Wednesday 30 November 2011
As global bulge-bracket firms drastically remodel and de-risk, their smaller and more nimble counterparts are hoping a trend towards independent advice will help them ride through a desert storm.
Boutique or independent advisory firms have won a greater share of global merger advisory work in recent years, accounting for 23 per cent of fees in 2011 compared with 19 per cent in 2007. That trend is mirrored in Australia, where boutique firms account for 22 per cent of the $US1.1 billion in merger advisory fees for completed deals this year, data from New York-based research firm Freeman & Co shows.
Boutique advisers lined up on several key transactions this year including 2011’s largest domestic deal, SABMiller’s $12.3 billion tilt at Foster’s Group. Gresham Partners and Grant Samuel & Associates joined Goldman Sachs as defence advisers to Foster’s, while independent firm Moelis & Co is one of four firms working for SABMiller.
Sydney-based O’Sullivan Partners scored an advisory role in West Australian Newspapers’ $4.1 billion takeover of Seven Media Group.
Although boutiques are benefiting from a trend toward independent advice, they are also feeling the pinch as sombre market conditions keep a lid on transaction levels.
US financial institutions are facing the slowest annual revenue growth since 1938, as lacklustre trading volumes and a slump in equity capital markets transactions put a dent in the global fee pool.
Turbulent market conditions and economic uncertainty, which have dampened demand for merger and equity capital markets transactions, have prompted fee reductions in some areas of advisory work. Boutiques, like their larger counterparts, are having to run harder to secure work.
“It’s as competitive as I’ve seen it for the last three or five years,” Rothschild Australia chairman Trevor Rowe says. “Volumes are down and we are seeing pressure on fees and the like.”
O’Sullivan Partners boss Tony O’Sullivan agreed fees were under pressure across the industry.
“There is no doubt that there is fee compression going on, largely as a result of the antics of the global IBs [investment banks],” he says.
“Most boutiques cannot afford to run a project at a likely cash loss as working capital is adversely impacted. This is not an equation the global IBs need to consider.”
Fort Street Advisers principal Richard Hunt cautions that fees were not the sole consideration for corporations seeking merger advice.
“In Australia, people focus on the expertise of the people they are dealing with,” Hunt says.
While boutiques operate a lower cost and more targeted advisory model, some still question whether the Australian market can sustain a large number of independent firms.
“The ones that are good and are relevant will survive,” says Peter Diamond, executive chairman of Perth-based advisory house Euroz.
For a boutique firm the difference between a good year and an average year may rest with one or two lucrative transactions.
“In a small boutique when you get a big deal you can do very well,” Moelis & Co Australia head of investment banking Andrew Pridham says. “If you haven’t got international capability you’re at a massive disadvantage.”
Domestically focused boutiques may find it difficult to secure work on inbound or cross-border transactions that drive local activity this year. In the first 11 months, inbound deals have already hit an annual record $US57.6 billion, according to Dealogic.
O’Sullivan says his firm recognises the need to establish ties with firms internationally.
BKK Partners, which counts former federal treasurer Peter Costello as a partner, recently recruited former deputy prime minister Mark Vaile to help foster relationships in China.
Other firms are also turning to high-profile individuals to help lure clients. Greenhill Caliburn has former Australian Competition and Consumer Commission chairman Graeme Samuel heading up its Melbourne office.
“Definitely the trend toward independents will continue,” Greenhill Caliburn co-chief executive Ron Malek says. “There are more and more corporates that are conscious of getting advice that is disassociated with product.”
Bad market conditions are spurring global bulge-bracket firms to cull jobs and cut expenses. Boutiques are also cost-vigilant. BKK recently temporarily shut its Sydney office in a bid to run most of its operations more efficiently out of Melbourne. It plans to re-establish an office in Sydney next year.
A difficult investment banking environment is set to persist next year. Several boutiques expect 2012 to be more challenging in terms of deal flow, with boards holding off from making deals amid global uncertainty and severe market swings.
“I think 2012 may be worse than 2007 and 2008 from an economic perspective,” BKK chairman AlastairWalton says. “The degree of difficulty of completion next year will be even more difficult than this year.”
Flagstaff Partners chief executive Tony Burgess says boutique advisers were well placed despite expectations of patchy merger activity in 2012. “Good advice never goes out of fashion, so there is always demand for it,” Burgess says.