What Is The Next Bulge Bracket Bank or Will There Ever Be Another Bulge Bracket Bank?
My understanding is that the following are the Bulge Bracket Banks with 100% consensus.
Goldman Sachs
Morgan Stanley
J.P. Morgan
Credit Suisse
Bank of America Merrill Lynch
Citigroup
Barclays
Deutsche Bank
UBS
Of all the other banks out there (EB, MM), which one will be the next to move into the category of Bulge Bracket?
Is this the definitive list until eternity of the Bulge Brackets until one of them files for bankruptcy?
If anyone joins the bulge bracket, it will be a full-service bank with a massive balance sheet bolstered by a retail arm. Think Wells Fargo. The speed of this will depend on how quickly they're able to develop the brand and reputation of their advisory franchise.
I don't think it will be through acquisition, given how robust their franchise is already. Bank of America acquiring Merrill was basically bolting a top-notch investment bank onto a huge retail platform. Wells already has invested a lot into its investment banking platform and I don't see anyone whose 'prestige' is meaningful enough to be a real boost to Wells' reputation agreeing to an acquisition.
Historically, a bulge had to provide not just advisory and financing services, but sales and research across numerous asset classes. The boutiques aren't really gunning to join the list of full-service firms. The 'EBs' of the world pride themselves on not having conflicts of interest and on winning mandates based on their advisory expertise. This is what Lazard, Blackstone (before spinning off advisory into PJT), Moelis, Greenhill, Evercore, etc. have always been about.
What's interesting is to watch how firms like Evercore, Lazard, and Moelis have added Asset Management functions in recent decades. Lazard's has been around awhile. Evercore added equity research recently too. Moelis has been building out fund-of-funds teams too. The important takeaway is that these are all advisory functions. They aren't financing. Lazard (et al.) isn't syndicating your debt for an LBO. They're advising you on the transaction.
At the end of the day, you go to the firm you have the best relationship with or think can do the best job for you. Those two don't always overlap. If you want financing for a megadeal, you're likely going with one of the balance sheet behemoths like JPM or BAML. If you operate in a niche and are doing a strategic transaction, Qatalyst, Centerview, LionTree, or even an FTPartners may look really attractive.
'Bulge bracket' is such a legacy term anyway. No longer are there publications that literally put the leading firms names in larger typeface on paper. There's just league tables, which add a greater measure of transparency as to who is successful in each product, geography, and industry. That allows a greater level of specialization, which lets clients make the types of decisions I referred to above.
+1 SB, this is an awesome post, and I genuinely learned more about the history of banking. Thank you
Interesting timing to see a NYT piece on Centerview's success in the past decade (and the boutique phenomenon in general) published a few hours ago.
http://www.nytimes.com/2016/01/06/business/dealbook/centerview-benefits…
I appreciate your insight. My takeaway from what you wrote is that the "Bulge or Bust!" mantra is not as relevant as it once was. I am curious to see where Wells Fargo stands a few years from now in the BB realm. It is exciting to see that elite boutiques are continuing to gain prominence, such as Centerview Partners. Thanks for the link!
There are a lot of benefits to being a boutique which is why ex-BB MDs start boutiques in the first place. I think the better question is to ask which boutiques have strong momentum and which banks are slowing down. This is just my inference based on what I've been hearing.
Strong Momentum: Centerview, Evercore, Jefferies, Guggenheim, Houlihan Lokey Slowing Down: Perella Weinberg Partners, Greenhill
Considering Jefferies has close to 4,000 staff and is a full service bank it shouldn't be classified as a boutique. Another poster raised a point before which I think is pretty interesting. The likes of Lazard, Rothschild and Evercore have become so big that they move into a category of "Independent advisory firms" rather than boutiques.
It's unlikely any bank will simply 'evolve' organically into a something that looks like a bulge bracket bank. The best example as was mentioned above was the Bank of America/Merrill Lynch combination.
There are a number of large banks with IBD and S&T operations such as HSBC/BNP/Wells Fargo but it'd be unlikely that they acquire an elite banking franchise and then become a bulge bracket. This thread is focused on the IBD, but in reality at all these banks it is the S&T divisions that bring in significantly more revenue (at significantly higher risk).
I am always so focused on IBD that I forget how important S&T is! Good point!
My money is on Wells Fargo, and that's got to do with a combination of their firm culture/strategy and the general market.
The context is that for a whole host of reasons (most of which stem from moronic public-sector policies and the sovereign debt crisis) that we are about to enter a period of extreme volatility. Trading volume is still down dramatically from pre 2008, and I've spoken to a number of traders who have said it's almost impossible to close positions in certain fixed income products( most notably European bonds).
Somebody is going to blow up soon, and other firms with a high risk propensity are going to be caught with their pants down. Most large banks are overly aggressive traders(and not as good at it as they think they are) as evidenced by the collapses that happen in every crash dating back to the 1820's.
Wells is one notable exception. They have an exceptionally conservative culture and philosophy compared to other large banks, and this will allow them to benefit in the long run. It already allowed them to grab Wachovia, and they are now seeing their fees rise faster than the industry is(indicating that they're winning bake offs, not just catching new clients). Combine their upwards trajectory and low risk exposure with other firms going belly up the next time the economy tanks, and they stand to come out of the next financial crisis as a Bulge Bracket firm.
Another good bank in that area is PNC. I've got to meet some of their higher ups(not quite C-suite, think a tier below that) and they also have a conservative, prudent approach to managing their business.
One story about PNC that speaks volumes to how their organization is run, is that the director of their real estate business noticed the housing crisis before the bubble burst. When he did so, he deliberately put himself out of a job to save the firm: he spoke with the CEO about his beliefs and recommended that they divest the business, which they did in time to avoid blowing up the company.
They're still a strong regional but are rapidly expanding westwards. However, they're not quite ready for primetime because their investment banking assets consist of Harris Williams. Fantastic firm (one of the best at what they do) but they also are (by design) not a platform with all the capabilities of a bulge bracket firm.
Stumpf hates the investment bank, I don't see it expanding in the near future maybe 10 years down the road when Sloan steps in as CEO we may see it evolve.
10 years down the line? We're living in the future!
Lehman Sisters
Barclays is a BB now? God I feel old ...
Can see DB easily being replaced by HSBC in the coming years should their retreat from capital markets continue. Huge market making capabilities is what made most of BB into what they are now.
What's your view on DB remaining a top bank in DCM, particularly Lev Fin? Furthermore, do HSBC have the market making capabilities to surpass DB? They seem very risk averse right now.
The definition of boutique used to be boutique ADVISORY firm ... in other words, if you're a tier 2 investment bank you're not a boutique automatically. Jefferies is not a bb but its not a boutique either - its just a 2nd tier bank
IE if I were a client looking for pure advisory, doesn't mean I treat Evercore and cowan as the same - So in my mind there's
BB MM Boutique
Credit Suisse, Deutsche Bank and UBS are shrinking.
Banks in best position to replace them in the BB-tier would be Wells Fargo, RBC and HSBC. However, all three of these banks are still miles away from even the smallest BB though (UBS). Wells Fargo and RBC have little to no presence outside the US (except Canada for RBC obviously). They have barely even tapped the European or Asian or Australian markets yet.
Bernie's gonna break 'em all up :O
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