Boutique Business
FinanceAsia
2004-09-01

The Lure of Running a Boutique Advisory Investment Bank Has Attracted Many Bulge Bracket Bankers Over the Years. Nick Lord Speaks to Some of Those Who Have Made a Success of It

There is something very attractive about running a boutique corporate finance advisory firm. You choose your own clients and your own hours and there is a direct correlation between work, success and rewards.

In recent years, there has been a marked increase in the number of these firms operating in Asia. The slew of job losses in investment banking since 2001 has forced many ex-bankers to try to go it alone.

Nevertheless, despite all the new firms offering advice, the market has been conducive since the lows of early 2003. Regulatory changes have also made it difficult for the traditional competition of accountancy firms to offer good advice. The general upturn in the markets has also led to many new deals appearing in the pipeline.

Most of the boutiques interviewed for this article say that they seek to do deals in the range of $10 million to $200 million, a size bracket that is badly served by the bigger investment banks, whose cost bases do not allow them to do deals of this size. "People hire us as we look at the smaller deals that the big investment banks will not do," says Tim Bardwell, head of M&A at Access Capital in Hong Kong. "It is actually very difficult to raise small amounts of money."

This difficulty has allowed the small boutiques to focus on an area of the market that has traditionally been badly served. "The mid-market is large but highly inefficient and fragmented and there are limited database/research sources covering this segment so finding good quality private companies in this area requires active industry coverage of the sector and deep market intelligence" says Frank Au, managing director of Hong Kong based Latitude Capital Group. "The challenge is not to fight off competitors but rather finding the right company at the right time with the right M&A idea."

This focus on deals of this size is one of the few things that unites the boutique advisory firms. While they might all offer advice on similar sized deals, most seek to differentiate themselves from their competition by forging a rigourous focus on a niche group of clients and products.

These types of deals include market entry M&A transactions for multinationals seeking to enter China and Asia. They can also be deals where fast growing Asian companies seek to buy brands and expertise outside of the region. They can be deals - either entries or exits - for some of the smaller venture capital and private equity players. Boutiques also work well doing what can be termed corporate private banking work for family firms, where the relationship is largely with the family that runs the company.

Mixed in with offering advice is also a general commitment to source capital. This is usually from the equity private placement market and increasingly from some of the new regional debt markets, such as mezzanine finance. In truth, there are as many deal types out there as there are boutiques: and there are a lot of boutiques.

"Our deals can range from $10 million to $200 million and our recent focus has been to identify a good management team with whom we can develop a business plan and an acquisition programme," says Matt Burlage, CEO of IRG in Hong Kong. "We would then go to the investment community to raise some finance and then take equity ourselves." This whole process can take time. "We have worked on an idea for several months which are only now becoming deals. Luckily we have found that generally people will pay for good ideas."

Getting clients to pay for advice is perhaps the key challenge that boutique advisory firms face. Ideas need to lead to deals for them to be worthwhile. And local Asian clients can drive a hard bargain when it comes to paying their fees. "Generally local companies prefer to work on a success fee basis only without a retainer," says Ambrose Lam, Chairman of Access Capital in Hong Kong. 'But, once you prove yourself with one or two good deals, then they will start to trust you and put you on a retainer."

Discovering a stable source of income can be the difference between success and failure for a boutique. And many firms have worked hard to bolt an annuity type stream of revenue onto the more choppy advisory and success fees. "Buyout deals often have long lead times and a fairly binary success profile - either you win or you don't," says Simon Fry, CEO of Crosby in London. "Chasing deals is also very expensive. To complement the rather lumpy and unpredictable income sources that arise from these deals we are focusing on the further development of the asset management side of our business. We believe that with a combination of these two main business lines we can achieve both the stability and the growth that our shareholders desire."

Crosby's asset management side manages more than $400 million and the firm has recently started a new wealth management arm to cater to rich individuals. The management fees from these businesses are key to underpinning the company's growth.

Other firms have similar strategies to tap into regular lines of business from which they can pay the rent, bills and some of the staff costs. These include fund advisory work, independent financial advisory roles and non-executive directorships.

