Boutique banks: small is beautiful

Big times for the small guys. The first quarter of 2015 was a good one for US boutique investment banks. Their names are becoming a familiar sight in M&A deals. For example, neither Heinz nor Kraft employed a big bank to advise on their recent tie-up.

With market conditions so strong for the boutiques, it is hardly surprising to see their owners thinking of cashing in. Houlihan Lokey, a specialist in advising on large volumes of small restructuring and M&A deals, is the latest boutique to see market conditions as strong enough for a sale. The bank is reportedly preparing for a $200m initial public offering later this year. Orix, the Japanese group which owns 51 per cent of the broker, is expected to sell some of its shares.

And it is not just the advisory boutiques that are selling out. Last month Sterne Agee - which focuses on institutional brokerage more than advisory - announced a sale to Stifel Financial in a deal valued at $150m. That deal expanded Stifel's private client group, added a nice trust and clearing business plus some heft in its fixed income business.

Other boutiques should also be considering their options. One of them is FBR & Co. The firm has a more balanced focus on investment banking and providing institutional capital markets services then either Houlihan or Sterne Agee. Roughly 57 per cent of its 2014 revenues came from investment banking (comprising capital raising and advisory business), 28 per cent from institutional brokerage, and the rest from interest, dividends, and investment income.

After the financial crisis, FBR racked up a series of annual losses, but it has made profits in each of the past three years. The broker's shares have risen more than 130 per cent over the past three years, and now trade at a small premium to book value. But the good times will not last for ever. A sale to a larger player would better position the company for any potential future turmoil.

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