It is becoming more difficult to call four-year old Moelis & Co a boutique firm. With a rapidly growing presence around the world and plenty of big deals under its belt, it is looking more like a bulge-bracket boutique. Times are good for independent investment banks, but can this run of good business continue?
In just four years, the headcount of boutique investment bank Moelis & Co, founded by former UBS Investment Bank president Ken Moelis, has grown to about 500. The firm has offices in New York, Los Angeles, Boston, Chicago, Houston, London, Dubai, Sydney and Hong Kong. It is soon to open an office in Beijing and in March signed an alliance with Japanese bank Sumitomo Mitsui Banking Corporation.
There is likely more expansion to come. Mark Aedy, head of Europe, Middle East and Africa, who is also responsible for all of Moelis' operations outside the US (excluding Australia, which is headed by JPMorgan veteran Andrew Pridham), says the firm would like a presence in India and Brazil, and to extend its European footprint with offices in Frankfurt and Paris. There are industry gaps the firm is filling: it is still building its oil and gas business, and its footprint in the financial institutions sector, for example.
“Our strategy is driven by the need to be globally relevant to our mid-cap and big-cap clients,” says Mr Aedy. “We have to be able to look clients in the eye and say that we have access, we have insight and we have the ability to execute in all the major markets in the world. Are there still places to fill? Definitely. But we will do so thoughtfully and carefully, and when the time is right.”
Combined impact
Independent investment banks are under no less pressure to be global than their traditional counterparts on Wall Street, because winning investment banking business is “logarithmic”, says Mr Aedy: each new banker, regional presence or acquired business leverages off the power of the whole. As an example, he cites the June initial public offering (IPO) in Hong Kong of luggage manufacturer Samsonite, majority owned by CVC Capital Partners and Royal Bank of Scotland.
Mr Aedy says that Moelis' financial advisory role was secured by three people who would not have won the business independently: Richard Orders, previously head of Hong Kong-based Asia Pacific Advisers, which was acquired by Moelis in January this year, and now heads Moelis' Asia-Pacific business; Meyrick Cox, formerly head of auto and steel at Rothschild, who is now advising Moelis’ industrial clients, governments and financial sponsors with a particular focus on the automotive and steel sectors, and has a close relationship with CVC; and Michael Findlay, formerly head of corporate broking at Merrill Lynch, who is a managing director at Moelis, focusing on equity advisory.
“Only with the right people in the right places can you create a business that is equal to more than the sum of its parts,” says Mr Aedy. “There is no middle ground in this business. You are either niche or global."
Capitalising on independence
The independent investment banking model has been given a series of boosts in recent years. The financial crisis highlighted the potential for conflicts between investment banks' advisory and origination operations, and their trading businesses. This famously led to the collapse of some, the bailing out of others, and even civil fraud charges for Goldman Sachs.
The resulting regulatory burden, and the punishing political and media spotlight on traditional banks, has also helped to loosen the bonds between banker and firm, creating hiring opportunities for the boutiques which have capitalised on the independence of their business model and client relationships.
While acknowledging the benefits of a less conflicted model, Mr Aedy says it is not independence that is Moelis' selling point, it is the quality of the people and the relationships they bring with them. Getting the hiring right, he adds, is the only thing that keeps him awake at night.
“Clients are clearly open to the independent proposition, but unless your people are as good as those against whom they are competing, it's a pointless advantage. That is why we have set the bar so high in terms of recruitment. We know what we are trying to create and what we want to avoid. We will hire no one rather than the wrong person,” he says.
Growth trajectory
Given the firm's growth trajectory, finding the right people has clearly not been an issue. Moelis has attracted a swathe of top talent, including Rick Leaman, formerly chairman of the investment banking division at UBS, and Matthew Prest, who led one of Europe's foremost restructuring teams at Close Brothers.
And long-term relationships are delivering a steady stream of business. For example, Mr Aedy says the firm is currently working with Bovis, whose IPO Mr Aedy led in 1995. Another transaction is Japanese pharmaceutical company Takeda's €9bn acquisition of Switzerland's Nykomed. This is the third Moelis transaction with Nykomed, led by Kasim Kutay, since Mr Kutay was hired by Moelis in 2009 after spending 18 years at Morgan Stanley, where he was most recently chairman of the European healthcare group.
Key Moelis deals include the $24.9bn Dubai World restructuring, the $1.6bn sale of hedge fund GLG to Man Group and two restructurings of Greek telecoms firm Wind Hellas. (Mr Aedy hastens to add that Moelis was acting for the creditors.) The Europe, Middle East and Africa business alone has done 23 transactions in the past two years.
Growing pains
But the pace of expansion led one analyst to suggest that the firm may be suffering from 'growing pains'. Senior bankers and a string of offices around the globe do not come cheap, says the analyst, and this must be putting a strain on the purse strings.
While the firm's finances are not public (nor is the identity of its core investors – all that is known is that they are from the US, Europe and the Middle East), Mr Aedy stresses that Moelis has been “a profitable, tax-paying business” since its inception.
“Many independent firms are woefully undercapitalised and living a hand-to-mouth existence. We are extremely well capitalised, we have no debt and the business is very cash generative,” he says. “We have to be well capitalised in order to deliver on the promises we made when hiring senior and junior bankers; that the resources are there for them to build a business.”
No to IPO
Others have suggested that, given all the equity the firm has handed out to those incoming senior bankers, the pressure to go public must be building in order for them to participate in the value they have helped to create. Mr Aedy says he would like to put this rumour to bed. “An IPO is not the only route to liquidity and the management committee is not discussing going public. We are still investing in a growing business.”
Another reason for not rushing into a public listing is that all the partners are fully aware of the downsides and pressures that this creates, says Mr Aedy. For one thing, it can force businesses to focus on quarterly results rather than long-term growth and fuel a preoccupation with league table results. “This can skew both the business strategy and the advice given to clients,” says Mr Aedy.
“Moelis bankers are under no pressure to suggest a transaction in order to bump ourselves up in the league tables. Our business model means we can say 'no' when we do not think a deal is the right thing for the client. Saying no is often one of the hardest things for a banker to do at a large bank, given quarterly revenue and league table pressures,” says Mr Aedy.
In the current revival of the partnership model, such firms are winning advisory roles on some of the biggest, highest-profile deals. Evercore, for example, is advising US telecommunications firm AT&T on its $39bn bid for T-Mobile USA (alongside listed boutique Greenhill and JPMorgan), while Perella Weinberg Partners is one of four banks advising NYSE Euronext on its $11bn bid from Germany's Deutsche Borse. Moelis, too, is continuing to win its share of big deals. It advised Australia’s Centro Properties Group on the $9.4bn sale of its US mall properties to Blackstone Group in February, one of the largest leveraged buyouts since the onset of the financial crisis.
Can this run of bumper deals continue? History has shown that corporate clients have short memories. The danger is that when they need capital, the conflicts revealed by the financial crisis may be quickly forgotten as corporates turn back to firms with big balance sheets.
Mr Aedy argues that the best boutique firms will always have a role to play. “Clients have seen the benefits of unbundling advice from capital. For firms which have the right bankers and relevant ideas and insight, that is unlikely to change.”
