Boutique banks: at your discretion

Ken Moelis is not given to bragging. Late on Wednesday, when his eponymous M&A-focused investment bank reported earnings, he would not even acknowledge that it had been hired to advise on the mega-IPO of Saudi Aramco. Given the performance of Moelis shares — up 60 per cent in the past year — he does not need a megaphone.

Mr Moelis said the key products he sold to potential clients were confidentiality and discretion. There are increasing numbers of buyers. In 2016, the three dominant bulge-bracket advisers, Goldman Sachs, Morgan Stanley and JPMorgan, saw their collective advisory revenue dip 4 per cent. For the six listed independent firms, it jumped 15 per cent. Clients are increasingly comfortable with smaller, independent firms. The success of Robey Warshaw in the UK tells a similar story.

A more important indicator than revenue growth is whether profits can grow faster than costs, which at a boutique firm are essentially rainmakers’ bonuses and their expense accounts. Revenue growth of 11 per cent in 2016 at Moelis was the weakest among the five start-ups. No matter. Its operating profit grew 16 per cent, a sign of efficiency.

The Saudi Aramco transaction presents two intriguing possibilities for future gains. Independent firms are finding ways to get hired on financing transactions even though they are neither underwriting nor extending capital. Companies are desperate not to look foolish when raising money. They are willing to pay up for experts in order to avoid that fate (and bankers are clever enough to exploit their self-doubt).

Moelis and the other US start-up banks are primarily focused on the US; unsurprising, given that it currently accounts for nearly half of global M&A. But as Europe recovers and the rest of the world prospers, bigger opportunities lie abroad. Boutique banks have tried acquisitions and joint ventures in foreign markets before, with mixed results. Should Mr Moelis’s firm be able to further distinguish itself internationally, and in new products, he may begin boasting a little.

Email the Lex team at lex@ft.com