Partner Kirk Mcintosh interviewed in Caixin

McIntosh: How the Boutique Model is Challenging the Large Investment Banks

Compared to the scale of operations of the likes of Goldman Sachs, the boutique investment bank is a more clear-cut model of an investment bank – its total number of employees may be less than the number of partners in a large investment bank. However, boutique investment banks have figured actively in more and more major acquisitions lately.
Valence Group is one such investment bank focused on the chemical and materials industries. According to its founding partner, Kirk McIntosh, compared with the “one-stop shop” service provided by the giants such as Morgan Stanley, Goldman Sachs, and UBS, the boutique model is more “specialized” and is usually founded by industry veterans with a wide network.

McIntosh said, the board of directors of listed companies tend to seek two things: independence and brand effect. In these companies’ list of consultants, it is now common to have a boutique investment bank alongside the bigger ones. This is because large banks have the brand recognition, while the boutique ones offer independent advice. In his view, the boutique investment bank’s value is its ability to provide independent advice, and these boutique banks have been gaining an increasing share in the mergers and acquisitions market.

Q: What is a boutique investment bank model? How did it come about?
McIntosh: In 2006-2007, the investment banking industry moved to an integrated model, providing a comprehensive range of products that clients would need. A good client base allowed these banks to sell different products and generate huge profits. This “one-stop” model could eventually lead to a serious conflict of interest. For example, if I were selling a business for a client, while at the same time offering a loan for the buyer – on one hand I want to get the highest price possible for the seller; on the other hand, I also want the buyer to present a counteroffer on behalf of the buyer. The boutique investment bank is developed by the people who want to avoid all potential conflicts of interest, focused on providing customers with the best independent advice. There are a number of boutique investment banks around the world that are specialists in different industries.

We have come to conclude that independent advice is valuable to customers. As experts, all we do is give you recommendations – is a certain acquisition really a good deal, as well as the industry, as well as opportunities that exist in the market.

Although the big investment banks will not disappear, you can expect to see boutique investment banks increasingly compete for the M&A market share. As an example is the open market acquisition deal in the United States, having a boutique investment bank among the list of consultants is no longer uncommon because the Board of Directors have to demonstrate to shareholders that they have sought independent advice.

Q: How did you and your Partners decide to set up a boutique investment bank?
McIntosh: All four of us founders worked at Bear & Stearns before. Like any large investment bank, Bear Stearns covered many product lines across different industries. They did not only do M&A, but also provided loans for proprietary trading and brokerage.

Also, in a large investment bank, the chemicals and materials industry will not be the focus of attention, because its profit contribution is not as high as the financial institutions, media or telecommunications. Profits generated by these industries are much greater than that of the chemical industry.

The first reason for the establishment of a boutique investment bank is we believe that our clients needed a more focused service around the chemicals industry, and we needed a team that’s fully dedicated to it.

The second reason is to avoid conflict of interest. In large organizations there will always be the pressure to sell other products. But the M & A business is about long-term relationships: it takes years of building a relationship with a company’s CEO and chairman before one can become an adviser and really get business out of them. Sometimes it takes 3 to 5 years before a deal comes around.

In our work, we need to build long-lasting relationships and trust. During this period, selling them other types of products such as loans, equities, derivatives and foreign exchange, is likely to cause a conflict of interest and may damage the relationship.

We believe that in this and other industries, there is a need for independent consultants who don’t have the pressure to sell diversified products, are experts in their field, and who can provide reliable advice.
2008 when we started was not a good time, but we have since become a leader in the field. We have completed approximately 20 deals, mostly done in the past two years. Last year, we served as a consultant in ninety deals; and in fifty-six this year so far. We also have good relationships with about 400 CEOs worldwide.

We were involved in the Eastman Chemical Co., Ltd. acquisition of the specialty chemicals manufacturer Solutia, where we provided independent perspectives around the transaction.

Q: How many boutique investment banks are there globally?
McIntosh: It depends on how you define boutique. Some have only one or two people. If these are counted, there may be countless numbers. But I think the real players may not be more than 50.

Some people think that Lazard (Founded in New Orleans in 1848 by Lazard Freres and gradually became specialized in financial institutions) is not a boutique investment bank, but most of the deals it’s involved in are in similar areas of business.
Evercore Partners is also a good example, they focus on four or five industries. The tremendous growth of the boutique investment bank happened around when Valence Group was established. Today in every industry you can find institutions like us.

Q: Who are the competitors of boutique investment banks?
McIntosh: Boutique investment banks will compete with each other, as with Lazard or Greenhill. We also compete with the larger organisations such as Morgan Stanley, Goldman Sachs, and Citigroup. I think the only place where boutique investment banks are unable to dominate the market is in an open market acquisition. The board of directors of listed companies tend to seek two things: independence, which we can provide; and brand. As a famous saying goes, “No one will be fired for hiring Goldman Sachs.”
So, you will often see both large and boutique investment banks in an open market acquisition, combining independent advice and brand recognition. As United States is a country where a lot of litigations and class action lawsuits happen, this is a way for the Directors of listed companies in the US to protect themselves. This is not such a concern in Europe.
Aside from this, there is no problem. We are often solely involved in projects worth hundreds of
millions in US dollars.

Reporter Comments:
In the current open market of acquisitions in the United States, the presence of smaller boutique investment banks alongside the “giants” is now common. In fact, these smaller banks should not be underestimated, as they are starting to gain increasing shares in the M&A market with Morgan Stanley, Goldman Sachs, Citigroup. And these boutiques are set up by industry veterans. 

Evercore Partners was founded in 1996 by Roger Altman, formerly with Lehman Brothers, and who has served as vice chairman of the Blackstone Group and U.S. Deputy Treasury Secretary; Greenhill, founded in 1996 by Robert F. Greenhill, the former Chairman of the Board of Directors of Morgan Stanley.
However, a large investment bank also has its advantages. Some large investment banks maintain that boutique investment banks cannot compete with the big investment banks in large-scale, especially crossborder, projects.
Larger banks have spent many years establishing offices around the world, building and maintaining networks of contacts and relationships. This ability to collaborate across a bank’s multinational networks is sometimes the key to a project’s success.
In addition, boutique investment banks, after all, are not be able to provide credit and other services.
Large companies also have to take into account relationships with equally large financial institutions.