Record earnings as sector recovers By Peter Thal Larsen and David Wighton Published: January 27 2005 08:34 | Last

updated: January 27 2005 08:35 Investment banks have bounced back. After three years of retrenchment and upheaval caused by the deflating of the stock market bubble and a string of scandals and regulatory battles, the investment banking sector enjoyed a broad-based revival in 2004, fuelling record earnings for most of its leading lights. As they look into 2005, most senior investment banking executives remain relatively upbeat. The boom in fixed income that helped to keep several groups afloat during the lean years may be tailing off, but traditional sources of revenue, such as equity underwriting and mergers and acquisitions, are coming back. At the same time, many banks have diversified by developing businesses such as proprietary trading, servicing hedge funds or making private equity investments. Guy Moszkowski, analyst at Merrill Lynch in New York, says the past cycle has been much shallower for the leading investment banks than in the past. If you look back over the last 20 years, at the bottom of several cycles the banks have seen return on equity fall to 5 or 6 per cent. This time it bottomed at 10 to 11 per cent. One important factor is that the banks have got better at cost management so that expenses, particularly compensation, are much more variable than in the past. Risk management has also improved. We have not seen the massive blowouts as certain parts of the market have performed poorly, he says. Bill Winters, co-head of JPMorgan Chases investment bank, says the appearance that this latest cycle had been shallower than in the past was somewhat deceptive. Cycles that used to play out over a number of years are now playing out over a number of months. On an annual basis, it looked less cyclical but there were some horrific quarters for the industry along the way, he says. What is more, the fruits of the rebound have not been evenly distributed. Banks with strong positions on Wall Street benefited most as activity in Europe lagged behind that of the US. Some, such as Deutsche Bank, have launched restructuring plans to tackle traditionally high cost bases. Meanwhile, Credit Suisse announced plans to integrate CSFB, its investment bank, more closely with its private banking and asset management operations. Marginal players, such as Commerzbank, decided to scale back.

One consequence of the shallower cycle is that most of the large banks have continued to perform well and, despite confident predictions of consolidation four years ago, there have been no significant mergers. Perhaps the best example is Lehman Brothers, which was widely seen as too small to survive in late 2000 but has enjoyed stellar returns since. Chuck Prince, chief executive of Citigroup, which looked at a takeover of Deutsche Bank, said recently that he thought deals between securities houses were unlikely in the short term. The fallout from such mergers, in terms of the loss of top fee-earners and of clients, had proved so costly in the past that it was very difficult to make them pay. It has become a commonplace to say that the future shape of the investment banking industry will be a few giant, global firms at one end and small specialists at the other, with little in between. Many believe this is still the case. This is still fundamentally a business where you are either globally important or you have a boutique model, says Simon Robey, UK head and co-chairman of global M&A at Morgan Stanley. It is very problematic to be caught between the two stools. That said, the experience of the past few years has shown that it is possible to be successful without offering the complete range of products everywhere in the world. European banks, such as Barclays, BNP Paribas and Socit Gnrale, have built up profitable investment banking businesses by concentrating on strengths in areas such as fixed income and equity derivatives. If you are dealing with large corporates, then you had better be good at what you do, youd better make sure you have an integrated offering, and youd better make sure you do it everywhere they operate, says Bob Diamond, chief executive of Barclays Capital. But if you are not top-tier in something, do "The demand for not bother. capital, in particular for credit, has helped the Even so, there are limits to the extent to which banks can universal banks to pick specialise. For example, some investment banks have up more investment deliberately pursued a strategy of concentrating their resources banking business" on certain industry sectors. But this approach can cut off other opportunities. To have a good relationship with financial sponsors, we think it is important to focus also on the industries they are looking at, says Andrea Orcel, head of European investment banking at Merrill Lynch. There is no doubt that there is significant overcapacity in some areas of the business, notably in cash equities, where the relentless squeeze on commission rates continues. But

none of the leading banks with large equities businesses seem prepared to get out. That is partly because it is seen as vital for a bank to be in cash equities to get business in other, more lucrative, areas, such as advising on deals. The banks have been able to keep investing in difficult areas such as cash equities partly because they have been so successful growing their earnings from trading. Mr Moszkowski is relaxed about the increased proportion of profits the large banks generate from trading. The diversity of trading profits and the improved risk management make them less volatile than in the past. And he plays down concerns that the banks are taking outsized risks. By the widely used measure of value at risk, the amount of risk taken on has not grown faster than the banks balance sheets in recent years. However, others think that the banks are underestimating the risks they are running. I cannot see how it is possible to generate such high proprietary trading results without running much higher value at risk than reported. I believe banks have been taking bigger and bigger bets and sooner or later it is likely to come home to roost, says one senior investment banker. Some argue that the pure investment banks, such as Goldman Sachs and Morgan Stanley, have been forced to take bigger risks to offset the inroads being made by universal banks, such as Citigroup and JPMorgan Chase. The increasing tendency of some banks to take proprietary positions is also raising questions about whether they will eventually clash with their corporate clients. Michael Klein, head of banking at Citigroup, says: The market strength of the last few years has in some ways delayed the real test of models in the business. Some firms are leaning more on proprietary trading, and as they do this, clients realise that they may not be a firms top priority or may even have contrary interests. Meanwhile, the growth of hedge funds has made prime brokerage a large and lucrative business, particularly for market leaders such as Goldman Sachs and Morgan Stanley. But regulators have increased their scrutiny of hedge funds and the banks that service them and it remains unclear whether the market will continue to expand. One constraint on smaller banks is the increasing pressure on investment banks to commit capital on behalf of their clients. Hedge funds want banks to invest in them and provide liquidity. Europe has seen the growth of block trades where investors sell a large stake in a company to a bank which, it hopes, will be able to place the stock in the market at a slight profit. As one senior investment banker says, this is a dangerous game involving a touch of skill

and a lot of luck. He believes that institutional investors are becoming increasingly concerned about the practice because of the number of occasions where a bank underprices the deal and is left with stock which overhangs the market. The demand for capital, in particular for credit, has helped the universal banks to pick up more investment banking business in the last few years. The universal banks insist that their market share gains in investment banking are built on the long-term relationships of their corporate banking business and the quality of their service, not their ability to offer cheap credit. However, the pure investment banks accuse the universal banks of buying market share by using the muscle of their balance sheets. While the universal banks have continued to move up the investment banking league tables, their rivals point to an apparent decline in their share of fees last year. In 2001 and 2002, when credit was in short supply, the universal banks used the leverage of their balance sheets to sell other investment banking services. Now that companies did not have the same need for credit, they are returning to their traditional investment banking suppliers, says a senior executive at a leading pure investment bank. However, the very strong fourth quarter investment banking revenues reported by Citigroup last week suggest the pure investment banks have no room for complacency. Growth of trading: Will investment banks sustain their explosive advance? By David Wells Published: January 27 2005 08:44 | Last updated: January 27 2005 08:45 Investment banks have delivered explosive growth in trading revenue during the last five years, a performance that has helped them to weather a downturn arranging stock sales and mergers. Frank Fernandez, chief economist for the Securities Industry Association, a lobbying group, summed up the situation saying: People are getting better at trading. The numbers show it. Three of the four largest US investment banks with November yearends Goldman Sachs, Lehman Brothers, and Bear Stearns generated record earnings in 2004 thanks, mainly, to their trading prowess. Consider Goldman Sachs. It generated $20.55bn in total net revenue last year. Tradingrelated revenue made up 65 per cent of the total. In 2000, trading-related revenue accounted for 40 per cent of the $16.6bn total.

