Boutique IB Firm Also Raising Fund?
Curious if you guys have seen IB firms also raise a fund that co-invests alongside the deals they bank. I've seen a firm do it before (on their 3rd fund while still maintaining IB services) but it smells weird to me that this is legal.
I don't have any specific examples of firms that do this, but I do think I've heard of it. One thing I do know is that some banks will sometimes roll their fees into newco and participate that way. I'm not a lawyer, but don't see any reason why this wouldn't be legal so long as you act in the best interests of both parties (clients for banking and investors for PE)
Not exactly the same thing but I interned at a small LMM shop that also had an affiliated PE arm. I am talking a <10 man shop, so everyone wearing their IB hat would in theory also perform PE roles when opportunities presented themselves.
While I interned there the work we focused on was exclusively IBD oriented, but given the bull market at the time the partners seemed to do quite well focusing on purely IBD. I left on good terms so I like to keep an eye on them because its a funky little bank that does well in their niche. I always assumed the PE thing had never really come to fruition and didnt really expect it to.
However, I checked in on them again a few years ago and observed they had made their first platform investment.
For context, they didn't ever mix IBD and PE services like your bank does, but to me that makes sense. I mean how good of a sell-side pitch would that be. "Hi [insert sponsor / strategic], we've got a new teaser for you, and btw did we mention that we're looking to take a 10-30% equity position in the company as well". While many prospective buyers may not necessarily move forward, it would increase the bank's credibility in reaching out with what they perceive as high quality assets.
I do see your point on the legality / conflict of interest though. Its kind of like having a realtor provide appraisal services on your house while also trying to buy it. It would be great for any prospective equity partner, but if I were the seller, I would seek sell side counsel elsewhere.
Your bank reaching out and emphasizing that they want skin in the game would certainly peak my interest, and increase my perception of your team. I would be more likely to use your firm for buy-side advisory if needed and sell-side services when we look at divestitures.
I’ve heard of this for businesses in the lmm/mm space.
Essentially it’s a good sign when a bank co invests in the platform they’re doing a deal for bc it’s showing they actually believe in it rather than just trying to make a commission
Summarized perfectly, exactly
This is how the GP described it as they're "eating their own cooking" on deals they bank. They're typically just a small co-invest alongside larger GPs. Typically just doing 1-2% ownership in the company as their funds are tiny (sub $75mm). I do think it's an easy way for them to rake fees on management/carry of the fund when typically their pay is done at transaction closing. They don't have any dedicated PE people, just 2-3 MP/MD that spend very little time on the fund itself as it's just co-investing in deals they've banked.
Do merchant banks do this?
Isn't that pretty much the merchant bank model?
There's nuances around separation of entities and such, LPs will want proper diligence and approval protocols and appropriate disclosure for transactions where bank is advising/underwriting and fund is investing.
That’s a merchant bank
I worked at a merchant bank for a bit, it’s an ok model but you end up competing with your clients, especially on things they really like if the equity ticket is limited. You’re also pitching to LPs that you’ll do “whatever deals CLIENT does but we charge 1.5 and 15 instead of 2 and 20” which can piss your banking clients off as you’re effectively undercutting them. Don’t think it lends itself to great long term relationships
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