Generation Next

When consumer banking veteran Lisbeth Barron left Centerview Partners earlier this year, she conceded that the thought of launching her own boutique had at least crossed her mind. While clients urged her to make such a move, Barron opted to join New York investment bank Berenson & Co., telling Mergers & Acquisitions at the time that the prospect of setting up a new shop seems like "a very lonely existence."

To be sure, many view the M&A landscape in 2010 as possibly the most challenging market over the past 20 years, perhaps ever, in which to launch a new shop. Yet over the past few months alone, a new class of boutiques has emerged, manned by some of the bigger names in mid-market M&A circles.

Metronome Partners, Intrepid Investment Bankers, Quarton Partners, HighBank Advisors and Cassel Salpeter & Co. are just some of the new groups opening their doors in May and June. The new shops, along with a handful of others, are entering the fray at a time when new mandates are in short supply and client expectations remain high.

"It would take amnesia not to remember how painful it was to grow our own firm the first time around," cites Intrepid co-founder and managing director Eduard Bagdasarian, who was part of the founding team that helped build Barrington Associates prior to the firm's sale to Wells Fargo in 2006. He's under no illusion that it gets easier with practice. "It takes even more guts to jump into this crazy market."

Still, those launching new shops spot an opportunity. Whether it's the pullback from the larger banking institutions, a deal market that seems poised for a rebound in the second half of 2010 or just a belief the M&A market can sustain any shop providing flawless execution, deal pros are certainly more confident today in launching new banking ventures than they seemed to be in 2008, at the onset of the crisis.

The "new" faces on the M&A landscape feature names that most are probably quite familiar with. Out of Wells Fargo, the former Barrington Associates veterans, such as Bagdasarian, Jim Freedman and Mike Rosenberg, led a small band of vets in launching Intrepid; Piper Jaffray veteran, Jeff Rosenkranz formed Metronome Partners after a two-year hiatus; André Augier, Brian Dragon and Robert Parker created Quarton Partners along with other WY Campbell & Co. defectors; and Ladenburg Thalmann's James Cassell and Scott Salpeter formed their new shop three years after selling their previous M&A boutique to their former employer. Meanwhile, other new shops have formed out of WY Campbell, which is being shuttered by its parent Comerica, and Barrington, which was merged with Wells Fargo's Wachovia Securities banking business a year ago in July.

Stephen Gaines, who took a year off after leaving KPMG Corporate Finance, launched HighBank in May. Gaines notes that his decision to leave KPMG and start something new had nothing to do with the downturn or timing. But he says that the current market, relative to the past three years, represents the ideal environment to launch a new boutique.

"If you're going to start a business like this, it makes sense to do it as the market is coming off a bottom and you have the growth in front of you," he says. "Right now is a particularly good time, because there is a pent up demand for liquidity, and the demographics, [with an aging population of business owners], suggest there'll be a significant uptick."

The arrival of new boutiques and advisory shops traditionally comes in bunches, and different markets tend to yield different types of investment banks. Nineteen Ninety One and 1992, successive years in which the annual domestic deal volume didn't even clear $151 billion, yielded scrappy mid-market stalwarts such as Harris Williams & Co., Dresner Partners and Grief & Co. Five years later, as the market was soaring into the tech bubble, firms like Evercore Partners and Greenhill Capital opened their doors with the kind of starpower that made them instant contenders for larger mandates. Alternatively, 2001 and 2002, the aftermath of the tech collapse, was again a huge year for the mid market as Edgeview Partners, Morgan Joseph, McColl Partners, Lane Berry and a number of other new shops all took shape. The two years heading into the market's most recent credit-fueled boom, 2006 and 2007, produced yet more boutiques of the Evercore and Greenhill ilk, with Perella Weinberg, Moelis & Co. and Centerview Partners all opening their doors.

The groups that emerged in 2001 and 2002 were launched into a void, taking on a market that saw Bowles Hollowell Conner & Co., Donaldson, Lufkin & Jenrette, Robertson Stephens and Montgomery Securities all gobbled up in the preceding years. Moreover, the bulge brackets that led the consolidation efforts, anecdotally abandoned the middle market, leaving a landscape calling out for settlement.

This time around, the middle market isn't suffering from an absence of dedicated advisory firms. The consolidation, not to mention the collapses of Lehman Brothers and Bear Stearns, has been largely confined to the Wall Street banks and global institutions. Groups like Moelis, Evercore and Greenhill have all been able to capitalize, be it by picking off talent or securing a greater share of high-profile mandates. The middle market, though, is arguably as crowded as it's ever been.

"It's unequivically harder to be a middle-market boutique today than at any time in the past," Imperial Capital's John Mack III tells Mergers & Acquisitions. Mack, co-head of Imperial's investment banking group and head of M&A, launched government IT and security banking specialist USBX in 2000 and received backing from the Carlyle Group before it was acquired by Imperial eight years later.

