Boutique Investment Banks See Opportunity

The conversion of Morgan Stanley and Goldman Sachs into bank holding companies will likely drive high-stakes, high-risk-loving finance professionals into the open arms of boutique investment banks.

"The move to become a bank changes everything - the regulator, the line of business - and the obvious outcome is a segregation of what is the focus and what's not the focus," says Ricardo Kaufmann, head of full service brokerage for Bulltick Capital Markets in Miami. "Some departments will cease to exist and (those people) will leave and form their own company or a new investment bank," he predicts. "You're going to see massive flows of intelligent people leaving those banks (and) aiming for an opportunity."

People who perceive themselves as highly talented won't want to work at a bank because they won't be compensated or rewarded for their expertise, believes Stuart Kruse, CFA, president of Kruse Asset Management in Chicago. "They'll look for a more entrepreneurial venture where they can eat what they kill, or go to private equity or a hedge fund where there's less regulation," he says.

They're Waiting for You

The end of large, free-standing investment banks does not mean the end of all investment banking. In fact, the shake-up is likely to create opportunities for pure-play boutique investment banking firms such as Boston's TM Capital.

"In this market environment, clients are going to look for experts who have handled complex transactions and are specialists in their field (i.e. M&A, vertical market, etc.)," says TM Managing Director Brad Adams. That means more invitations to pitch on opportunities that might in the past have gone solely to larger investment banks.

Adams expects his niche will also see an influx of new competition as senior investment bankers leave firms like Lehman/Barclays, Merrill Lynch/Bank of America and, to a lesser extent, Goldman Sachs and Morgan Stanley.

"We saw this to a certain extent here in Boston in the early 2000s," he recalls. "Just as the Internet bubble burst, most of the New York investment banks pulled out of the Boston area and thought they could cover this market out of New York. Many of the Boston investment bankers at these firms left and started their own Boston-based investment banking boutiques and have done quite well."

Adams knows he's not the only boutique banker planning to sign new players to his roster as talent shakes out of the bulge brackets. "I have to believe that a specialist boutique that is unencumbered by all of the distractions of the larger firms has to be an attractive home for a Wall Street investment banker in this environment," he says. "We are certainly keeping our eyes open here at TM Capital and, in some cases, being proactive to find new talent. And, I am sure our competition is doing the same."

The current turmoil in the sector is sure to spawn a new era of true small investment banking, and bolster business at M&A boutiques across the country, if not the globe, says Andre Peschong, partner and co-founder of Bridgewater Capital Corp. in Newport Beach, Calif.

"There is a lot of talent out there that cannot get jobs, and the best of that talent will recognize the opportunity to start a focused investment banking operation," he says. "The other boutiques out there will also have a net positive effect on this turmoil, and that will come from increased deal flow and institutional willingness to move their accounts to a smaller boutique investment bank."

Or Maybe Not

Others are less optimistic about the future of specialized investment banks. "In the foreseeable future, the boutique investment bank relying on wholesale funding of its balance sheet and high leverage (assets-to-equity) is pretty much dead," says Stephen Vanstone, vice president of Global Banking and Financial Markets for CGI in Toronto.

"All major investment banks are either now part of a commercial banking organization that relies on more stable funding from consumer deposits, or they are adopting a model that allows them to seek retail deposits," he says. "The investment bank growth model was also built on high leverage, which will not be the case in the future. In fact, leverage will have to decline, so investment banks will likely be shrinking or staying the same size."

Not surprisingly, Adams disagrees. "TM Capital and our many competitors are very good examples of leaders in the boutique investment banking world," he says. "We are not overleveraging our balance sheets, taking risky positions in mortgage-backed securities, etc., and our clients do not have to worry about whether we will be around to complete the assignment that they engaged us to do."