The banks biggest contributor in 2004 was the fixed income, currencies and commodities department, known as FICC. It had record net revenue last year of $7.32bn, a gain of 31 per cent from 2003, the previous record year, and about 2.5 times the $3bn reported in 2000. Rivals have reported similar gains. The figures have impressed investors but also have generated fear that Wall Streets trading departments, especially those involved with fixed income, currencies and commodities, are due for an inevitable cyclical downturn in 2005 or beyond. The investment banks do not deny that trading is a cyclical business and do not pretend that their trading departments are immune from downturns. They do, however, argue that improvements in technology are allowing them to open new markets and manage risk more efficiently, increasing their chances of weathering downturns better than in the past. They also say another factor helping them is the rise in sophisticated clients, especially hedge funds, which adopt their new products quickly and find uses for them that go beyond that for which they were intended. Lloyd Blankfein, president and chief operating officer of Goldman Sachs, says: I think that concern over the growing percentage of trading revenues at investment banks is misplaced. Mr Blankfein has been instrumental in keeping Goldman Sachs traders adept at managing risk and shifting resources to meet the needs of clients. Goldman Sachs reported $9.29bn in net revenue from all trading last year. If equities commissions and principal investments are included that total rises to $13.33bn, an increase of 28 per cent from 2003.

To understand further how explosive trading growth has been at Goldman Sachs, it helps to know that, in 2000, it generated net revenue from trading of $6.49bn. FICC revenue was $3bn. Lehman Brothers and Bear Stearns have also at least doubled the amount of fixed income trading revenue they generated in the five years from 2000 to 2004. Mr Blankfein says he thinks concern over the growing percentage of trading revenues at investment banks is misplaced for several reasons. First, client activity is the key driver of trading it is our role and valuable franchise to be asked to price and assume risks that our clients want to shed, he says. And trading opportunities come from increasingly diverse businesses and sources, involving broad and often uncorrelated markets. Competitors echo Mr Blankfeins opinion. Morgan Stanley did not achieve record profits in 2004, but its trading divisions have generated explosive revenue growth as well, especially in fixed income. Jim OBrien, co-head of Morgan Stanleys corporate credit group which trades investment grade and high-yield bonds, says: What has characterised the improved performance is bigger risk taking and bets in macro markets. Investment banks, he adds, have benefited from managing risk more dynamically and from trading more often with clients. Morgan Stanley and others, says Mr OBrien, were taking steps to make it even easier to trade and manage risk. This includes finding ways to improve liquidity, developing more index products and promoting the development of electronic trading. Our view is that as the market gets bigger, we will benefit, says Mr OBrien.

Morgan Stanley boosted its fixed income trading revenue last year to $5.56bn, up from $2.7bn in 2000. Technology has played an enormous role in the growth of trading profits and will continue to do so this year, say traders. Advances in software have allowed investment banks to identify more efficiently the trading opportunities and to analyse the accompanying risk. Take Credit Suisse First Boston, which has an advanced execution services (AES) division that develops algorithms to help clients trade electronically. The product helps clients to protect their anonymity, provides split-second forecasts and trades throughout the day. Manny Santayana, a managing director in AES, says the program helps traders simplify their life with complex algorithms. He adds: You can bundle all the intellectual capital at one keystroke and help people to make money. Mr Santayana says that for products such as his, acceptance is the key. He says that once he can get clients over what he calls the Fuds fears, uncertainties, doubts and suspicions then he can create a fully empowered trader. Since the inception of AES in 2002, volume has almost tripled each year, says Mr Santayana. However, he declines to offer a specific number. Investment banks argue that if they can keep getting clients over the Fuds issue, then trading will continue to have a prominent place in the percentage of revenue generated by banks. As Mr Blankfein of Goldman Sachs says: I am not suggesting that revenue from trading is like an annuity, but the franchise value and recurring nature of this part of the business is underestimated. Private equity: Conflict of interest on Wall Street? By James Politi Published: January 27 2005 08:52 | Last updated: January 27 2005 08:52 The Bankers Trust building at 280 Park Avenue, New York, will soon have a new tenant. In the past few weeks Larry Schloss, the former head of Credit Suisse First Bostons private equity unit, has been preparing to move Diamond Castle Holdings, the buy-out group he recently founded, from temporary offices into the building. The move means yet another private equity group will be setting up shop along Park Avenue, where many medium-sized funds, as well as Blackstone and Warburg Pincus, the industry giants, are already based. But its significance extends well beyond that.

During the past year, many of Wall Street's top investment banks have been searching their souls to decide whether it is worth their while to maintain a significant private equity arm as a core part of their business. Last month, CSFB, which had one of the largest and most successful operations in the business, came to the conclusion that it would be better to let go. As part of its wideranging strategic review CSFB decided to spin off its DLJ Merchant Banking Partners IV, which is expected to raise about $3bn. Mr Schloss had already left the Swiss banking giant when the decision was made. Yet, his departure remains one of the most glaring symbols of CSFBs move away from the business. CSFB is not the only bank to have parted ways with its private equity arm recently. In July Morgan Stanley sold its private equity unit to a team of bankers led by Howard Hoffen, one of the top executives at Morgan Stanley Capital Partners, and renamed it Metalmark Capital. That move came on the heels of a similar one by Deutsche Bank in 2003. Industry observers say the main reason for the string of spin-offs is that banking executives are worried that their in-house private equity arms will end up competing on deals with the largest buy-out groups, which have developed into crucial clients. Blackstone, for example, doles out about $700m in fees to Wall Street firms every year for mergers and acquisitions advice, debt financing, and equity financing. Some of our funds have grown to the point where they are now competing with major clients of the firm, or would otherwise benefit from an independent platform, says Brady Dougan, the new chief executive of CSFB, explaining the move last month. It would not surprise me if private equity groups get a bigger voice as they get more and more muscle, says Joshua Leuchtenberg, a lawyer who specialises in the private equity industry at Ropes & Gray in New York. This would involve being more vocal about asking an investment bank to back off seeking a deal for itself in favour of working for another buy-out group as a mergers and acquisitions or financing adviser. Many bankers within private equity divisions are often happy to accept a spin-off that would offer them more freedom to choose their investments. In some cases, such as CSFBs, it is difficult to see what the negative side to such a move might be. People close to the bank say the spun off unit will continue to benefit from the deal flow and the contacts its bankers had while the business was fully integrated with the mother ship. However, while the belief that investment banking and private equity are incompatible appears to be gathering pace, other banks, such as Goldman Sachs, JPMorgan Chase and Bear Stearns, all of which have significant private equity arms, do not appear to be