Mack cites that launching a boutique is difficult in any market. "It can take a year to 18 months to build a pipeline, and from there the business has peaks and valleys because it's so difficult to maintain any consistency; the classic conundrum of a small shop is that once you've got a pipeline, you spend all of your time on execution at the expense of business development."

But building a pipeline is even more difficult in 2010, because a void does not exist in the current market. On the contrary, shops such as Mack's Imperial, RW Baird and Houlihan Lokey are as strong as they've ever been, with capabilities covering the capital markets, restructuring and other services. And the consolidation that has occurred hasn't had the same desiccating impact that it has in the past. PNC's Harris Williams has only gotten stronger since the 2005 sale, while Lazard Middle Market, marketwatchers say, hasn't lost a step since it abandoned its Goldsmith Agio Helms name following its sale.

Consolidation efforts continue, which at the same reflect the challenges of the current market and the build out of capabilities by firms looking for a competitive edge. Thomas Weisel, in the first week of July, closed its sale to Stifel Financial, following the likes of Lane Berry, Watch Hill Partners, Gleacher Partners and others into the arms of larger competitors. Mack's Imperial acquired The Mercanti Group and Petrobridge Investment Management in successive months last year, deals designed to augment the firm's industry coverage.

These transactions, though, have done little to loosen the pressure facing the new shops. "You must have eternal optimism about where the market is going, but everyday the environment becomes more competitive," Intrepid's Bagdasarian concedes. "The business may be tougher at certain points in the cycle, and with bankers out on their own, new competitors are coming from all directions."

André Augier, who formed Birmingham, Mich.-based Quarton Partners in May, agrees that launching a bank today is "infinitely" more complex than back in 1988, when he helped form WY Campbell. Beyond having to build out a deeper back-office infrastructure, Augier identifies that regulatory costs have "skyrocketed," and the regulatory regime, amid unceasing debate over financial reform, "is only going in one direction."

He adds that boutiques also have to overcome a challenge of perception. "At WY Campbell, [owned by Comerica], it was nice to have a $70 billion bank behind us when the boards of directors wanted to see the balance sheets of their advisors," he says.

Augier says his new challenge, as Quarton looks to fill out its book of business, is to fight the inclination to take on smaller deals. "It's important to maintain the transaction size that has been our traditional focus. If you take on smaller deals, you'll dilute yourself too thin."

It's debatable what clients actually prefer, boutiques versus mature institutions with other resources at their disposal. Imperial's Mack believes the new shops that target a specific industry vertical face the best chances of survival and success. The generalist shops, he says, may have a tougher time catching on, especially since they're competing against institutional firms that have built out their capabilities in recent years.

Others, though, see value beyond the universal boutique sales pitch, highlighting senior-level attention. Rich Lawson, a managing director and co-founder of private equity firm Huntsman Gay Capital Partners, says he'll often see the smaller shops differentiate themselves by "bringing ideas" specific to a buyer's needs.

Jay Jester, a managing director focusing on business development at Boston private equity firm Audax Group, points to a benefit that many mention when discussing the private equity market -- the fact that new shops are starting with a clean slate. In a way, it also underscores Augier's point about not diluting a a fledgling firm's capabilities.

"There were a lot of mandates signed up by the bigger shops during 2008 and 2009 that couldn't get done. So as more attractive deals get picked up, these same shops, who might be shorthanded, will have to split time between the new clients and these zombie deals," Jester says.

In contrast, Jester speculates that the newer shops also have more incentive to see a deal through to completion. "If they're working on two deals, and one doesn't close, that's not a good ratio for a new firm," he cites.

Anecdotally, many of the newer shops have hit the ground running. Augier's firm Quarton closed a handful of deals in its first eight weeks. Its new website already showcases three tombstones, including sell-side advisory mandates for Thermon, acquired by Code Hennessy & Simmons, and Dynamic Manufacturing Corp., sold to Nordco Equipment. Quarton, which aligned itself with broker/dealer Leonard & Co., benefitted by transitioning a number of WY Campbell's clients to the new shop.

Stone Key is another one that has let the deals do the talking. Formed by Bear Stearns veterans Denis Bovin and Michael Urfirer in March of last year, the new firm in July had the defense industry buzzing when Argon ST was sold to Boeing & Co. for $775 million dollars, representing a 14x multiple of earnings, well above of what analysts had been expecting.

To many, it's the name on the business card that carries more weight than the name on the front door. That's why no matter how difficult the environment, nobody would count out a veteran like Jeff Rosenkranz or Mike Rosenberg.

Jester even goes against the conventional wisdom, saying that in his eyes, the playing field "is as level as it's been in a long time."

"In this kind of market, it's about who's your banker, not who's your bank, Jester adds. "Those three- or four-man shops, who will keep 100% of the fee, are going to pay more attention to your average mid-sized deal than a bigger institution whose backlog is filling up."