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Elite Boutique Investment Banks Versus Bulge Bracket Investment Banks

Who are the Elite Boutique Investment Banks?

The main Elite Boutique Investment Banks are Rothschild, Evercore, Moelis, Lazard, PJT Partners, Centerview, Greenhill, Perella Weinberg, and Guggenheim. These firms have wide reaching platforms with many senior bankers and offer advisory services globally.

There are also regional or industry specific elite boutique investment banks which offer a similar experience for junior bankers, with the caveat that exit opportunities and moving up the ladder will be focused in that niche. And then there are some elite truly boutique banks that are just one prominent rainmaker advising on mega deals and with commensurately small teams. A technology focused elite boutique would be Qatalyst.

Elite Boutiques Then and Now

Back when I first started my career (700 years ago), elite boutiques were semi-trendy and known to pay well and garner good exits for investment banking juniors. They would show up on a few major M&A deals every year and talk around the water cooler would be something like:

Did you hear about [boutique], they were started by the head of xxxx at Morgan Stanley and now they are on every major [sector] deal

But for the most part, investment banks who had been around forever continued to lead the league tables – as in the Bulge Bracket.

However, if you look at the league tables today at the turn of the decade, elite boutiques have carved out a niche in advisory that is here to stay – Evercore, Moelis and PJT routinely fight with Goldman Sachs, Morgan Stanley and JP Morgan for all of the biggest M&A deals. They also have bolstered their senior banker ranks substantially.

Elite Boutiques became increasingly relevant as the historical bulge bracket investment banks moved away from their longstanding partnership model similar to law firms or consultancies and partners cashed out via IPOs or being taken over by commercial banks. Elite Boutiques became compelling for rainmakers looking to be free from the compensation shackles of their new commercial banking overlords and/or public shareholders.

Elite Boutiques Versus Bulge Bracket Banks Today

Who is and isn’t part of the Bulge Bracket has always been contentious. Goldman Sachs, Morgan Stanley, JP Morgan, Merrill Lynch (now Bank of America Securities), Citi, UBS, Deutsche Bank, Barclays and Credit Suisse were generally accepted to be the post-financial crisis line-up.

Back then students and first year analysts posting on Wall Street Oasis would separate the Bulge Bracket into Tier 1 and Tier 2. And then Tier 1A and Tier 1B. And then Tier 1A (+) and so on. No one really cares.

Today, who belongs and does not belong to this fabled group is no longer so clear. Is RBC in the Bulge Bracket? Is Wells Fargo in the Bulge Bracket?

The more important thing to note is that Bulge Bracket is a meaningless term – we should just classify banks as those who have balance sheet (lend money as an anchor for ancillary investment banking and capital markets services) and sales and trading capabilities and those who offer advisory only.

The distinction should be between Elite Boutiques and Balance Sheet Banks – with the prestigious balance sheet banks being the ones who top the league tables every year. And even within the balance sheet bank classification, it gets tricky because banks such as Goldman Sachs and Morgan Stanley do not lend as much (expensive balance sheet), but have those capabilities and hold capital markets, trading, research and other brokerage functions. Ditto with Jefferies.

What Are Some Major Differences Between the Bulge Brackets and the Elite Boutiques?

One major absentee item from most Bulge Bracket product suites is a robust Financial Restructuring practice. Restructuring is a major business line for most elite boutiques (although generally still much smaller than M&A because most large businesses should not be failing) but are difficult to market within the Bulge Bracket platform because of conflicts in lending and capital raising.

For example, it is difficult for a client to bridge XXX Bank being their primary lender and relationship bank while XXX Bank is also advising their creditors and therefore does not have their best interests in mind, no matter how many internal silos are set in place.

Elite boutiques do not have balance sheets and generally do not lend or underwrite securities. This is a major difference and is why major IPOs will hire financial advisors who are not part of the equity syndicate to shepherd the deal.

Ultimately, the pure relationship aspect and acting on the company’s behalf is compelling for management. As an example, for underwriting, the bulge bracket investment bank is enticed by the fee as opposed to getting best pricing. Additionally, it is important to remember that investment banks have two sets of clients – they also have to place the securities with buy side clients who are looking to subscribe to new issues. These clients also pay tremendous amounts in terms of brokerage and market making.

Compensation is understandably higher at the elite boutiques – and this is readily available information just from looking at compensation as a percentage of revenues for the financial statements of each bank.

Elite boutiques pay out a material amount of what they bring in as revenue. Although most elite boutiques are also publicly traded companies now, a large percentage of the shareholdings are held by insiders and compensation is generally seen as a key retention factor and competitive advantage.

Analysts will get paid a little more than their bulge bracket peers (which may seem like a lot more to a 22 year old), while managing directors can make millions more because of the profit sharing agreements of the boutiques.

Risk and network are also much more important for the elite boutique banker – a good year with dealflow may mean millions. A bad one may mean nothing or a pink slip. At a Bulge Bracket, there is somewhat of a view that part of the revenue being brought in is a function of having the firm’s platform – whoever sits in that chair will get something, which rings more true in capital markets roles.

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Matt
ex investment banking associate
https://www.linkedin.com/in/matt-walker-ssh/

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