rethinking their strategy. Moreover, Merrill Lynch is said to be bolstering its small private equity division. We are separate from the investment bank but we can draw on it in many helpful ways, says Jeff Walker, managing partner at JPMorgan Partners, hailing the benefits of his firms model, which usually involves seeking smaller investments that do not pit it directly against the likes of Kohlberg Kravis Roberts, Thomas H Lee Partners, or Bain Capital. If we are looking to make a technology investment, we can benefit from advice and deal flow by meeting with our global technology team, and so on with other sectors. That is a real advantage, says Mr Walker. The private equity arm of Goldman Sachs is generally regarded as the most integrated with its mother ship because its bankers report to the investment banking unit and are paid on the basis of the performance of the entire firm. This means Goldmans unit, in a similar way to CSFB, often co-invests on deals that have come through the investment bank. You can tell the client, we will not just finance the deal with debt and advise you on the M&A strategy, we will also add some of our own equity, says a banking executive familiar with the model. Risk management: Keeping pace with effective results By David Wighton Published: January 27 2005 08:05 | Last updated: January 27 2005 08:05 If you are looking for the hot new jobs in investment banking, forget fixed-income, eliminate equities and do not bother with derivatives. Risk management...thats where the growth is. Banks have been ramping up their risk management operations in recent years, increasing headcount, technology investment and status. According to the 2004 Global Risk Management Survey by Deloitte & Touche, 81 per cent of global financial services companies now have a chief risk officer. Two years ago, it was only 65 per cent. Most industry insiders believe this has resulted in a big improvement in the effectiveness of banks risk management in spite of the perceived increase in risk the banks are taking on, the growth of hedge funds and the ever increasing complexity of financial products. However, some regulators question whether risk management has improved quite as much as the banks like to believe. It could be they have just been lucky. Edward Hida, head of banking risk management at Deloitte & Touche, says that, while it is difficult to prove that risk management has improved, all the evidence points that way. The fact that there have been fewer disasters in many of the larger markets suggests that risk management has improved.

He says there have been advances in all the main areas of risk management credit risk, market risk and operational risk and, in particular, in the way these all interact to create financial risk for the firm. Guy Moszkowski, investment banking analyst at Merrill Lynch in New York, agrees that the lack of massive blowouts is persuasive. His analysis of the top Wall Street banks shows that the efficiency of risk taking has improved, measured by the ratio of trading revenue to value at risk (VAR). Value at risk is a measure of the potential loss in value of trading positions due to adverse market movements over a defined period.

Mr Moszkowski disputes the widespread belief that banks have been taking on proportionately more risk. The amount of risk measured by VAR taken on by the top Wall Street investment banks as a group has not increased in relation to their growing capital in recent years, he says. "Some regulators Among the European banks, Deutsche is widely seen as having question whether risk been aggressive on risk recently and it recorded a sharp rise in management has VAR in the third quarter of last year. However, bankers say this improved quite as much was inflated by a statistical blip and that its risk-taking is not out as the banks like to of line with its US peers. believe" The ever growing complexity of the products investment banks trade makes some outside observers nervous and risk management experts agree that they do present new challenges. Don McCree, deputy head of risk management at JP Morgan Chase, which has a huge derivatives business, says it is critical that the risk management process keeps pace with product innovation. We routinely move people from the business into the risk management function to ensure that we remain in step with developments, he says. However, Mr McCree says it is important to remember that, in many ways, the growth of derivatives has made risk management easier, not more difficult. In particular, the growth in credit derivatives has allowed banks, such as JPMorgan, to manage their big credit risk exposures much more efficiently. When we weigh credit derivatives as a risk or a benefit, we come down significantly into the benefit category. The other development that makes some outside observers jumpy is the growth in hedge funds. This nervousness is understandable given that the collapse of Long-Term Capital Management is still a recent memory. When the hedge fund imploded in 1998, prompting the Federal Reserve to organise a $3.6bn bail-out, its bankers had an estimated exposure of $125bn. Tim Geithner, president of the New York Federal Reserve, one of the US bank regulators, said in a recent speech that the quality of risk management of counterparties of hedge funds had improved substantially since 1998, but that progress had been uneven across the major dealers. He also drew attention to signs of some erosion in standards in response to competitive pressures as banks fought to attract increasingly lucrative hedge fund fees. Mr Geithner said that improving the overall discipline of the stress testing regime was critical. Because potential future exposure measures are based on VAR calculations, they can produce misleadingly low overall measures of counterparty credit risk, he said. This is because VAR calculations reflect recent market conditions and correlations, so do not necessarily provide an effective measure of vulnerability to loss under more severe conditions of market stress and illiquidity.

Thanks partly to the relatively benign market conditions in recent years, the biggest risks to leading investment banks, particularly in the US, have come from a completely different quarter: the wave of corporate scandals. Citigroup and JPMorgan alone have set aside billions of dollars to cover potential settlements of lawsuits related to their alleged role in scandals, such as WorldCom and Enron. Mr McCree says JPMorgan is spending an enormous amount of time analysing new risks such as reputation risk and litigation risk created by parties we do business with. At the same time, banks are also facing new demands on risk management as part of their implementation of the Basel II capital adequacy rules. All of which suggests those risk management departments will keep growing for some time to come. Jamie Dimon: Obsessed with cutting costs By David Wighton Published: January 27 2005 08:09 | Last updated: January 27 2005 08:09 Jamie Dimon is so focused on costs that, shortly after he became chief operating officer of JPMorgan Chase, he ordered the meat portions in staff cafeteria in its New York headquarters be cut by 25 per cent. That story, along with many others told about Mr Dimon during the last year, is completely false. But it does illustrate two truths. One, Mr Dimon is indeed obsessed with costs; two, Wall Street is obsessed with Mr Dimon. Mr Dimon returned to New York last year when JPMorgan paid $58bn for Bank One, the Chicago group he headed. Ever since, he has been a favourite subject of Wall Street debate, rumour and gossip. The interest is not new. Almost as soon as he left New York to go to Bank One four years ago, the speculation started about when and how he would return to Wall Street. That he would return never seemed in doubt. The Bank One deal brought him back as number two at JPMorgan with the agreement that he would succeed Bill Harrison as chief executive in 2006. The Wall Street gossip is that Mr Dimon has already taken control, an impression heightened by the large number of former Bank One executives that have moved into senior positions. Insiders insist that he and Mr Harrison are working very well together. In a recent interview, Mr Dimon said that the two agree on most things but that he had been overruled by Mr Harrison a couple of times. Wall Street is in Mr Dimons blood. Not the glamour of investment banking, or the high stakes of trading, but the more down to earth world of retail broking.

