One of the hallmarks of the financial crisis over the past two years has been the explosion in the recruitment and expansion efforts of boutiques and mid-sized firms, and the migration of talent from bulge brackets to smaller players. But now that a recovery, however tenuous, may be underway, some industry observers wonder whether that trend is about to be stopped in its tracks.

One of the most expansive of the up-and-coming firms has been Moelis & Co., co-founded in 2007 by former UBS rainmaker Ken Moelis. Earlier this week, the shop announced it opened a new office in Sydney, Australia, staffed by a five-person team of mostly JPMorgan Chase veterans. Moelis & Co. will also continue to build its London office, which was opened in September 2008.

When IDD profiled Moelis & Co. in early October, the firm had 22 managing directors. Today, it has 40.

"For many reasons, the drivers for why people are attracted to firms like ours are still there," says Navid Mahmoodzadegan, a managing director who has been with Moelis & Co. from the beginning. "The pace [of recruitment] could definitely be impacted by near-term market conditions, but I don't believe that the long-term issues with respect to the challenges of working at the giant firms have gone away."

In the first half of 2009, there were approximately 250 investment banking senior appointments, a number representing 70% of the entire recruitment volume of 2008, according to executive-search firm Sheffield Haworth. Boutiques accounted for about 73% of hiring by investment banking firms in the first half. Sheffield Haworth listed the "most active senior hirers" of the first half as Deutsche Bank, Jefferies & Co., Greenhill & Co., Moelis and Sagent Advisors.

The number of giant financial institutions has shrunk with Bear Stearns, Lehman Brothers and Merrill Lynch out of the way, but the disappearances led some of the remaining firms to grow even larger (Bear and Merrill were sold to JPMorgan and Bank of America, respectively, while Lehman's assets were absorbed into Barclays Capital and Nomura). "There have been two outgrowths of this market dislocation — some firms went away and others have merged into much larger entities," Mahmoodzadegan says. "When giant firms are combined into a few mega banks, many world-class bankers feel less relevant and less able to connect with clients at those places, and that leads them to explore other opportunities."

John Mack 3rd, co-manager of the investment banking group at Imperial Capital, notices two counterbalancing developments related to recruitment. "Some of the best people made available have been picked up in one way or another, so there's less opportunity to get incremental talent that was made available by the dislocation in the market," he says. "But, as the economy recovers there is more activity and that increased activity drives the need for staffing to handle more volume. That trend will outweigh the trend around availability."

The industry has quite a way to go before it sees staffing levels comparable to those from 2006 and early 2007, but some professionals are leaving the investment banking industry entirely, "so it's not as though the available pool of everyone employed in 2006 is waiting on the sidelines," Mack says. Imperial has experienced double-digit growth in the number of corporate finance, sales, trading and research professionals it has hired over the past year and a half. Many of the new sales and trading pros were made available due to the demises of Bear and Lehman.

Bobby Tudor, chairman and chief executive of energy-focused Tudor, Pickering, Holt & Co. and a former Goldman Sachs partner, says boutiques have been concentrating especially hard on bulking up their presence in his sector. In late May and early June, Greenhill and Evercore Partners announced within days of each other that they were opening new offices in Houston to serve clients from the energy and power space (and hired BofA Merrill bankers to oversee the new branches). "I wouldn't expect the same rate of growth or expansion in the next few years, but I do think people will continue to see the boutique model as a viable competitor to the bulge brackets in many products," Tudor says. "It's been viewed as a window of opportunity that is likely to at least narrow, if not close, as many of the larger banks get their act together again."

Hal Ritch, chairman, CEO and president of Sagent Advisors, feels boutique recruitment and expansion will continue, but those firms will continue to co-exist with bulge brackets. "I think there's going to be a mixed model on Wall Street going forward — boutiques and full-service banks, and some people will go back and forth between them," he says. "There has been a large migration of talent out of large firms and I think it's going to continue, but that doesn't mean that the full-service and universal banks are going to become extinct. They'll be around for the foreseeable future, and some clients will work with them while others will work with firms like ours because they like the experience, senior attention and the tailor-made advice we offer, plus the fact that we can keep secrets better for size and structural reasons."

The present cycle of talent migration out of the large firms is, from an industry-wide perspective, the greatest Ritch has ever seen. The cycle that followed the Drexel Burnham Lambert blowup was also significant, but more localized because it involved exits from only one firm. "The analogy for what's happened in investment banking is what happened with hedge funds," Ritch says. "Hedge funds were able to get a lot of sales and trading talent to migrate away from larger firms years ago, and then investment banking and M&A boutiques came along and did the same thing to the corporate finance side of the large firms."

