The rise of boutique investment banks in India

By Suveen K. Sinha

It was amusing to see my host, a man of about 40, dressed in a white shirt with two front pockets, with flaps. Didn't those things go out with tail fins on cars? Useless paraphernalia.

Not quite, it turned out. When the time came to pay the bill for our lunch, my host - MH for short; it would be tactless to name him - did not reach for his wallet in the back pocket. Instead, he undid a flap in front and took out a wad of currency notes. "We have not yet spent all of the fees we earned the last time," he said with a disarming smile. And thereby hangs a tale.

A few months ago, a man in his fifties climbed up the steps to MH's office, caught his breath, put a satchel on the table and said: "Here."

The satchel was packed with Rs 25 lakh in cash. MH had raised some working capital for this man's small business and he, brimming with gratitude, had come to pay the fees.

MH did not expect cash, but recovered quickly and told the client to come back after two days. When the client came back, MH simply kept the satchel. The client, unable to contain his curiosity, asked what had changed.

Two things had. One, MH had installed a rock solid safe in his office. Two, he had got pest control done. Couldn't have allowed anything to eat into his fees, could he? MH's outfit, with a little burrow for an office, half a dozen researchers, one man to serve tea and coffee, and another to make photocopies and run to the bank, is what is these days called a boutique investment bank. At least a dozen of them have mushroomed in the last few years. They provide most of the services a full-blown investment bank does: advising on mergers and acquisitions, managing initial public offers, and raising all types of funds including private equity (PE) and bank debt. And they match the big boys in finesse, though one or two of them may have at some point found themselves staring at a satchel full of cash. They are happy to serve clients whose need for funds may be less than Rs 100 crore, sometimes less than Rs 50 crore. This is what the big investment banks - like Goldman Sachs, Morgan Stanley, J.P.Morgan, JM Financial and Kotak - won't do. Given the cost structures they have, with several partners, and dozens of associates and analysts getting fat paycheques, it makes sense for them to enter a deal only when the fees - 0.5 per cent in a bad market, two per cent if they are lucky - are enough to take care of the crew. For that, the deal size ought to be Rs 200 crore or more.

"We would not look at smaller deals - like $5 million (Rs 28 crore) or $10 million (Rs 56 crore)," says the M&A head of a big Wall Street firm's India unit, "unless there was some exceptional value attached." Boutiques have no such qualms. One of them - P2P Consultants - is a one-man show by Francois Montrelay, a French national who cannot get over his India hangover. Mehul Savla and Vipul Shah, who were together in school and college, have RippleWave.

It has two other people, of whom one looks after administrative functions. Cogence Advisors, owned equally by Rishi Sahai and Manish Gupta, both from the Economics Honours class of 1991 at Hindu College, has four other people, all doing research. Among the "bigger boutiques", Veda Corporate Advisors, set up by C. Venkat Subramanyam and M. Vinod Kumar, who have been together for 20 years, through three jobs and two entrepreneurial ventures, has 20 people. Jacob Mathew, M. Ramprasad and Ajay Garg left DSP Merrill Lynch to start MAPE Advisory, which has 38 people. And Equirus, which came into existence when Garg left MAPE to start his own outfit, has 40, half of them in investment banking and the other half in institutional equity.

This bunch has subverted Tom Wolfe's vision of the bonusguzzling investment banker, which he outlined in The Bonfire of the Vanities, calling them the Masters of the Universe. Right now, it is all about little masters. And often they punch far above their weight.

In fact, boutiques are the ones really active in the ring right now, feasting on deals of Rs 50 crore to Rs 200 crore, which is the range where the action is. They charge the same percentage as fee that the big ones do, but get by happily in spite of the low absolute amount, a result of the smaller deal sizes, because their expenses are far lower.

Globally, boutiques are capitalising on the fact that big investment banks have lost sheen in the aftermath of the 2008 financial crisis. According to Thomson Reuters data, the market share of the 10 largest Wall Street firms, by fees, dropped to 36.3 per cent last year from 42.2 per cent in 2007. In India, though such data is not available, Grant Thornton's Dealtracker shows 971 deals, including M&A and PE, were struck in 2010, totalling $62.2 billion. In 2011, there were more deals - 1,026 - but their combined value was lower at $54.3 billion. This shows that deals got smaller, closer to the boutique comfort zone.

"We have lost deals to boutique banks," admits Sanjay Sakhuja, CEO, Corporate Finance, Ambit Group, which started as a boutique but has since become a mid-size player, with a tall building in Mumbai's Lower Parel area proudly bearing its name. "But I'm not sure we have the DNA to do those deals."
 
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