His Greek-American grandfather was a stockbroker and his father still works as a broker at Citigroups Smith Barney. It was through his father that Mr Dimon met the man who was to become his mentor, Sandy Weill. After graduating from Harvard Business School, Mr Dimon became Mr Weills personal assistant and was his right hand man for much of the next 16 years, during which Mr Weill put together the worlds largest financial services company, Citigroup. Colleagues say Mr Weills success owes a good deal to Mr Dimons energy, intelligence, eye for detail and ruthless approach to costs. He is a very smart guy, and he knows it, with an unbelievable memory for detail. He is great at deals but also at running businesses, says one senior executive who worked with him at Citigroup. Mr Dimon was president of Citigroup and Mr Weills likely heir when the pair fell out and he was sacked in 1998. In some ways, the timing was fortunate for Mr Dimon. His move to Chicago 18 months later meant he was far from Wall Street during the aftermath of the corporate scandals which cost many of the banks a fortune. Both Citigroup and JPMorgan have put aside billions of dollars to cover lawsuits related to their alleged roles in scandals, such as Enron and WorldCom. While many Wall Street reputations were severely damaged in that period, Mr Dimons was enhanced by his tenure at Bank One. He slashed the loan book, cut back costs, sorted out its tangled computer systems and generally dressed it up for a deal. The deal with JPMorgan has created a smaller version of Citigroup, though with a less international spread, no retail broking and a much less strong investment bank. Mr Dimon has made clear he would like the group to have a retail broking business. Analysts speculate that he will also try to fill out the group with more US retail banking and greater international exposure. They think deals are unlikely on the investment banking side and Mr Harrison recently ruled out buying a securities firm. For the moment, Mr Dimon is focused on the integration of the two groups and cutting waste across the board. One area where his influence has already been clearly felt is in information technology, where he persuaded Mr Harrison to scrap a huge outsourcing contract with IBM. This reflected Mr Dimons, unfashionable, belief that systems are so strategically important to banks that they should be managed in-house. Mr Dimon inspires great loyalty and many people now in senior positions in JPMorgan have worked with him for years, not only at Bank One but also at Citigroup. Colleagues insist that this is not because he likes to surround himself with yes men. On the contrary, they say he creates an informal and open culture in which people are encouraged to speak their minds.

True up to a point, says one admirer who recalls Mr Dimons tendency to think hes right and everyone else is wrong. His self-confidence, combined with his energy, sometimes left him accused of micromanagement. It could be infuriating when he seemed to want to make all your decisions for you, says one fan. But even his critics agree he is one of the most able executives in the financial services industry and the expectations of his leadership at JPMorgan are extremely high. To meet them he will have to do more than revolutionise the cafeteria portion control. Hedge funds: The attraction is still there By James Drummond Published: January 27 2005 08:13 | Last updated: January 27 2005 08:13 Hedge funds are sometimes described as unregulated banks. Banks, so the analogy goes, take short-term liabilities like sight deposits and invest them in longer-term instruments like mortgages. Hedge funds do the same type of thing or they may do it the other way round taking longer-term liabilities and trading rapidly in short-term, liquid instruments. Either way, both hedge funds and banks are in the business of earning money from supplying liquidity and bridging a mis-match between assets and liabilities. The similarities do not end there. Investment banks, and in particular their proprietary trading desks, also play in the same spaces: bonds, equities and derivatives trading. The difference is that hedge funds shun the limelight while banks are, whether they like it or not, in the public eye, highly regulated and have to meet capital requirements. Such speculations point to the symbiotic, some would say incestuous, relationship between investment banks and hedge funds. Investment banks act as so-called prime brokers for hedge funds, settling trades and providing a range of back-office services. In the US, prime brokerage is dominated by Goldman Sachs, Morgan Stanley and Bear Stearns. The banks also extend credit to hedge funds and may also supply investors through their capital introduction departments. The banks brokerage teams may well come up with suggestions for hedge fund traders on individual trades and market specifically designed securities. However, the hedge-funds-as-unregulated-banks conundrum begs a question: if hedge funds are so profitable and populated by people who used to work in banks, why do investment houses not do more to retain hedge fund traders within their own ranks?

The answer is that they do up to a point. But hedge fund trading is a volatile and risky business and credit rating agencies already take a dim enough view of the proportion of revenues earned by investment banks from proprietary trading. The charge is denied by investment bankers. Contrary to what you may think, we are not a hedge fund with some investment banking tacked on the side, says one prime broker. The vast majority of our business is executing trades on behalf of our clients. We have a range of fund management businesses, including hedge funds. If we wanted to have more hedge fund business (in-house) we could do, but we choose not to, he says. The scale of business that a hedge fund can execute with its prime brokers there can be more than one is staggering. Hedge funds are usually active managers and that means that they trade a lot. Marshall Wace, a large, London-based long-short equity hedge fund with about $5bn under management, has between 400 and 500 stocks on its books at any one time and turns over its book more than 30 to 40 times a year. A study last year by Andrew McCaffrey, chief executive officer of Attica LJH Investment Management, indicated that investment banks may derive about one-fifth of their revenues from prime broking with hedge funds. The attraction of hedge funds to investment banks was seen by JPMorgan Chases acquisition last year of Highbridge Capital and Lehmans on-again, off-again pursuit of GLG. Lehman already has 20 per cent of GLG and an immediate acquisition now appears unlikely. For the hedge fund managers, their relationship with their former employers who may now be acting as nursemaid is critical. A large relatively well-established hedge fund will be able to put the squeeze on its prime brokers when it comes to fees, while a start-up will be grateful for all the help it can get. When you start, you are very reliant on someone big and powerful taking an interest in you. That is very important. The type of relationship will alter over time, says Michael Alen-Buckley, one of the founders of AIM-listed RAB Capital in London. The fact is that the universe is well defined now. I would say that price and service are critical. The scale and complexity of hedge funds relationship with their prime brokers, combined with memories of the collapse of Long Term Capital Management, a hedge fund, in 1998, has repeatedly caught the attention of regulators.

