your 40's or 50's when you possibly have the rolodex and experience to start your own shop, you probably have a family at home, a mortgage or two, kids in private schools, and a bunch of other expenses. You probably also have a decently secure job at a top firm and you're making a few million a year and unless something catastrophic happens (I really like the example of a "relatively safe" job and Lehman in the same statement), you're going to make be making a few million per year for the foreseeable future and it's a big risk leaving that.

You also have to run your own company. Sure, maybe if you're an absolute rock start you could run with less than 10 people and actually do deals, but most guys are going to start something up with a team of people so, for example, even though it's called Moelis & Co, he left UBS with a team of 7 or 10 other senior bankers and that multiplied the employee count from the start. That adds up in management duties and takes away from actually doing deals. Moelis is an outlier, but even running a 10 man shop takes up extra time and 99% of the time a 10 man shop isn't doing billion dollar deals.

For every Taubman who can advise on multi billion dollar deals by himself, or the Wasserstein & Perella 's or Moelis's who can and do open their own shops, the vast majority of bankers don't have those skills, don't want to take the personal and financial risk and are simply comfortable where they are professionally.

 

More client facing maybe, but also more "administrative" work if you start your own firm. I'm not sure if its really all that glamorous and fun in actuality.

Full disclosure, I'm an analyst for a small IB in Dallas (less than 10 people) with MDs all originally from the BB. While I'm sure they hated the bureaucracy and red tape in the former lives, they have other sorts of problems to deal with now as owners of a business. Hiring and find good talent in a competitive market is one of their complaints.

 

More client facing maybe, but also more "administrative" work if you start your own firm. I'm not sure if its really all that glamorous and fun in actuality.

Full disclosure, I'm an analyst for a small IB in Dallas (less than 10 people) with MDs all originally from the BB. While I'm sure they hated the bureaucracy and red tape in the former lives, they have other sorts of problems to deal with now as owners of a business. Hiring and find good talent in a competitive market is one of their complaints.

 

I was under the impression this was norm for a good amount of people in terms of their long term goals. I mean, who wouldn't want to do that? The thing that most likely holds a lot of people back are the risks of any entrepreneur and the enormous opportunity costs in terms of giving up a (presumably) significant salary and bonus. Running your own shop sounds great out loud, but on paper it's probably less glamorous.

Remember the news is also survivorship biased. You tend to only hear about the successes...and not all the failures.

 

Your mistake is that you think bankers are risk-takers. They're not. The vast majority of people going into banking do it because they're risk averse and it's what their parents, friends and relatives "expect" them to do. At target schools banking is the vanilla option and is filled with the students who spent 4 years with their nose to the grindstone ready to follow their forebears like lemmings. It is emphatically not filled with those looking to do something different or take a big risk.

 
Masterz57:

Your mistake is that you think bankers are risk-takers. They're not. The vast majority of people going into banking do it because they're risk averse and it's what their parents, friends and relatives "expect" them to do. At target schools banking is the vanilla option and is filled with the students who spent 4 years with their nose to the grindstone ready to follow their forebears like lemmings. It is emphatically not filled with those looking to do something different or take a big risk.

This is far more true than most people would ever realize.

 

I interned at a boutique when I was in college that was founded by a guy that worked at a MM in New York for a few years and then returned to his home state to get his MBA and to open his own shop.

It was definitely a different experience than my friends who work/worked at BBs and bigger MM places. Deal Size was very small, dealing with companies that had revenues in the $5-50 million range. Generalist firm, mostly catering to companies nearby, but the senior guys traveled somewhat (though usually stayed within 300 miles of home).

This experience led me to want to do something similar when I am at that stage in my career. Make no mistake, this firm will not rival Moelis but there were definitely upsides in this particular case. My boss only worked a few years in NY, so he didn't spend 10-15 years building up a client base/making millions. But the city he opened his own firm in is located in a decent sized city (top 20 for population) but had a really weak M&A scene, so he benefited from that. I've tried to ballpark what he would take home (and was asked about it somewhat frequently in interviews, bigger places were curious when I told him how small the companies were that we dealt with), but I know that he lived a very comfortable life, would often take days off to golf, worked maybe 45-50 hours a week (had two young-ish kids at home), would plan trips abroad on a month's notice, etc.

Obviously wasn't all rosy, firm was still fairly young (I'd imagine he worked like crazy getting his name out there when he first started the firm) and there was plenty of grunt work for everyone (especially the interns!), but I can definitely see the appeal of starting your own firm and not necessarily being a rainmaker to do it.

 

Any idea what your fees would be or the volume you would have to do? I feel like if you're helping companies that small you need really low fees, in which case you would need to do a ton of volume. I interned for an angel investing group during school and my job was to help source deals and we would read hundreds of business plans before finding one worthy of an investment. Angel investing is understandably very different than what you're talking about, but I would think it would be difficult to make any money even if you're engaged and advising a lot of clients because a lot of these clients would be tough to sell. If you don't plan on having high volume then your fee will probably be too expensive.

