Investment Banking – Industry Dynamics
At www.PrivateEquityInfo.com, we track investment banking firms, their preferred sectors and their key executives. We also predominantly serve investment bankers as customers and correspond with them daily. Consequently, we have a good pulse on M&A deal flow and changes in industry dynamics. Over the past eight years or so, we have seen an industry trend reversal. Five to eight years ago, we noticed a general consolidation within investment banking as smaller firms moved under the umbrella of larger firms. However, in the last few years, we are seeing the opposite – the investment banking industry becoming more fragmented as newly-created firms launch and scale with the help of third-party services.
Industry Consolidation – Recent Past
Perhaps 5 – 8 years ago, we saw the trend of smaller investment banking firms slotting under the umbrella of a larger firm’s corporate broker dealer license for ease of registration and compliance. This was an efficient way for smaller firms to operate under the proper FINRA licensing without all the compliance hassles overburdening the smaller firm. On the flip side, this arrangement allowed the larger firms to share in the success fees of their new, smaller satellite offices. It also gave the broker dealer a broader geographic footprint and more subject matter experts within the larger, collective entity to share ideas, especially for deals requiring industry-specific knowledge and collaboration.
Industry Fragmentation – Current Trend
Although some consolidation did occur, the investment banking industry is still quite fragmented. As previously discussed, the median middle market investment bank only has four deal makers. Including a few junior staff and a few support staff, the most typical (if there is such a thing) middle market firm now looks like about 8-10 total people firm-wide. An astute investment banker observing this level of fragmentation within any other industry might think it would be ripe for an industry consolidation. However, it would appear that the exact opposite is occurring. Investment banking is becoming more fragmented.
With the advent of newer third-party services, investment banking firms are launching with flex-scale business models that allow newly created firms to ramp up quickly and to operate at scale without the high fixed-costs of a traditional investment banking firm. Newer, small firms simply outsource more.
I’ll follow-up with another article outlining the various third-party services provided to the investment banking industry and how these services are shaping the way investment banks operate.