In November, Tim Geithner, president of the New York Fed, warned that investment banks may be low-balling in an effort to attract hedge fund business. There was evidence, Mr Geithner said, of some erosion in standards in response to competitive pressures in banks risk management of relationships with hedge funds. Nick Roe, head of European prime brokerage at Deutsche Bank in London, is unruffled by the charge that investment banks might be unduly reliant on hedge fund business. He points to the institutionalisation of big European hedge funds such as GLG, Vega and CQS, which want to be seen more as money-managers. These funds are moving into conventional, long-only management, says Mr Roe. I do not think that people will distinguish between institutional flows as more institutions are looking more like hedge funds (and) as more of these (conventional) institutions are beginning to take on risk, I do not see people distinguishing hedge fund flow. Regulators: Learning to cope with a blizzard of reform By Andrew Parker Published: January 27 2005 08:20 | Last updated: January 27 2005 08:20 Investment banks are still learning to cope with the regulatory blitzkrieg that was unleashed by Eliot Spitzer, New York state attorney-general. Mr Spitzer rocked Wall Street to its foundations in April 2002 by revealing how some research analysts were privately disparaging companies that they were publicly recommending investors to buy. In one notorious e-mail to his colleagues, Henry Blodget, a senior research analyst at Merrill Lynch, described an internet companys stock as a piece of shit. Merrill Lynch is among 10 of the worlds biggest investment banks that were fined and forced to embark on sweeping reforms under a global settlement with regulators led by Mr Spitzer and the Securities and Exchange Commission (SEC) in April 2003. The central objective of the settlement is to bolster confidence in the integrity of equity research. Banks have had to sever links between their research and investment banking businesses after evidence that the latter was compromising the formers independence. But the global settlement crystallised concerns about conflicts of interests at the banks that continue to preoccupy regulators today. It has been a regulatory blizzard for almost three years now, says an executive at a bank that is party to the settlement. As well as dealing with conflicts of interests between research and investment banking, the global settlement also banned the practice of spinning by banks.

Some had sought investment banking business from companies by spinning or allocating of stocks from initial public offerings to their directors. Hard on the heels of the global settlement, Mr Spitzer turned his attention to abuses in the mutual funds industry. The enforcement actions and reforms that have followed are affecting the investment banks because many have asset management arms as well as brokerage operations. Some executives at the banks still feel a sense of injustice at how state and federal regulators have competed for the title of Wall Streets toughest supervisor, and thereby engendered a climate of fear. But initial anger among executives about the scale and complexity of the reforms in the global settlement, given they insisted the abuses were strictly limited, has subsided. Initially, there was a lot of hand wringing and hair pulling, says an executive at another bank that is party to the settlement. He says the banks then realised that, although the settlement is far reaching, the reforms applied to most of their peers, and so no one would be left at a competitive disadvantage. It affects all the major Wall Street firms, so we have not really felt any negative impact because everybody plays on the same field, says the executive. Under the global settlement, the banks have been required to separate physically their research and investment banking businesses. Research reports now include opening statements that warn of possible conflicts of interests. The banks must also offer independent research to their customers. Tom Hill, global head of equity research at UBS, which is party to the settlement, says its impact had been positive. The settlement has achieved what it set out to achieve, which is to improve the truthfulness of Wall Street research, and that is a good thing, he says. Mr Spitzer admitted last month that the settlement had also provoked some unintended consequences, such as reduced coverage of stocks by the big investment banks. However, executives at the banks appear divided as to whether the settlement has caused the reduced coverage or the economic downturn that preceded it. "The number of analysts at the big investment banks has declined, together with their pay"

The number of analysts at the big investment banks has declined, together with their pay, compared with the time of the internet boom years. Prior to the global settlement, their pay could include large bonuses that were linked to their help in generating investment banking revenues.

Some of the senior and most experienced analysts have therefore left the banks to work for hedge funds offering higher salaries. One executive expressed fears about the potential for a deterioration in the quality of research at the big investment banks because, he said, they had fewer and less experienced analysts. Another executive argued that the banks would focus their research on certain industry sectors rather than opt for the blanket coverage that was attempted in the past. The other glaring result of the settlement has been multiple initiatives by regulators in the European Union and Asia to buttress the integrity of research. The investment banks, given their global presences, are having to contend with national rules that are not necessarily complementary, although most borrow heavily from the US. Tim Plews, a partner at Clifford Chance in London, says: One of the unintended consequences of the global settlement has been a plethora of regulatory initiatives outside the US by regulators who have not ensured that those initiatives always fit together. Moreover, the investment banks are unlikely to get any let up from the regulators. Stephen Cutler, head of enforcement at the SEC, used a speech in September 2003 to invite the banks to review further possible conflicts of interests inside their multi-disciplinary businesses. The banks are still busy sharing the information with SEC staff, and they suspect it could result in new enforcement actions. Investors, meanwhile, are still waiting for their compensation. Under the global settlement, banks paid $430m that is to be given to investors who suffered losses. But the plan for how to distribute the money, which has been drawn up by an academic, has yet to be approved by the courts. Harvey Pitt, a former chairman of the SEC, who oversaw some of the negotiations on the global settlement, says it was important that investors got their compensation as soon as possible, partly so as to maintain faith in the regulatory system. Anyone who cares about investors would say it would be much better if investors are going to receive a benefit from the settlement sooner rather than later, he says. Private banking: Top bankers are back on the trail of the super-rich By Peter Thal Larsen Published: January 27 2005 08:29 | Last updated: January 27 2005 08:29 Once again, the worlds largest banks are keen on private banking. For decades, the business of managing money for the worlds rich was seen as a niche business best left to secretive institutions in Switzerland and Luxembourg.

