How Do LMM / Boutique M&A Firms Make Money?
This just doesn't make sense to me. I see a massive amount of boutique investment banks that focus on ~$50M M&A deals. Then there are some where $50M is honestly a huge deal and $25M is closer to the norm. I just do not understand how these people make any money.
If you're getting a 2.5% fee on each deal, you make $1.25M per deal assuming $50M transaction size. Assume you close three $50M deals in a good year, you're looking at $3.75M in revenue. But is that really enough for a firm that has 3-4 MDs and 3-4 junior bankers? Assume MDs get $500K a year on average, and junior bankers get $250K/year on average. You're looking at $1.5M - $2.0M for the MDs and $0.75M - $1.0M for the junior. Total comp thus is between $2.25M - $3.0M. At best, even if you're underpaying the shit out of your employees, you're still only looking at like $1.5M of excess capital. Other Expenses probably run a good bit over $100K/month for the combination of software/market data licenses, support staff (accounting/IT/compliance), rent, travel & entertainment, employee fringe benefits/healthcare, 401K matching etc. Thus in a GOOD year, while paying people poorly, you're still cutting it close af and only breaking even by like ~$100K. So in a bad year where you only get 1 or 2 (or zero) deals done that are all in the ~$25M range, you've got to lose way more money than you can make back over the ensuing good years.
Am I missing something here or do these firms basically just suck really bad, underpay the hell out of people and struggle to survive?
The MDs at these firms typically don't take salary and just get a commission when they source a deal. Most of these guys are from real banks but are in the sunset period of their career, have all their kids through college and have built up a reliable nest egg. So they go work for a chill boutique where the day-to-day work is negligible unless they're leading a live engagement. You might do nothing all year and make nothing all year, which is fine. You also might basically work a part time schedule while working through one live engagement a year. If you can bring in a $1.25M fee and get to keep ~30% of that as a commission, it's actually a pretty sick deal given you're working part-time, remote, on your own schedule and would probably just be retired making $0 a year otherwise.
To your point about losing money in down years, well, frankly, you're right. A ton of these firms blow up or reshuffle & combine / dissolve every year. But nobody is that invested in them so it doesn't really matter. The junior bankers who are there are solely there to get experience and lateral, so they'll simply move on. And the MDs there are a bunch of 60 year olds just looking for a place to hang their licenses so they'll just move on to the next boutique. Seen it happen before (I used to work at a shit boutique).
TL;DR: Nobody is getting rich at boutiques. They're either gaining experience (to lateral to a better job), or they're 60 year old MDs in their later years who are there to do a few casual deals and take it easy. If the shop goes under it goes under. If not, great.
Edit: Boutique banks run the gamut. My experience was at a truly shit boutique doing like 2-3 ~$30M M&A sell-sides a year, like OP is talking about. Tons of boutiques out there are super legit though like Union Square Advisors, Luma Partners, etc.
Does this also apply to MDs who work at good MM banks (HL M&A, Raymond James etc) that do deals in the lmm?
I thought senior bankers move downstream to get a better slice of fees for each deal they close
MDs at HL, specifically in restructuring and M&A, absolutely rake
Good MDs will make much more money at a MM firm than at a BB.
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How would that apply for them? How did you read that and think that would apply?
He’s specifically talking about small shops that do 3-4 deals p.a
It’s not a symptom of small deal size. It’s the narrow service offering, small team size on top of seal size.
Someone in my close personal circle works at these type of boutiques. For the founders, it affords them to live a comfortable life and the hours aren't terrible (45-60 hours max) for junior employees. Lot of interesting exposure to micro PE firms (some regional PE firms founders definitely kill it, founders netting 7 figures on smaller companies they turned around). Deals with mostly companies being sold in the $5-15M range.
Not a career move for the person I know there but it was a stepping stone for them after getting stuck/feeling unfulfilled in BO/MO office at a few large banks.
