The world below the bulge

Whatever the depth and length of the credit crisis, one thing is certain: Wall Street will look different. The blowups, the tie-ups, the changeups; these all speak to a new look for financial advisory services.

What's the role for boutique investment banks? These advisory shops, often stuffed with former bulge-bracket bankers, tout their independence and expertise to woo clients. So far, they've held steady, no mean feat in this turbulent era, with some expanding businesses despite, or in many cases because of, Wall Street's turbulence. Longer term, though, prospects for boutiques are murky.

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"Potentially, it's a very exciting time for boutiques to provide what the market needs, which is quality advice," says John Waller, president of Fox-Pitt Kelton Cochran Caronia Waller. "It's an auspicious time for independent advisers," echoes John Studzinski, global head of Blackstone Group LP's corporate advisory unit, who adds, "I've never been busier."

Many boutiques say they're busy, especially those helping sort out the mess. Blackstone is working for American International Group Inc.; Fox-Pitt advised Bank of America Corp. in its purchase of Merrill Lynch & Co.; and Lazard has helped Mitsubishi UFJ Financial Group Inc. on its Morgan Stanley stake, Lehman Brothers Holdings Inc. on its North American asset sale to Barclays Capital Inc., Lloyds TSB Group plc on its merger with HBOS plc and Fannie Mae on its bailout.

Both Blackstone and Lazard resist the "boutique" sobriquet, pointing to their global footprint. "We're not a boutique," says a Lazard spokeswoman. Studzinski prefers to call Blackstone's advisory arm a "leading international, independent advisory partnership."

Whatever the nomenclature, these firms' freedom from lending or from mortgage securitization suddenly looks like a virtue. A senior Lazard banker attributes his firm's recent success to its "lack of conflict" and its industry knowledge. Studzinski notes the importance of freedom from conflicts and from "conflicts perceived."

The appetite for risk taking has also diminished, and clients are seeking stability, which seems to reside at the poles of the spectrum: large banks like a J.P. Morgan Chase & Co. or Citigroup Inc., or smaller outfits.

Still, boutiques live a hazardous existence. If the economy dips, there won't be much advisory work to go around. Many smaller shops are more susceptible to fluctuations because they're less diversified than the big banks.

Recession fears may explain why many smaller firms are not rushing to fill the space vacated by Lehman, Bear Stearns Cos. and others. Nonetheless, many are hiring, taking advantage of dislocation to pick up talent and add clients. "We are looking to grow on an opportunistic basis," says Fox-Pitt's Waller, whose firm lured financial institutions group banker John Roddy away from Lehman in July. Greenhill & Co. also brought on Lehman veteran Christopher Cooke for its recently formed fund placement group. Blackstone, on the suggestion of the Chinese government, hired Lehman's Anthony Steains, Johan van Jaarsveld and Dong Hyun Lee for its new Asian advisory team. And Evercore Partners Inc. snagged tech banker Jed Sherwindt, Citi's global software investment banking chief, and Daniel Celentano, who had run Bear's financial restructuring unit.

The additions reflect those areas of the business that are likely be focal points in the near term: FIG, tech banking, fundraising, restructuring.

A more pervasive uncertainty comes not just from the economy, but from the industry as a whole. These bankers have gone through down cycles before, but the scale is unprecedented. The need for advisers will remain. Blackstone's Studzinski believes companies will use at least two sets of advisers for deals: one for management, the other for the board, which will seek more objective advice.

What structure will triumph? Says Studzinski, "The industry model going forward is unknown." No surprise there.