Attitudes changed during the 1990s, when large financial institutions were seduced by the prospect of luring millions of newly wealthy investors. But when paper riches shrivelled in the bear market, most of the new ventures were scaled back. Now the worlds investment banks are, once again, showing an interest in private banking. UBS, the investment bank which has probably most successfully aligned its brand with managing money for the worlds super-rich, is on an acquisition trail, snapping up smaller operators around Europe. However, others are pursuing similar strategies. Late last year Credit Suisse paid its Zurich-based rival the ultimate compliment when it announced plans to integrate more closely its investment bank, Credit Suisse First Boston, with its private banking operations. Several trends are fuelling the vogue. To begin with, executives at UBS and elsewhere have simply spotted a growth opportunity: private banking is still a relatively fragmented business where scale can bring improved returns. The largest players can afford to invest more in information technology and other services. As clients demand access to ever more sophisticated financial products, the private banks with the largest pools of capital can also negotiate preferred access to alternative investments, such as private equity and hedge funds. What is more, as regulators and tax authorities crack down on offshore financial centres, much of this activity is taking place in onshore accounts. The promise of discretion and absolute secrecy the traditional selling point for the smaller Swiss banks no longer has the same appeal. These factors mean the largest private banks are at an advantage. According to Goldman Sachs, the flow of capital to private banking will increase by about 7 per cent a year until 2007. However, the private banking arms of UBS, Credit Suisse and other industry leaders should grow faster: in 2003, Goldman estimates, UBS captured 7 per cent of the industry inflows even though its market share is just 3.5 per cent. Several large groups now argue private banking is not just a good growth opportunity, but also a business that offers substantial synergies with their investment banking arms. The benefits fall into two categories. First, there is the ability to cross-sell. Entrepreneurs who hire an investment bank to sell or float their business will also need some advice on managing their new found wealth, creating an immediate opportunity for the private banking arm. Similarly, a businessman who has developed a trusted relationship with his private banker may be willing to hire the same institution when he needs wholesale banking services.

Clearly, there will be cases where these benefits exist, though it is uncertain that the two arms will always work well together, particularly as the organisations grow larger and more complex. It may also be hard to mesh the eat-what-you-kill culture of an investment bank with a private banks longer-term approach. A striking example is Citigroups recent setback in Japan, where regulators shut down the groups private bank. A more ambitious claim is that investment banks can offer wealthy private clients to a range of complex products that have been developed for institutional customers. The cost of specialised products, such as tax and inheritance planning, can be provided inhouse and amortised over a larger revenue pool, making them more accessible to clients from a cost standpoint, analysts at Goldman Sachs wrote last September. Yet, at the same time, private bankers must also convince their clients they are not being used as a captive distribution base for whatever new-fangled products the investment bank is churning out. That is why, while pointing to synergies, most private banking arms of investment banks also publicly embrace a so-called open architecture business model, meaning they will offer the best products regardless of where they come from. There are some clients who warm to the intellectual innovation of these banks, but there are others who see the whole culture as too aggressive for them and would prefer to deal with people who stand back and dont get overexcited by every new development, says Michael Maslinski, director of Maslinski & Co, the wealth management consultancy. Moreover, the crossover between investment banking and private banking works best when clients are rich enough to start behaving like institutional money managers. So the synergies may work for wealthy family offices with full-time professional staffs. They are less likely to apply to clients who have just scraped together their first million. The model we have pairs investment banking with ultra high net worth investors. It would be much harder to pair retail banking with private banking, says Marianne Hay, head of private wealth management for Europe and the Middle East at Morgan Stanley. A more compelling case for the combination of private and investment banking may be that the former is relatively stable, neatly balancing the growing risks that investment banks are taking on their own account. Under new capital adequacy rules, private banking assets can provide a stable asset base and source of steady revenues. That is a development investment banks and their shareholders are likely to welcome.

Asia: Market is firing on all cylinders By Francesco Guerrera Published: January 27 2005 08:41 | Last updated: January 27 2005 08:41 End-of-year trips to headquarters in New York and London tend to be painful pilgrimages for Asia-based senior investment bankers. Explaining why a region with the worlds fastest economic growth, one-third of the earths population and some of the nascent stars of global capitalism delivers only tiny profits is, undoubtedly, a tough task. It is true that, in Asia, competition among securities houses is fiercer than in the US or Europe, and the regions companies are less active than their western counterparts on both capital markets and the merger and acquisition arena. But for those looking at Asia from the corner offices of a skyscraper in Manhattan or Londons Canary Wharf, dazzled by the constant talk of Chinas rocketing economic expansion, it is difficult not to interpret these reasons as excuses. In the past few months, though, the pilgrimages have turned into triumphant homecomings. Last year, for the first time in recent memory, Asia fired on all cylinders for investment banks. Equity issuance in Asia Pacific, excluding Japan, was the highest on record, with total volume reaching more than $100bn last year, according to Dealogic, the research firm. Debt issuance was also at a record, with volumes rising more than 30 per cent to $254.3bn, helped by large bond issues by governments, such as China and Hong Kong. 2004 mergers and acquisitions in Asia Excluding Japan (Jan 1 2004 - Dec 31 2004) Rank Advisor 1 2 3 4 5 6 7 8 9 Morgan Stanley Citigroup Goldman Sachs JP Morgan Credit Suisse First Boston UBS Deutsche Bank Rothschild Merrill Lynch Rank Value Market Number of ($m) share (%) deals 17,370.8 11,396.7 9,666.5 8,704.8 8,474.0 7,725.4 7,619.0 4,676.5 4,623.5 3,725.0 3,720.0 16.7 11.0 9.3 8.4 8.2 7.4 7.3 4.5 4.5 3.6 3.6 41 47 22 38 33 18 16 26 31 10 1

10 HSBC Holdings 11 Black River Capital

12 ABN AMRO 13 ING 14 Somerley 15 Australia & New Zealand Banking

3,615.2 3,440.3 2,833.9 2,618.0

3.5 3.3 2.7 2.6

18 24 37 8

Source: Thomson Financial Mergers and acquisitions, traditionally the Cinderella of Asian investment banking, recorded its best year since 2000 as transactions such as Lenovos $1.75bn purchase of IBMs personal computer business pushed the total value of deals to $224bn. The sharp rise in activity translated into higher earnings for investment banks in the region. Dealogic estimates securities firms shared more than $2.5bn from debt and equity deals alone. We had our best year in Asia in 2004, says Paul Calello, chairman and chief executive of Credit Suisse First Boston Asia Pacific. What is most encouraging is that we have seen an increase in activity spanning a broad range of products across the entire region. The problem for investment bankers looking forward to fat bonuses and further investment from New York and London is that Asia has been here before. The boom times of 2000, for example, were followed by a couple of lean years that prompted several firms to cut staff and reduce their presence across the region. In this respect, this year will be crucial. If investment banks can extend the good showing that began in the second half of 2003 into 2005, they will be able to show that Asia is outgrowing short boom-and-bust cycles and becoming a consistent contributor to global profits. The regions bankers are typically bullish about the near-term outlook. Asia is coming off a very strong year for investment banking, but the backlog is very healthy across all products, says Todd Marin, co-head of investment banking for Asia Pacific at JPMorgan. The pipeline of new equity issuances is bulging. CSFB estimates that initial public offerings alone could raise more than $70bn this year, 17 per cent higher than 2004. Part of the reason for the expected rise is that 2005 is forecast to witness a wave of IPOs by small privately-owned Chinese companies, especially in the technology and manufacturing sector. And if two giant state-owned lenders, China Construction Bank and Bank of China, succeed in raising a combined $15bn, Asia will witness another record year for equity issuance. "Markets are showing minimal risk aversion, so capital is available at historically tight rates"

The question is whether stock markets, which have begun the year on a negative note, and foreign investors, the key driver of the recent IPO boom, will be able to absorb such a large amount of new shares.