Fwiw, from what I have seen, those banks can justifiable charge closer to 5%. That allows the economics to work a bit better as you cited above and the clients are seemingly happy to pay that amount because it’s sometimes either hire that bank to run a process or basically do nothing since no one else is really around to hire for them. The MM platforms aren’t really interested / able to make the economics of a $50mm sell side work and often the market for LMM is so spread out and thin that no one else may be interested or around to do that deal at that time with that niche company in its niche space. Also they can really tighten up on overhead expenses and pay juniors meaningfully under “market” as per these message boards especially since hours and intensity of workload can be less than the MM/BB jobs with those salaries cited here. Just a thought that I hope may help. Good luck
I work in a LMM group and I’ll give you a better understanding here:
We’re anywhere from 5-10 MDs for the sake of secrecy. The more experienced MDs tend to bring in $5-20M per year in fees and keep ~50% of what they bring in. Usually, MDs each close 2-3 deals in the $50-100M EV range (2-3% fee) and maybe 1-2 deals that are $250M+ EV (some cases can exceed $1B). Each experienced MD has maybe 1 VP, 2-3 associates, 2-3 analysts so overhead is fairly low, even when paying street level comp.
I worked at a LMM boutique (10-15 total bankers at a given time) in a non-tier 1 market. A good year was $10mm or more of revenue, and hours were chill + pay was great for the market. People were super nice. I'm a big dummy for leaving as I could've been pulling in $300-400k as a VP by now working anywhere from 30-60hrs/wk.
Mind if I Pm you about your experience? I’m starting at a LMM this spring
Lol where was this?
At a LMM boutique trying to lateral to a MM, don’t like the work or team
How has your experience been on this transition? I am trying to move in the opposite direction. Really enjoyed interning in the LMM, where people were much more relaxed. The wood that was copped always felt more meaningful. If you can find some good legacy MDs in a space it seems like a no-brainer to swim down market.
Are you at an MM?
What was your pay in the LMM compared to hours? Good?
Did soph summer at a boutique like that. The MD had rebranded the bank like five times to capitalize on trends. It was a healthyech boutique, then a fintech boutique, then a greentech boutique etc. Five man team doing cold outreach, pitching, general marketing materials and then he would bring on his friends firm as contractors to help with execution. Very lean operation.
Great sophomore summer experience and probably a good junior SA gig if you can’t land anything else. That said, the bullshit the FT analysts had to deal with working at such a tiny/lean operation was painful. Office was disgusting, reimbursement for late night meals/transportation was effectively quarterly and capped at like $15 for dinner (T1 market), analysts spent a lot of time physically assembling books, other shit.
have seen a M&A team of 1 MD, 1 D and 1 Associate. they close US$2.5m+ of fees per year. would say that's alright for a small team.
Interviewed with a ten man boutique that was closing 8 deals $25-50M a year. Pretty sweaty compared to what most people seem to be commenting here, but it makes the economics better. Not sure what they were making on a deal, but would assume it's in line with other LMM. The pay was pretty bad comparatively (I would've been soph summer), but they hired a lot of junior non-targets who would probably be ok with the difference in pay to get into the industry. Always wonder if those guys were able to make it upstream eventually.
Work at a LMM shop in second tier city, and the answer to OP’s question that depending on group, they don’t make money. I’m in a generalist M&A group, and our average deal size is $25-40mm with a lot of engagements below $15mm and an occasional deal above $50mm. I’ve seen fees on these deals range from $400-900k, never seen $1mm fee.
Group is 2 MDs, 2 Dir, 1 VP, 2 Assoc, 2 Analysts. We - the junior bankers - are paid about 50% of street at the base comp level. My all in for 2021 was approximately 1/3 of friends at MM shops like HL, Stifel, Gugg, et al.
I have a lot of thoughts about the LMM and my firm specifically, but my plan was always to use it to get reps, get licensed, and get out. After two years that’s my move for 2023.
Was it solely because of comp that you are moving? What's the culture like
Culture was generally OK, but there has been a lot of turnover over the last 8-9 months, and some additions to the team are, IMO, questionable.
Comp will almost always be the impetus to move, given my background and longer than typical work experience.
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