Looking back on his six-year stint at Barclays, Hugh "Skip" McGee can think of only one thing he misses: corporate outings with Phil Mickelson, the superstar golfer who has long been sponsored by the British bank.
Mr McGee turned his back on the Wall Street life in April last year when he stepped down as the head of Barclays' US investment bank. He was among the highest paid bankers at Barclays, earning a bonus of more than US$13 million (S$18.4 million) in 2013, but he could no longer cope with working at a sprawling "universal" bank.
"Between regulatory compliance and internal bureaucracy, I found myself spending 80 per cent of my time on non-client activities, which is really not fun," says Mr McGee, a top dealmaker at Lehman Brothers before its collapse.
But Mr McGee, 56, has not given up on investment banking. Instead, he has returned to his native Texas to set up Intrepid Financial Partners, a merchant bank that advises energy companies.
He joins other veteran bankers, including Mr Simon Robey (ex-Morgan Stanley), Mr Simon Warshaw (ex-BS) and Mr Paul Taubman (ex-Morgan Stanley), who have decided to leave coveted jobs on Wall Street or in the City of London to launch their own "boutique" firms.
Frustrated by post-crisis regulations - most of which were designed to prevent risky trading and lending and had less to do with advising on deals - they have decided to give up the relative safety of working at a big bank. They are often taking decades-old client relationships with them.
This new generation of boutique banks is in some ways a throwback to an earlier time. Small partnerships, where a select group of senior bankers mostly own and operate the firm, dominated Wall Street for decades. Critics of the big universal banks say this is a superior model: Risk-taking is likely to be more prudent when partners have more skin in the game.
The bankers claim they are having more fun - and making more money - free of the big bank shackles. Clients say they welcome what should be more conflict-free advice, since the boutiques do not have other products to sell.
This rosy picture may be due in large part to a resurgence of dealmaking. Global volume in mergers and acquisitions is on pace to surpass US$4 trillion this year, the highest level since the financial crisis.
Within that growing market, independent firms are expanding their market share. According to Dealogic, small advisory-only firms accounted for 16 per cent of M&A deals last year, doubling from 2008.
The question is whether the boutiques will be able to outlast the M&A boom - and whether firms of a few dozen bankers will be able to take more business from the big banks where many of them cut their teeth.
Boutiques will always be at a disadvantage for clients who want a "one- stop shop" bank that can provide advice on a deal and round up the financing to pay for it. A dry spell, or a deal that falls apart, can be disastrous for a small firm. And there are risks in relying on only a few big deals a year - especially with so many new boutiques fighting over a limited number of transactions.
"The scarcity value of boutiques has diminished as competition has intensified with the expansion of other top-tier franchises like Centerview and Perella Weinberg, and soon PJT Partners," says research analyst Ashley Serrao, who is with Credit Suisse.
A BIGGER SLICE
For now, though, the upstarts are enjoying the rising tide.
Messrs Michael and Yoel Zaoui, brothers who founded Zaoui & Co after leaving senior roles at Morgan Stanley and Goldman Sachs, bagged US$22 million for their firm by advising Dresser-Rand, a US oilfield equipment maker, on its US$7.6 billion sale to Germany's Siemens last year. That nearly matched the US$29 million that Morgan Stanley earned working with Dresser-Rand.
But with only a handful of junior bankers and support staff and no public shareholders, a bigger slice of the fees will go to the Zaouis.
The concept of an advisory boutique dates back to the 1980s, when some of Wall Street's biggest names ditched established banks to set up their own firms - often after legendary bust-ups.
Mr Peter Peterson and Mr Stephen Schwarzman quit Lehman Brothers after an epic power struggle to start the Blackstone Group in 1985. Blackstone started out as an M&A advisory firm before branching out into private equity investing, a formula that made both men billionaires.
A few years later, Mr Bruce Wasserstein and Mr Joseph Perella left First Boston and created Wasserstein Perella. Mr Perella, 73, says starting a new firm in the late 1980s was easier than it is today.
"There were no gardening leaves," he says, referring to the practice of suspending bankers with pay for a set time following their departure to keep them from leaking privileged deal information. "You just walked across the street and started doing business. The clients came with you. It's what I call a vertical take-off."
Mr Perella left Wasserstein Perella to join Morgan Stanley in 1993 after falling out with his co-founder Wasserstein. He then co-founded another boutique bearing his name in 2006, Perella Weinberg Partners, with Mr Peter Weinberg, then of Goldman Sachs.