We are very negative on the likelihood that foreign investors will mop up such large volumes unless there are sharp falls in valuations, according to an equity strategist. There are similar doubts about the strength of investor demand and companies appetite for debt, as US interest rates are expected to keep rising, lowering the attraction of corporate and sovereign bonds. As for M&A, bankers believe the strength of the market will be driven by the ability of companies to raise relatively cheap funds to pay for acquisitions. Markets are showing minimal risk aversion, so capital is available at historically tight rates, says Matt Hanning, head of regional M&A at Morgan Stanley. M&A activity will be fuelled by market confidence and access to this capital. However, a sharp fall in share prices would damp Asian companies desire to acquire, triggering a downturn in takeover activity. The real unknown of the year, however, is the extent of outbound M&A by Chinese companies. Recent developments, such as the Lenovo/IBM deal, and news of interest by the state-controlled group CNOOC in a $13bn bid for its US rival, Unocal, have raised hopes of a flood of overseas takeovers by Chinese groups. But failed deals, such as the $5bn offer by the Chinese state group Minmetals for the Canadian company Noranda, are a reminder of the inexperience and lack of financial sophistication of would-be Chinese acquirers. With the region poised between an extended bull run and a return of the bad years, Asiabased investment bankers will have to work harder than ever in 2005 to make that end-ofyear trip back to headquarters all the more pleasurable. Putting more value on credit facilities By Jane Croft Published: January 27 2005 08:49 | Last updated: January 27 2005 08:50 There is a long running debate among the investment banking community about how important capital and balance sheet size are to winning M&A mandates. In these days of mega-mergers and global deals, an investment bank is seen to have a huge advantage over rivals if it can offer clients vast loans or complex financial deals together with its M&A services. To do this, an investment bank needs a big balance sheet which only large commercial banks, such as Citigroup and JPMorgan Chase, command.

These giant banks have an edge over rivals such as Goldman Sachs and Lehman, whose balance sheets do not always allow them the luxury of lending billions of their own money to clients. In fact, to help increase its balance sheet, Goldman Sachs did a deal with Japans Sumitomo Mitsui Financial in 2003. Sumitomo provides credit loss protection to Goldman and takes most of the initial losses suffered in providing such facilities, allowing Goldman to make loan commitments. Russell Collins, head of financial services practice at Deloitte, says: Banks with large balance sheets have the advantage of being able to take on risks and, as a result, can price aggressively, which also helps them to win M&A mandates. He adds: The investment-only banks have responded aggressively by stressing their traditional advisory and distribution capabilities. But they are sometimes taking on more risks. Although they have large balance sheets, these are not as large as the global commercial banks. For Citigroup and JPMorgan Chase, both banks that have added investment banking to their repertoire in recent years, it is only to be expected that they should make big loans. Lending is their main business, while investment banking is a more recent addition. Banks with large balance sheets also have an advantage in the current growth of structured products and derivatives which can be capital-intensive. The big banks may be using their balance sheet weight effectively, but they still face fierce competition from those who claim that advice, not cash, is the real requirement. However, banks with large balance sheets have also recognised they need to bolster their M&A capabilities by hiring experienced staff. Clients are looking for three areas in M&A advisory work: relationship trust, content and execution capabilities, says Ted Moynihan, director of Mercer Oliver Wyman. We have seen banks with large balance sheets beginning to build up their M&A capabilities and add to them because having a balance sheet is not enough. However, credit is still important and the balance sheet is increasingly part of the discussion with corporate clients, he says. Another senior investment banker acknowledges that a large balance sheet is helpful in winning mandates as many clients prefer a one stop shop. However, he cautions that the power and scale of these banks can, potentially, make clients feel intimidated if they rely on the bank for both lending and M&A. "There is no shortage of capital in the world...only a shortage of good ideas"

He says: Where a company is in difficulty, they may feel pressure to accept an advisory mandate from a bank which is also their lender; otherwise, the bank could become an unattractive creditor. A bank can ask a company for an investment-banking mandate but, if that bank is also the companys biggest lender, a company can feel compelled to accept. The investment banker says: It depends on the size of the company. But if you are a business halfway down the FTSE 100, you are not on an equal footing to argue with some of these huge banks. He also believes that with the availability of credit, capital has become a commodity and balance sheets are less important. There is no shortage of capital in the world but there is a shortage of good ideas and if you have a good idea, finding the capital to support it is not a problem, he says. Capital is a commodity but I do not think M&A skills are a commodity as every deal is different. Mr Moynihan adds that a bank seeking an M&A mandate could have a big advantage over rivals if it is also the lender. In theory, of course, the killer punch can be if two banks have exactly the same execution and M&A capability and one is a long term lender to the company. That might swing the mandate, he says. In the US, advisory businesses often have in-house teams for idea generation, but in Europe they often have a main advisory and usually a secondary advisory team which can often be the credit lender. One risk for a large commercial bank seeking M&A work is that ruthless investment bankers might advance their own careers in winning M&A mandates while dispensing their banks cash unwisely. At Smith Barney, bankers may have been thrilled about winning the Enron M&A business but it was parent company Citigroup which lost hundreds of millions of pounds in bad debts when the energy group collapsed. An investment-banking arm could still clock up big profits from advisory work while the bad-loan loss would be attributed to a different department. Brady Dougan: Plotting a course to the top By David Wells Published: January 27 2005 08:54 | Last updated: January 27 2005 08:54