Even those that at present do not have this kind of revenue are looking to get some. "Aside from retainer income which has been healthy recently, we don't have any annuity income stream at the moment," says Burlage at IRG. "But I think we might have other annuity streams in one or two years."

These two types of business do not need to be discrete. Indeed if there are strategic fits, each arm of the company can improve the other side of the business. Au at Latitude Capital explains, "having an advisory platform actually gives us good primary deal flow and overall market knowledge and insights, which in turn benefits the private equity arm."

Once the bills are paid, firms can start concentrating on the corporate finance advisory core of their businesses. For this firms will take a mixture of success fees and retainers (with the usual rule of thumb being the higher the retainer, the less likely the boutique thinks the deal will be successful). Boutiques are also in the position of being able to take equity from their clients in lieu of payment. While this is obviously useless when it comes to paying for the office Christmas party, it can be the real juice on the balance sheet if the stake can be held for a number of years, and rises in value.

But before boutiques have the luxury of worrying what to do with all that free equity, they first have to get the deals in. In the beginning most boutiques survive on deals handed to them by clients with whom they had a relationship at their previous firm. But after a few years, they need to start winning deals on their own merits.

"You live and die by your clients in a boutique," says David Law, managing principal of Woodstone Capital Partners in Hong Kong and a 20-year veteran of the regional banking market. "You definitely need to have clients that will follow you and maybe even offer your best clients an opportunity to buy shares in your business."

Some boutiques rely on more formalized networks which give them a global footprint of referrals without being part of a global institution. Access Capital for one, is the only Hong Kong/China member of IMAP, a global grouping of independently owned M&A advisory boutiques, Member firms try to do deals through the network while sharing information and soliciting bids and offers.

One other interesting structure has come out from Morgan Stanley's private banking unit. They have hired an ex-Morgan Stanley M&A banker called Anand Kumar to provide boutique M&A advisory work to their private clients' companies. Under the arrangement, Morgan Stanley covers the costs of Kumar's office while he shares the success fees with them. In this way, Morgan Stanley private bank can provide corporate finance advice, even on deals that are below the radar screen for its usual M&A deals. Kumar gets a steady stream of referrals for his business.

Many boutiques also get deals passed on to them by their friends and ex-colleagues at the bigger banks, generally when the deal sizes do not meet the larger banks' requirements, although not on the formal basis of the Morgan Stanley structure.

According to Law, how you structure the corporate entity of the boutique at its inception, can be instructive of the types of deals you can do. He says that there are two ways that most boutiques set themselves up. The first sees the potential clients put up the capital at the beginning. The principals then have buy in rights over time and use the proceeds of the deal flow to take control of the boutique. The advantage of this method is that it allows you to start quickly, although the principals are not in full control of the boutique from the start.

The other way is for the principals to put all the money in themselves up front and then build the business through retained earnings. This is clearly more risky but it does have the attraction of giving the owners full control from day one.

And control is clearly one of the main reasons why bankers start their own boutiques. "Running your own business is fun, there is no doubt about it," says Law. "You do need strong self discipline and lots of confidence. You cannot be fazed by disappointments as you can fall off the radar screen very quickly. You don't have a brand name behind you or a big infrastructure supporting you and letting you know what is going on in the market. So you need to be constantly out there pitching for new deals."

Boutiques are places where the more entrepreneurial bankers can thrive. Although they might not be making as much as they would at the top of a bulge bracket firm, they are spared much of the politicking and back biting that goes with it. They also become better businessmen, which in turn makes them able to better serve their clients. "I think every investment banker should work in small boutique at some stage so they can really understand how small businesses run themselves," says Bardwell at Access Capital. His colleague Lam adds "The work here is more enterprising than in bigger firms. People are encouraged to have ideas and there is no room for politics."

But with that, sacrifices have to be made. The most obvious one is that without the investment banking cost base, there are no investment banking perks. But at the end of the day that might be a small price to pay for the freedom of running your own shop.