Rainmaker paydays cloud boutique banking forecasts
BREAKINGVIEWS-Rainmaker paydays cloud boutique banking forecasts The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Liam Proud
LONDON, July 29 (Reuters Breakingviews) - Making it rain is getting harder, and pricier, for investment banks. Boutique shops, in particular, are contending with the heavy compensation weather after splashing out larger sums for dealmakers. In some cases, the money going out washes away a bigger share of revenue, clouding the industry forecast.
Between 2016 and 2022, M&A advisory firms Evercore EVR.N, Lazard LAZ.N, Moelis MC.N and PJT Partners PJT.N could generally cover their collective wage tab, including benefits, with about 60% of the fees they collected. Three years ago, however, the closely watched "comp ratios," as they are known, started to soar.
The average across the foursome, with roughly $30 billion in combined market value, reached 74% in 2023. This proportion dipped to a still-high 65% last year, with analysts expecting the same again in 2026, according to Breakingviews calculations using Visible Alpha data. These figures, which exclude the wealth and asset management units at Evercore and Lazard, indicate that, in relative terms, bankers are keeping more of the spoils and leaving less for shareholders.
There are innocent explanations for the change, including that merger activity plunged in 2023. When fees fall, the fixed portion of pay automatically accounts for a higher proportion of revenue. It does not, however, explain, the sticky higher rate. Worldwide M&A fees last year were almost back to their 2021 peak, according to Dealogic. Recent jumbo-sized deals include the intended $88 billion combination of U.S. railway operators Union Pacific and Norfolk Southern and the $55 billion leveraged buyout of video-game developer Electronic Arts by Saudi Arabia's Public Investment Fund and buyout firm Silver Lake. Annualizing first-half activity, as tabulated by LSEG, suggests this year will end with about $5.7 trillion of announced transactions.
Compensation remains elevated because of the ongoing battle among firms to secure the services of trusted boardroom consiglieri, and to prevent the ones they already employ from being poached. Proven CEO-whisperers are scarce, and increasingly coveted when executives anticipate a deal boom.
Marquee signings in recent years include Jason Auerbach, who joined Moelis from the collapsed Silicon Valley Bank to lead global technology investment banking. Lazard has been busy, parting ways with 87 of the 212 financial advisory managing directors it had at the end of 2022. CEO Peter Orszag has since replaced them, and then some, including by recruiting private equity advisers Courtney Haydon and Adam Cady. Paul Taubman's PJT brought in Orlando Knauss, who counsels industrial companies, and Gwenaëlle Billon, whose expertise is in the hot European aerospace and defense industry. There have been acqui-hires, too, such as Evercore's $200 million deal for Britain's Robey Warshaw.
Moelis boss Navid Mahmoodzadegan in April described the hiring market as "hand-to-hand combat," while Evercore Chairman and CEO John Weinberg said, "The ante has been raised." To keep staff happy, investment banks increasingly sense a need to match alluring bonuses dangled from elsewhere. Moreover, new recruits are securing chunky guaranteed packages, which typically last two years. Since it takes roughly that long to refill a deal pipeline, some rainmakers are all pay and no hay for a while.
Comp ratios exceeding 60% aren't necessarily a bad thing. If existing and new senior bankers attract sufficient business, they could justify the outlay. Evercore CFO Timothy LaLonde said that to assess recent additions, he considers metrics including internal rate of return and net present value, concluding that the numbers looked "pretty good." It would be counterproductive to stop hiring what he called "positive-NPV" partners just to meet an arbitrary expense ratio.
The assertion raises an important question: Just how much extra revenue would it take for the higher outlays to make financial sense? One M&A-banker tool, the return on invested capital yardstick, is instructive.
Start by quantifying the "I" in ROIC. If pay ratios from 2016 to 2022 are deemed "normal," then anything above that level can be considered additional discretionary investment in people. For Evercore, Lazard, Moelis and PJT, this "excess comp" between 2023 and the end of 2026 will be about $2.3 billion, Breakingviews calculates.
Assume a 10% return would qualify as success. On that basis, the extra outlays would need to generate a collective $230 million earnings uplift, equivalent to $300 million before tax. Use a 35% operating margin to estimate incremental profitability, 10 percentage points above the norm, which already factors in existing overhead costs. The necessary fee income to generate a healthy return for shareholders would then be $900 million.
How plausible is that target? As a percentage of the quartet's relevant revenue in high-flying 2021, it's 11%. Relative to total industry M&A fees that year, it would amount to an extra 2 percentage points of market share. That figure may overstate the size of the task because other businesses, like restructuring, will do some of the lifting. AI-enabled cost-cutting also could help. It's nonetheless a stretch target.
Evercore is the only one of the four firms to have consistently and materially boosted its portion of deal fees recently, based on Dealogic figures. Boutiques also collectively lost market share in the first half of the year, to 25.7% from 26.4% in full-year 2025. Bigger and broader banks such as Goldman Sachs GS.N, JPMorgan JPM.N and Morgan Stanley MS.N are reporting bumper earnings, potentially giving them resources to invert history and poach from their smaller peers. Another danger is that the M&A boom peters out sooner than expected or simply falls short.
Bosses at deal-advice shops could argue they have little choice but to keep compensation ratios higher. Failing to stump up for new rainmakers would stunt growth; not paying existing ones leaves an escape hatch in a frenzied climate. It may be true, but also a tacit admission. For the first time in a while, instead of creating the M&A storm, the boutiques are at its mercy.
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(Editing by Jeffrey Goldfarb; Production by Pranav Kiran)
((For previous columns by the author, Reuters customers can click on PROUD/liam.proud@thomsonreuters.com))