How will boutiques fare in the next downturn?

clebrowns's picture
Rank: Monkey | 58

Most elite boutiques are relatively new compared to the BBs and never went through a situation of comparable magnitude to 2008.

Given that boutiques are majority advisory focused and run lean deal teams, how would they fare in the next recession compared to the BBs? Will deal flow decline/increase given their strategic advisory models, will many implement tighter regulations despite them being private, will hiring rates go up/down/remain the same, etc.

Comments (22)

Jun 9, 2019

Which EBs weren't around in 2008?

Jun 9, 2019

Guggenheim, PJT, Moelis (founded during start of downturn I believe?) If I am correct, many weren't as relevant as the BBs in terms of being in the deal space and only took off post-recession

Jun 12, 2019

Moelis was founded in 2007 and PJT was Blackstone. Not sure about Guggenheim.

Jun 9, 2019

Most of them have RX groups. They should be fine

Jun 9, 2019

What about their M&A practices, since most boutiques exclusively work on either m&a or rx deals?

Jun 9, 2019

sector dependant just like BBs.

Jun 9, 2019

A couple thoughts:
The reason so many household name banks were on the brink during the crisis and cut employees wasn't primarily due to lack of deal flow. Depending on the industry a lot of that slowdown actually happened later. After the real estate bubble popped in around '06 the ripple was felt first and most acutely on the balance sheets of banks that were doing a huge amount of securitization. This (and other factors, oversimplifying here) caused Lehman to collapse and AIG to be placed in conservatorship by the government. Most other bbs suddenly had to take a hard look at their own balance sheets/counterparty relationships and start unwinding toxic assets/doing damage control. As a consequence of these factors, there was a liquidity crunch that hit the rest of the economy causing many sectors to enter correction territory with all the familiar effects of generally reduced dealflow, etc.

So to op's question, let's say it's 2009. Why did banks lay off/hire fewer juniors? Lots of effects to consider. Many trading desks were decimated by the crisis and banks had tightened their belts and teams to begin with and simply had higher priorities for burning cash than hiring analysts. Reduced deal flow didn't help.

Boutiques are a slightly different animal because their balance sheets and by extension existence won't suddenly be in jeopardy because you wake up and realize AIG might not post collateral for swaps you're using to hedge debt. These means that while companies are rarely 100% prepared for recessions, odds are there isn't a barrel of dynamite on your books that no one saw coming. Boutiques also have comparatively leaner teams; some have 1 or 2 analysts for even massive deals (= painful hours) which means they're already in some ways operating in "recession mode" with minimal junior support. In addition, many have strong restructuring practices (PJT, EVR, LAZ, etc) which can have a counterbalancing effect.

My guess is that analyst hiring will change more for places that have really expanded their classes of late; guggenheim comes to mind here among others.

Interested to hear others' thoughts.

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Jun 9, 2019

Is it safe to say that the big balance sheet banks would least prone to being harmed by a downturn? Or do the restructuring practices of these boutiques more than make up the losses relative to the big balance sheet banks?

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Jun 9, 2019

I don't think that's safe to say at all. Each recession has its own quirks; as I describe in my post above, the big balance sheet banks were hit very hard in 2008/9 thanks to some of the "assets" they had on their balance sheets. That wasn't the case in 2001; so maybe you could argue that in that kind of an environment where M&A activity declines but financing is still going strong bbs have the upper hand thanks to their more diverse offerings. It all depends on the recession.

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Jun 9, 2019

Earlier comments mentioned that it is sector dependent. From an IB point of view which sectors would be most likely to get hit the hardest in a recession (in terms of deal flow)?

From my very limited experience/research, I feel like FIG would be least impacted, but any insight from more experienced monkeys would be appreciated.

Jun 9, 2019

Things like consumer, transportation, tech to an extent tend to be particularly cyclical. Examples of less cyclical industries are power/utilities, defense because it's driven by govt contracts and def spending, and fig (arguably; there tends to be a lot of consolidation during downturns which can translate into dealflow).

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Jun 9, 2019

I know that in the immediate wake of the crisis, MS FIG had one of their best quarters ever as a result of every client they covered working out ways to deal with their own toxic exposure.

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Jun 10, 2019

Given that many of them are restructuring leaders, I would expect relative stability. Not total stability because it would be hard for restructuring to match the fee flow from M&A. But it's a buffer.

Wasn't sure what you meant by this: "will many implement tighter regulations despite them being private." First of all most of the big ones are public not private (Centerview the only non-public EB I can think of). I wouldn't expect any regulatory impact on an advisory shop but curious what you mean.

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Jun 10, 2019

Relax, the next downturn is much further than you think it is.

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Jun 10, 2019

My take: With the same caveats others have laid out about deal flow and sector being the most important determinants, Id say "won't be affected much":

  • The clientele for EBs are already focused on paying for the best advice, which is why they're going to an advice-only advisor rather than a BB that can also help with financing, etc.
  • EBs aren't playing from their balance sheet - unlike the BB's in '08, there isn't really going to be a sudden and dire question of counter party risk/credit risk/liquidity risk, or the need to curtail front office activities to shore up the BS.
  • EBs staff lean - it's not like there's a lot of bottom bucket juniors lying around to fire/not hire.
  • (My personal hunch) a lot of EBs, while technically public, look and feel a lot like a partnership in practical terms. Partnerships, for a variety of reasons, are generally more averse to firing junior resources or letting them go through attrition if it can be avoided, as they have a lot of credibility to lose if they start axing the cheapest members of their workforce. It is, as they say, "not a good look".
  • As others have said, most EBs sport a restructuring practice whereas most BBs do not. So, there is somewhat of a countercyclical buffering effect on the bottom line.
Jun 11, 2019

Pretty much this spot on

Jun 12, 2019

not having stuff that gets paif off balance sheet activity sounds good to me and having human capital only teams that advise through the crisis (restructuring etc.) too.

There is an old Trian pres on lazard online and why its crisis proof

Jun 12, 2019
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