The boutiques' pitch to clients has not changed much since the 1980s: Their advice to directors and chief executives can be trusted because it is untainted by the cross-selling of loans, derivatives and wealth management products that is common at the big banks.
"When we started, we wanted to re-create the best of the old Wall Street, where people were loyal to their clients and always in their corner," Mr Perella says.
The cross-selling intensified only in the late 1990s, when the "financial supermarket" model was ascendant.
Mr Sandy Weill rolled up various regional commercial banks, investment banks, brokerages and insurance companies to form Citigroup. JP Morgan and Chase Manhattan agreed to combine and Credit Suisse swallowed Donaldson, Lufkin & Jenrette in 2000.
All of this was stoked by the repeal in 1999 of the 1933 Glass- Steagall Act, which had kept investment banks and commercial banks separate to protect depositors.
CRISIS BENEFITS
At the universal banks, along with freewheeling investment banks such as Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns, the real profit centres became activities such as lending and trading. It was harder to be in the boutique business then.
But if the rise of the megabanks - the "bulge bracket" - threatened the boutique business, the global financial crisis helped bring them back into vogue.
"The deregulation of financial services starting in the early 1980s created an artificial revenue stream which gave the big banks a competitive advantage when it came to compensation," says a senior executive at a large independent investment bank who asked not to be named. "The financial crisis ended that dynamic."
To former UBS banker Blair Effron, the difference between the smaller and large firms, where he had worked most of his career, is what led him to set up Centerview Partners with former Wasserstein Perella president Robert Pruzan in 2006. "Dillon Read, where I started, was about providing intellectual capital. UBS (which acquired Dillon Read in 1995) was a provider of financial capital."
However, he added that "this is not the case at all bulge bracket firms".
Centerview has come the closest to seriously challenging big banks on dealmaking, ranking 11th globally in M&A deal volume. Unlike many boutiques that focus on specific areas, Centerview has worked on major deals across sectors. This year's blockbuster transactions include Heinz's takeover of US foods group Kraft and GE's sale of its financial services arm, GE Capital.
A person familiar with its finances says Centerview is on track to reach US$600 million in revenue this year, a tidy sum for a firm with just 35 partners, and rivalling larger listed rivals such as Greenhill and Houlihan Lokey.
The question for most of today's upstarts is how they move from landing a few plum deal assignments to creating an institution that has a chance for longevity and can provide founders with liquidity for their stakes.
"It's very hard to build a firm beyond just two bankers," Mr Effron says. "But you then have to have operational expertise to manage the growth of the firm while, at the same time, still executing for clients."
The original Wall Street partnerships such as Goldman Sachs, Morgan Stanley and Lazard were eventually compelled to list their shares to give bankers the ability to cash out their large stakes.
"There are considerable advantages to public ownership - shares serve as a powerful retention tool and, if they perform well, that enhances the firm's brand," says Mr Roger Altman, co-founder of Evercore Partners.
INDEPENDENT VALUES
Still, Mr Altman says not every firm can - or should - become big enough to list its shares. "We're trying to build a truly elite, global, permanent institution. Not everybody seeks this. Some other independent firms have different goals."
The largest independent firm, Lazard, got its start in 1848 and went public only in 2005 under the leadership of Mr Wasserstein, who unified its disparate branches. The bank boasts about 150 managing directors globally who generated US$1 billion of advisory revenue last year.
When the shares of PJT Partners, the firm that combines Blackstone's advisory unit with Mr Paul Taubman's start-up, begin trading next month, six boutique firms will have listed in the US since 2004.
Centerview's Mr Pruzan, whose firm would appear like the next logical boutique bank to list, remains circumspect about an initial public offering.
"There are good reasons to go public, but it's not for us. Once you do, the market wants you to grow at all costs. Unfortunately, things don't grow in the sky. There are times when it takes time to build the pipeline."
Mr Michael Tory, a former Lehman Brothers banker who had his fortune wiped out by the bank's crash in 2008, says the culture of a firm changes radically after a listing, potentially spoiling the close- knit, long-term orientation of a partnership. That is why his London-based firm, Ondra Partners, has written into its charter never to sell or go public and that can be changed only with the consent of all 13 founders.
The spirit of the partnership cannot be recaptured once the firm goes public, Mr Tory says. "The souffle doesn't rise twice."
FINANCIAL TIMES
