Elite Boutiques and Bulge Brackets

Prospect in Other

What do people mean when they say EBs have no balance sheets? So they don't do capital raising which BBs do? But I still see they do capital market advisory which includes acquistion finance, private capital raising etc. And I am confused whether capital raising falls under corporate banking or investment banking.

Comments (15)

  • Prospect in Other
Nov 26, 2019

bump

Nov 26, 2019

No balance sheet = doesn't lend money. Also in certain transactions, banks buy the securities from the company before selling them to investors, such as in IPO's. Both of these things would require money off a bank's balance sheet

  • Prospect in Other
Nov 26, 2019

But I see EBs could also do IPO which confuses me.

Nov 26, 2019

EBs can advise on IPOs, they can tell you how best to market it, to structure it, to value it, they can tell you what is a good shareholder base, they can oversee the process, and they can work with you to even decide whether or not it's a good idea.

They can't underwrite it that's all. And that is a very good thing. Most banks will advise your IPOs for free hoping to make money off the underwriting. This can lead to things like WeWork or Saudi Aramco.

Controversial
Nov 26, 2019
JustAnAnalyst:

EBs can advise on IPOs, they can tell you how best to market it, to structure it, to value it, they can tell you what is a good shareholder base, they can oversee the process, and they can work with you to even decide whether or not it's a good idea.

They can't underwrite it that's all. And that is a very good thing. Most banks will advise your IPOs for free hoping to make money off the underwriting. This can lead to things like WeWork or Saudi Aramco.

I've never seen an EB as an advisor on an IPO. At most, they're running the other side of the dual-track process (EB may run a sale process for a company while another bank is concurrently running the IPO process for that same company, and company/sponsor will decide at certain decision points when they want to abandon one of the processes).

Nov 26, 2019

Not sure why this is voted as the most helpful comment because it is wrong - I have friends in the ECM group at Evercore and they advise IPOs on the reg. Most of the EBs do capital raising advisory, especially on the equity side. Go to Guggenheim's recent transactions - they also do a bunch of IPO advisory. You can find this in really any EB's transaction pages.

You do not need to look any harder than potentially the largest IPO ever: Saudi Aramco IPO. Moelis and Lazard are the lead advisor for this IPO. Yes, of course they cannot underwrite, but they own the relationships and give strategic advice such as pricing and who to choose as underwriters, etc.

For further details, Evercore's ECM team is comprised of former big shot ECM MDs at BAML and the key thing is that these boutiques just have better relationships than BBs and the CEO trusts the MDs at boutiques for their strategic advice even if they aren't underwriting anything. The couple million in fees is more than worth it to the company when they have someone they trust on the deal.

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Funniest
  • Intern in IB-M&A
Nov 26, 2019

You have a very romanticized image of the value of "strategic advice" to very experienced CEOs.

    • 3
Nov 27, 2019

Evercore, Guggenheim, etc has traditional Research and ECM functions. But the teams aren't big like a BB (like broad research coverage) and they also don't have the sales team scale to go pump out a $3bn IPO. The coverage guys do have good relationships (mostly M&A focused) and when IPO time comes, in area they have some sort of research coverage, they'll get a right / passive role. It's kind of free money but not leading the charge on IPO or providing some serious execution advice. Dual track is often the case. You can look it up by IPOs they are part of, mostly hanging to right or passive.

Aramco is an exception case. Anyone who would tell them they are worth $3 trillion without having to actually sell it to the market / execute (hello Moelis) probably collected a fee. Now if that valuation was a great advice who knows.

    • 3
Nov 26, 2019

The term "balance sheet" means the bank has the ability to house the securities internally while offering the money it holds in exchange to the corporate borrower--acting as a principal rather than an agent. Corporation X needs $500m... JPM can offer that money directly in form a loan and hold a piece of paper on it's "balance sheet" that says it's owed; Greenhill doesn't have the capital to do that (i.e. balance sheet) but they could act as an agent in a high yield bond transaction.

Leveraged_burnout's example is of a firm commitment offering, where bank would commit to purchasing excess of the offering that's unsold. So EBs can still do IPOs as agents but likely wouldn't be able to do that kind of offering where they're on the hook.

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  • Prospect in Other
Nov 26, 2019

So does this capital raising example you mentioned fall under corporate banking or investment banking?

  • Analyst 1 in IB-M&A
Nov 27, 2019

Investment banking. If the bank wanted to make a loan or invest it's own capital the corporate bank would get involved.

Nov 27, 2019

Private capital groups like the one at Lazard or PJT's Park Hill . . these are their own thing that isn't really comparable to IB or CB. Technically falls under IB on some org charts but won't offer some of the important spoils of IB, namely experience with building financial models that will help get to PE afterward.

Most Helpful
Nov 28, 2019

One of the reasons EB's are very successful is because they operate independently of the lending and underwriting that the BBs do - the most important point is that they are unconflicted, and I'll explain below why that has important ramifications.

If you think about an IPO, there's really 3 components to the fees - the advisory fee, the underwriting fee, and the selling concession. A BB who leads all three may be incentivized to suggest a lower price so that their underwriting risk is less (e.g. they can more easily be certain they can sell all the shares and won't be stuck holding an outsized portion). With an EB they are not underwriting, and thus for the advisory part, can offer actual advice on what they think valuation is, etc. without being influenced by their own ability to underwrite.

EBs are also transaction agnostic and thus they are great for doing strategic alternatives reviews because they aren't biased towards doing a certain type of transaction. IPOs tend to result in bigger fees (given the advisory, underwriting, research, etc.) components and thus BBs may be biased in recommending that when an outright sale would be a better exit. EBs are fine doing either and will likely get paid similarly on either

Why are all the best restructuring teams at advisory firms? Because most of the time the BBs have participated in lending the debt being restructured and thus are conflicted.

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Nov 29, 2019

I would argue if it's a dual track - the incentives are very misaligned. Let's say a $200mm IPO, 7% spread for a $1bn EV biotech company ($14mm fees total) and the EB has 15% of the book given their not so active status. That's $2mm in fee.

The EB also has a sell side mandate for the same company. Standard M&A fee is somewhere around $10-12mm. Unlike BBs, the boutique isn't counting on follow one or future debt. They have every incentive to push for a sell over IPO.

    • 1
Dec 1, 2019
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