Many bankers, including those still employed, continue to be open to changing jobs. "You can interview almost anyone at this point," says John Owens, president of executive-search firm McCann Partners. "Even people who are gainfully employed are meeting with other potential employers, if nothing else to be careful. They're thinking, 'What if I lose my job or something happens to my firm?' You can call the best of the best and say, 'Things are going great for you but my client is interested in you, and they want to take a meeting or take coffee,' and 99.9% of the time the person will agree to it."

Ritch recently had lunch with an M&A-focused managing director at a bulge bracket, who said he is biding his time until he finds the right opportunity. When he finds it, he'll bolt. "I'm not saying you can willy-nilly dial up anyone and have anyone take a meeting, but the preponderance of people at the big firms will talk," says Ritch. "It seems like a minority of people who I talk to at the big firms are permanently wedded to their jobs." Besides Moelis and others such as Greenhill and Evercore, Sagent has also grown tremendously during the market dislocation — 40% of the firm's senior bankers have joined in the last 20 months.

The decrease in the value of stock holdings in bulge brackets has made it much more compelling for senior bankers to leave, says Maureen Brille, a managing director at executive-search firm Westwood Partners.

David Berman, the former head of global gaming investment banking at Credit Suisse, struck out on his own to form Regal Capital Advisors with two colleagues. He announced Regal's establishment in a Feb. 10 e-mail to clients and peers (see related story). Los Angeles-based Regal, which specializes in real estate, gaming and lodging, has six bankers and may grow to seven or eight in the near term. Nevertheless, says Berman, "We have received a constant stream of inbound calls and résumés from highly qualified bankers at bulge-bracket firms who have witnessed the success of the boutique model and are frustrated by the conflicts, politics and bureaucracy at larger firms. In addition, the compensation structure at boutiques is generally far more transparent compared to our larger competitors. There is something to be said about cash bonuses tied to performance — a refreshing change from the 'black box' model utilized at larger firms."

Boutiques and mid-sized firms are primarily on the hunt for managing directors as opposed to junior bankers. "At this point, the boutiques or middle-market firms don't have a huge interest in any junior bankers because they're well-staffed at that level and they don't have an appetite for bringing on additional fixed costs related to junior banker compensation," Owens says. "The ones that are hiring are looking for originators and producers."

On the corporate finance side, Imperial is looking for professionals involved in building out or leading industry groups who have M&A and capital markets experience, Mack says. The firm is also continuing to hire new talent for its restructuring business, given that the next two to three years will likely yield strong restructuring deal flow, he says.

Union Square Advisors, a technology-focused M&A boutique, feels its 30-person headcount is competitive, says W. Carter McClelland, Union Square chairman. Executive-search firms told McClelland and his colleagues that the five or six largest banks have between 45 and 50 professionals in their North American technology investment banking groups, but those groups are also responsible for other types of assignments, such as high yield and IPOs. Union Square, however, only executes M&A mandates, and therefore, 30 professionals is competitive, says McClelland, formerly chairman of Banc of America Securities, president and CEO of Deutsche Bank North America and chief administrative officer of Morgan Stanley. The firm, however, would like to grow its headcount to between 45 and 50 professionals, as per its original business plan.

Capital markets value?

Some smaller investment banks focus only on M&A advisory services, not equity capital markets, where a sizable increase in activity has been evident (see related story). "They may find themselves in an awkward situation come the end of the year or whenever the markets start to return," Owens says. "The equity markets might return earlier than anything else, so it could be that firms end up finding out they're understaffed within equity capital markets."

Moelis & Co. has taken steps to enter the capital markets arena. The firm is about to hire professionals on the equity private placement side, and has already hired managing directors Chris Ryan, formerly global head of credit fixed income at UBS Investment Bank, and Dominick Petrosino, most recently head of leveraged finance capital markets for Bear Stearns. So far, Moelis & Co. has worked on two common stock offerings and a fixed income deal.

"While the advisory business has been lucrative over the past couple of years as the underwriting business has stagnated, that pendulum will shift back, and I believe that a boutique firm not positioned to benefit from that shift could be left in the dust," Berman says.

However, building a capital markets segment isn't easy, especially in this environment. Firms with established capital markets businesses, like Pali Capital and Imperial, formed them long before the meltdown. "In this particular cycle, I don't think we've seen firms that were M&A boutiques becoming capital-markets firms with sales, trading and research capabilities," Mack says. "The one firm you could see doing that is Moelis, but even with someone who has [Ken Moelis'] presence, it takes years to build up that capability."

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