Most importantly, small business owners are very tied to their business and I would find it hard to believe they would want a college student to sell their company. It's mostly small lawyers and accountants (from what I understand) that sell these businesses and I would imagine a business owner would hire an experienced accountant over a college student without question.

 

At that target deal size and your experience level (no offense), the marginal benefit of hiring you will likely not be worth it for these owners. These guys are already going to be hiring a lawyer, and honestly, I doubt you can provide a ton of value above what an experienced lawyer can. This just makes it doubtful you'll land many sell-sides.

Lead gen, though, you may be on to something. Know first hand that alot of PE funds would be interested in retaining a buy-side advisor to focus on finding leads for bolt-ons to existing platforms. Still, not sure if at 21-22 you can win the trust of fund managers to hire you, but if you can come up with a distinct competitive advantage in how you'll source leads, I think you could potentially find success.

 

If you need a business developer (sales guy) I'll come and help you. Srs.

"It is better to have a friendship based on business, than a business based on friendship." - Rockefeller. "Live fast, die hard. Leave a good looking body." - Navy SEAL
 

This is astute thinking on your part. The primary hurdles will be your age and lack of experience; if you can convince all your counterparts that your skill outweighs those, you're in business (literally).

I'll echo the previous poster who said your value-add as a sell-side advisor is lower than it is as a source of dealflow. You could start by pitching the sponsors you have existing relationships with of your ability to source bolt-on acquisitions to their existing portfolio. Or standard buyout candidates. The important thing is to get a legal arrangement in place that guarantees how and when you get paid.

With that taken care of, you are free to scout for deals. I would actually avoid making a detailed website. You can get away with a simple landing page from Squarespace with a single tagline like "Identifying partnership capital to help entrepreneurial executives build or exit their great businesses." Get Google Apps for Work and make an email [email protected] and you now have a legitimate presence.

That alone will help a lot of business owners you speak with take you more seriously. Not many 'kids' put together something that professional. Couple that with a LinkedIn that doesn't say "Investment Banking Intern" and "Private Equity Fund of Funds Intern" but simply "Investment Banking" (2014-2014) and "Private Equity Fund of Funds" (2015-2015) and you now look more legitimate. Scrub the start and end dates for your university as well (leaving the university entry itself though).

Write a good summary for your LinkedIn also; you want anyone who Googles you to get an accurate impression of what you're there to offer.

You're then free to get in front of as many businesses as you can; get the owners to trust you and get a sense of their business performance. Explain your relationships and ability to help them to a liquidity event. Make sure you have a template NDA ready at hand in case they demur and are uncomfortable discussing the business with someone they don't know. Your first conversation shouldn't be even there though, it's all about the relationship and inquiring what their future plans are.

Go to conferences, networking events, and industry trade shows. Develop a fantastic network. If you're able to execute on this (identifying dealflow for sponsors), you could move to the classic advisory boutique model and be a sell-side advisor. That would best be done after years of success on the buy-side, and it would come with way more strings (regulatory and legal, hiring and managing a team, taking an office, etc.). I'm personally not the person that gets jazzed by all that. If you're like me, getting a flat percentage fee for the deals you lead a sponsor to is a fantastic opportunity. You operate with no strings. If you want to earn more, you scale either the volume of deals done or their size (move up the middle market).

I know several people who have pursued a route like this. One out of undergrad, two out of MBA programs. Two had strong family connections to begin with (and both came from solidly upper middle class families, meaning they had no concern about staying alive for the first few years while getting things off the ground). The third is just a fucking hustler who I respect to death. I threw him a six-figure check for a piece of the business when through extenuating personal circumstances he was illiquid but decided he wanted an office and secretary and was also facing five-figure airfare costs monthly traveling internationally for family office clientele. That check was one of the best I ever wrote.

I am permanently behind on PMs, it's not personal.
 

I apprecciate the positive encouragement and thoughtful discussion in this post....

But seriously you think you can start an advisory practice as an intern? I'm not saying you don't have everything it takes to do so (except inside of these parenthesis) but do you think any client that can succesfully run a business to the oint of sellling equity to ahedge fund has gotten there by giving a kid with 0 experience responsibilty over the fate of his company?

 

Why not go do BB IBD or whatever for a couple years before coming out and doing this...? It'd up your street cred considerably, and it would only set you back a couple years (while also paying you an amount of money equivalent to what you'd get selling 1x $10MM business). Doesn't seem like it'd hurt to get those first couple of years in.

 

I don't understand this business model at all. Entrepreneurs in the lower middle market who want to sell their business to a corporate or a financial sponsor are going to contact lower middle market investment banks, of which there are tons and tons out there.

Sponsors in the middle market space already source deals from all the same lower middle market investment banks for free so why would they pay you to find leads. Unless you are saying you can do a better job than these investment banks at finding companies tailored specific to each private equity sponsor, then you are not adding value.

 

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