The crisis that wiped off Lehman Brothers also generated a historic opportunity for smaller investments banks. From then on, smaller firms could grab a bigger chunk of the total banking fee pie (coming from restructurings, M&A advice and all other investment banking related activities).
Here I take the case of three banks and I will try to decide which one has the best possibility of becoming the next big success story within the industry. The boutique banks I would like to review are Lazard Ltd (NYSE:LAZ), Evercore Partners Inc. (NYSE:EVR) and Greenhill & Co., Inc. (NYSE:GHL).
While Lazard Ltd (NYSE:LAZ) is already a bigger and more mature company, Evercore Partners Inc. (NYSE:EVR) and Greenhill are still in their adolescent phase. They are both constantly reshaping their business models to see what best fits what they both want to achieve. Despite their relative success, not so long ago both companies missed Wall Street estimates in their first-quarter results. When Greenhill & Co., Inc. (NYSE:GHL) presented weaker than anticipated M&A revenues its stock fell as much as 10%. Evercore’s earnings miss was less severe, and its shares fell by 1% but, still, I felt disappointed with the overall result of the bank in the M&A ranking table.
Even if Greenhill & Co., Inc. (NYSE:GHL) and Evercore Partners Inc. (NYSE:EVR) are roughly the same size (both companies have a market capitalization in the range between $1 and $1.5 billion), the two banks have a very different business strategy. While Greenhill only gives deal advice, Evercore counts with an asset management business (generating 10% of total revenue) and provides equity underwriting. Since Evercore’s business is more capital intensive, its operating margins are lower. Evercore’s 21% operating margin is well below Greenhill’s 25%.
The two boutique banking companies have opposing views on what “investment banking” should be about. While Greenhill believes that activities related to investing could create conflicts with its clients (again, remember Goldman Sachs’s CDO case), Evercore thinks that lending and trading to clients helps the firm to give better advice through deeper market knowledge.
Lazard Ltd (NYSE:LAZ) is another story. The company is almost four times bigger than the competitors I just mentioned above (its market capitalization stands at $3.9 billion). Lazard Ltd (NYSE:LAZ)’s business model resembles closer the model chosen by Evercore since its two business segments are asset management and advisory. The company has yet to present first quarter results but expectations are set low for the same reasons they were low for Greenhill and Evercore Partners Inc. (NYSE:EVR): the low M&A activity during the first quarter of the year.
That said, most analysts stress that, on a positive side, Lazard asset management’s performance will remain strong thanks to the continued equity market appreciation. Besides, Lazard has built an extensive financial advisory backlog that should help support this year’s final results. Thanks to its wonderful management and its ability to work on the weaknesses of its bigger competitors, I expect Lazard to continue gaining market share across all its business lines. Lazard Ltd (NYSE:LAZ) has achieved a perfect size that lets the company be small enough to be manageable but big enough to achieve high operating margins.
These three companies all seem to have great futures. While Greenhill is exploring a new “conflict-of-interest-free” business model (advising only), Evercore Partners Inc. (NYSE:EVR) and Lazard have the twin model combining asset management and advising. Naturally, the twin model produces higher ROE because the model requires leverage, which also makes it riskier.
My personal bet among the group is Lazard Ltd (NYSE:LAZ). The firm’s size and experience are just in the right spot. Besides, it’s cheaper. While Lazard, with its 2013 return on equity (ROE) of 35.8%, sells for 17.3x P/E, Evercore Partners Inc. (NYSE:EVR) and Greenhill, producing ROE of 16% and 15% respectively, sell for 18x P/E and 23.5x P/E. In my opinion, if you want to own an investment bank, go long Lazard.
The article Betting on Boutique Investment Banks originally appeared on Fool.com and is written by Federico Zaldua.
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