Brady Dougan spent his first six months as chief executive of Credit Suisse First Boston under the radar of investors. During that time he completed a six-month review of the investment banks operations. His goal: devising a plan to help the bank to catch up with rivals. He said Goldman Sachs and others had been more adept at shifting capital and people to exploit market opportunities, such as commodities trading, and he wants to outmanoeuvre them. In December, CSFB unveiled its plan. The investment bank will revamp its business lines and merge with the banking operations of Credit Suisse, its parent company, over the next two years. Mr Dougan said in an interview at the time that the task would be a challenge akin to piloting a tall ship in rough waters, a reference to a painting that hangs behind his desk in Manhattan. During the review, critics had offered routes the new captain of CSFB could take to safer waters. One was to exit cash equities. But this turned out to be wishful thinking on the part of rivals. Mr Dougan said last month that he was not searching for calmer waters. He just wanted to make sure his ship had the right crew and sails people and capital and that these resources were used appropriately. He said CSFB had considered exiting cash equities, but decided that doing so would not save enough money to justify the pain. More importantly, Mr Dougan did not want to become a niche player. We will continue to be a full-service investment bank, he said. This desire comes, in part, from his experience. Mr Dougan has worked in most of the businesses CSFB operates and has ideas for improving them. He joined CSFB in 1990. Prior to being named CEO, he was co-president of institutional securities with responsibility for the oversight of day-to-day management and strategy of CSFBs equity, fixed income, investment banking and private equity businesses. From 2001 to 2002, he was global head of CSFBs securities division and before that was in charge of equities for five years. Mr Dougan had also been co-head of the CSFB global debt capital markets group and co-head of Credit Suisse Financial Products marketing effort in the Americas. Analysts said that CSFBs rivals had already implemented many of the steps Mr Dougan outlined in December. But Mr Dougan is betting CSFB can still outperform rivals because improvements will mean more at CSFB. Goldman and Morgan Stanley generate $1.2bn a year from their commodities businesses, he said in December. If we can do a third of that, it would have a big impact.

In addition to commodities, Mr Dougan also has plans to expand in derivatives, a longtime interest of his. He joined CSFB from Bankers Trust where he began his career in the derivatives group. Mr Dougans plan for improvement also involves changing how it covers clients and manages its top talent. CSFB, he has said, often sent too much firepower when it met with corporate clients who might use the bank to buy a rival or raise capital. So it is dividing bankers into teams of generalists and specialists. CSFB was getting 60 per cent of its investment banking revenue from companies, typically small to medium-sized operators, which required just one product from the investment bank. But CSFB was courting them, with star bankers eager to sell them a host of services rather than the one they needed. This occupied the time that a generalist could have spent serving clients who desired more than two products. Brian Finn, the CSFB president, who oversees the division, said the move would increase accountability and profitability. He also said he is willing to risk being wrong sometimes. There is no doubt that a percentage of our coverage decisions will prove to be wrong and we will lose out, said Mr Finn. But we have no interest in wasting resources. Now a bright spot on the radar, Mr Dougan is putting the right bums on seats and getting these people to implement his plan. He expects to lose staff unhappy with the changes forced on them but thinks he will find good replacements who think hes steering the ship well. Boutiques: Still not quite the obvious choice for loans By James Politi Published: January 27 2005 08:56 | Last updated: January 27 2005 08:56 As the US market for initial public offerings heated up last May one of the new listings on the New York Stock Exchange stood out. Greenhill, a private investment bank specialising in mergers and acquisitions advisory work, as well as restructuring, was valued at about $600m, significantly higher than the target set by the IPOs underwriters. Throughout the year, its shares kept rising, and, earlier this month, were trading 50 per cent above the offer price. The success of the deal, however, has been more than a boon for the companys investors. To many on Wall Street, the success of the Greenhill deal provided a crucial sign that socalled boutique banking, where small private partnerships offer only strategic advice to companies rather than lending them money or offering them other products and services, which most large investment banks do, is an attractive and growing, business.

When I started, only two people thought it was a good idea to have an independent investment bank: my mother and I, says Peter Solomon, a former Lehman Brothers banker who founded a boutique bank, called Peter J. Solomon, in 1989. However, the belief that size is the only factor driving success in investment banking, which was pervasive in the late 1980s and much of the 1990s, has since taken a hit, as the largest investment banks, particularly in the wake of the corporate scandals of 2001 and 2002, have been severely criticised for being riddled with conflicts of interest. Mr Solomon, whose firm advised 45 clients last year, including retailers Barneys and Fortunoff, says the new morality on Wall Street is a key element driving business for smaller, private investment banks. Public boards receive firm instructions from their lawyers to obtain independent financial advice on important strategic transactions, says Alan Colner, a partner at Compass Advisers, a boutique investment bank in New York founded slightly more than three years ago. This type of counsel generally cannot be obtained from an investment bank that has been hired to arrange the related M&A financing. Since its birth, at a time when financial advisory work was experiencing a sharp downturn, Compass has expanded its offices in New York, London and Tel Aviv. It has also advised on a number of high-profile transactions, such as Lukoils alliance with ConocoPhillips, one of the most significant international oil deals of 2004, the restructuring of ATA Holdings, the US regional airline, and the purchase of Sunny Delight, the fruit juice producer, by JW Childs, a US private equity firm. In advising a client on a recent acquisition, we succeeded in soliciting more than 20 proposals for funding the transaction. The company would not have had the benefit of these choices if it had initially sourced both strategic advice and capital from a single bank, says Mr Colner. Other boutiques have also been busy. Rohatyn Associates and the Quadrangle Group, set up by former Lazard bankers Felix Rohatyn and Steve Rattner respectively, advised Comcast on its ultimately unsuccessful $66bn offer for Walt Disney, the largest hostile takeover bid in the US last year. Furthermore, Allen & Company, a boutique established by Paul Allen, the co-founder of Microsoft, is currently working on all cylinders as it flanks UBS in weighing bids for Adelphia Communications, the fifth-largest US cable operator that could be sold for as much as $20bn in an auction. For all their inroads, however, boutiques are still not the preferred choice for companies seeking advice on M&A and other advisory services. In recent years, the so-called league tables, or rankings of number and volume of deals, have shown that large investment banks, such as Goldman Sachs and Morgan Stanley, still rake in most of the business in this highly lucrative sub-sector of investment banking.

Another encouraging piece of news was that Rothschild, a private investment bank, was the top ranking M&A adviser in Europe last year, according to Thomson Financial. However, that position was controversial in that it was partly obtained thanks to Rothschilds work on the restructuring of Royal Dutch/Shell, which did not involve a deal but was still awarded $80bn in credit for the rankings. However, the success of boutique investment banking this year is unlikely to be measured only in their league table performance. Industry insiders say many will be watching to see how easily boutiques will be able to attract talent at the peak of their careers from the largest investment banks, which they have traditionally had trouble doing. Mr Solomon suggests that the success of the Greenhill IPO, and the prospect of an IPO of Lazard, which also offers independent M&A advice but whose size and breadth means it is rarely labelled a boutique, may boost the attractiveness of working at a boutique. Referring to the Greenhill listing, Mr Solomon says: All of a sudden, people who owned stock in Peter J. Solomon could figure out how much it was worth.