The planned IPO of 7-year-old investment bank Moelis & Co. is a signal of just how far boutique bankers have yet to come — that, in spite of all their hopes in the immediate aftermath of the financial crisis, they’re still stuck in their niches while the largest institutions are more dominant than ever.
In its filing with the Securities and Exchange Commission, Moelis & Co. cited the growing demand for independent advice as a reason it should continue to grow revenues and gain market share. Moelis has played a key part in some of the biggest recent mergers and acquisitions, including Anheuser Busch's $61 billion deal to buy InBev SA and the $28 billion purchase of Heinz by Berkshire Hathaway and 3G Capital.
"We believe the shift toward independent advice has been driven largely by the actual or perceived conflicts at the large financial conglomerates where sizable sales and trading, underwriting and lending businesses coexist with an advisory business that comprises only a small portion of revenues and profits," the company said it its filing.
Yet instead of rivaling Goldman Sachs, Moelis is turning to the banking giant (and to its arch-rival, Morgan Stanley) to underwrite its own just-announced public offering.
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Many boutique bankers expected that, whether as a result of increased regulation or simply in response to changing industry fundamentals, banks would reshape themselves. The industry as a whole, they hoped, would become more diverse, more “multipolar” — and offer more opportunities for firms like Moelis’s to follow the pattern laid down by Goldman and Morgan Stanley in the 20th century, parlaying investment banking expertise into a broader role in finance.
Yes, Moelis is an underwriter of its own IPO, but it’s not the underwriter, which is what founder Ken Moelis might have hoped would be the case back in 2007. The financial world is full of boutiques, but none have yet shown an ability to go head-to-head with mega-institutions. Capital still rules, making giant institutions like JPMorgan Chase king of the hill.
Still, a niche isn’t a bad place to be, at least when it’s this particular niche. In 2013, Moelis’s IPO prospectus notes, 80 percent of the top 10 M&A deals included a boutique investment banks among the roster of advisors, while 75 percent of the 20 largest deals did so.
Moelis is launching its IPO on the heels of own of its own very best years, after advising HJ Heinz’s board during last year’s $23 billion buyout of the food services company. Moelis & Co. has been profitable since its inception, and was exceptionally profitable last year, after which the bank doled out $35 million to its owners.
The IPO will enable the 55-year-old Moelis to monetize some of the value he has built up in his firm and to diversify; it also will make it easier to hang on to key employees via grants of publicly traded shares and stock options.
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In the past, however, Moelis has publicly opposed an IPO – for some of the same reasons other members of his team may have eagerly sought it out. Moelis and the firm itself need long-term loyalty; as he himself told the Financial Times in 2011, “the good news about long-term vesting is that you can look to your right and left and know that your support crew is not going to leave you.”
The deal is very likely to be a slam-dunk success for Moelis and his bankers, and even for those who line up to buy the stock. Investors love rival boutique Evercore, whose share price has soared 436 percent over the last five years. (The S&P 500 index is up 163 percent in the same period.) The bank’s simple and straightforward business model – no proprietary trading or “market making,” no complex side businesses to muddy the waters – is alluring to both clients and prospective shareholders.
Prospective investors might want to ask how that Moelis culture might change in the wake of an IPO. Many Wall Street bankers who remember the days of the big investment banking partnerships will admit that while the reasons for going public remain valid – the need to access capital, to give bankers a stake in their companies that could be widely traded – the evolution from partnership to publicly traded corporation changed the business.
One former Goldman Sachs top banker told me that this change was dramatic, and not necessarily for the better. Once, he said, Goldman was quite prepared to walk away from questionable deals or clients that didn’t “smell” right, regardless of the size of the short-term profits. Post-IPO, that became tougher to do, given that the bank’s managers had become accountable to outside shareholders requiring them to maximize profits. It wasn’t that Goldman or other banks deliberately sought out risky transactions or sketchy clients; more a matter that when it came time to make a call, they tilted toward taking a risk.
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This ex-Goldmanite drew a direct line from this transformation to the now-infamous case brought by the SEC against Goldman Sachs in early 2010, alleging that the bank misled investors about the nature of a subprime real estate security it had structured and sold. To settle those allegations, Goldman paid out $550 million in fines, a figure that at the time was a record. “I can recall a time that we would never have contemplated doing this kind of transaction at all, because it raised questions in the minds of some” partners, the former Goldman banker told me.
Now, Moelis & Co. too is making the tradeoff, swapping access to capital for the scrutiny of outside investors whose goal isn’t necessarily the same kind of long-term, thoughtful growth Ken Moelis has been able to deliver in the few short years of his boutique’s existence. There likely will remain plenty of profits to spread around, delighting all those shareholders. But as we saw in the years leading up to the financial crisis, what’s in the short-term interests of a group of investors isn’t necessarily in the long-term interests of the industry or the financial system.
There’s no reason to become alarmed by this IPO filing, but it’s worth using the occasion to stop and ponder where our financial system stands, five years after the recovery from the last crisis began.
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