Why Tesco (and others) are rushing to shop at boutiques

Impartiality and an individual approach mean small advisory firms are much in demand. Abigail Townsend reports
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The Independent Online

The world of finance has not done itself many favours of late: the tech boom analysts who pushed stocks they privately would not touch, the over-hyped flotations, the corporate scandals, the questionable client loyalty, the "fat cat" executives and their exorbitant bonuses, and now the recriminations, fines and even, in some cases, criminal charges.

Much of this can be attributed to the rate of growth within the investment banks in recent years. Since the Big Bang, they have expanded and consolidated, supported by high levels of fee income during the boom times. The downside is that expansion has often led to a lack of internal control and growing conflicts of interest, as the global banks sell not only finance but a whole host of other products, including corporate advice.

Of course, not all investment banks can be tarred with the same brush, and governments, regulators and the banks themselves are acting to ensure the bigger scandals never happen again. But, as a result, there is now a demand for independent advisers with unblemished records.

Andrew Sibbald is co-founder and managing director of just such a firm, Lexicon Partners. Set up in 2000, it has since acted on around 40 deals, representing a combined transaction value of £6.5bn. Mr Sibbald believes it is the firm's independence that has proved so attractive to clients. "We give an objective view that's not coloured by us providing x million of finance that's going to earn us a fortune," he says. "The big investment banks started giving away the advisory product, and that completely undermined the whole point of it."

Another plus is that smaller firms, known as boutiques, tend to be less preoccupied with the time-consuming management issues that are part and parcel of global institutions. With staff numbers often in single figures, they are able to devote more time to clients.

Andrew Galloway left HSBC in 2002 and last month launched West Hill Corporate Finance with Alan Richards, an insurance analyst also from HSBC. He agrees that the firm's independence is a major selling point but adds: "Clients also want guys who are focused on them rather than spending all their time on internal meetings," he says. "They want individuals with experience who are serving their needs and know their industry."

Clients appear to agree. Retail entrepreneur Bob MacKenzie had no qualms about using Bridgewell, a firm with a headcount of just 70, to work on the Somerfield bid by the Springwater consortium. He says: "We hired Bridgewell because they have some excellent people and an impressive selection of non-executive directors with a raft of experience."

The deal roster across the boutique firms is certainly impressive. For example, the London office of Greenhill & Co is currently advising Tesco on its Safeway approach, while the German office is acting for Wella on its protracted takeover wrangles with Procter & Gamble. Greenhills was one of the first boutiques, set up in 1996 by Wall Street veteran Robert Greenhill, the former chairman of Smith Barney and president of Morgan Stanley. Two years later, James Lupton and Simon Borrows - both highly rated dealmakers - left ING Barings to set up the London office.

Lexicon is currently advising Benfield on its £100m flotation in something of a double coup: not only is Benfield the world's third largest reinsurer but the float is also the first initial public offering (IPO) in London this year. Merrill Lynch and Morgan Stanley are also advising on the deal, but as Mr Sibbald says: "There's a role for the boutique to co-exist. People get to work with the people they are used to, who are there at the beginning, the middle and the end. We can adopt the role of trusted adviser."

Now leaner times are here, many of the large investment banks have been left with exorbitant cost bases and are forced to focus on themselves as they restructure. In contrast, smaller firms - running leaner outfits at a fraction of the cost - remain focused on their clients.

And ultimately, the lure is the same for anyone setting up their own business - a chance to be master of your destiny. For the senior bankers, that also means getting back to basics. Says one: "I was getting sucked into management but what I really enjoy is looking after my clients. The problem with the big banks is that the better you are at looking after clients, the more likely you are to be promoted out of that."

A case in point is that of Tim Shacklock. The former deputy chairman of Dresdner Kleinwort Benson left the German back last year and by Christmas had decided his future no longer lay with the bigger firms. He has worked on a host of big-ticket deals, including the Orange IPO, and says a major factor in his change of direction was his wish to move away from management and back to a pure advisory role.

Mr Shacklock has joined Gleacher Partners, the New York firm set up by Eric Gleacher in 1990. In London, the firm has become Gleacher Shacklock and it is already involved in the BMI British Midland/Virgin Atlantic negotiations.

The reality, of course, is that no boutique will ever usurp the power or importance of the major banks, particularly the big Wall Street firms, no matter how much trouble some "star" players at the banks have got themselves into.

The complex deals, advice, international reach, contacts and funds to which the big banks have access are unrivalled. But there is also a role for the boutiques either to work alongside them or even to replace them when the sort of reach Morgan Stanley can provide is not required.

For clients of small firms, there is the added bonus of working with someone you have a long-standing relationship with, as well as the absence of concerns about conflicts of interest. Ultimately, boutiques can provide a counterbalance to the large banks that stand to make millions should the deal go through - and considerably less if it does not.

As Giles Elliott, who left Singer & Friedlander in 2000 to set up Bridgewell with his colleague Ian Dighé, explains: "It's a bit like going to war. It's a good idea to have the Yanks on your side, because they have got the tanks, but you wouldn't ask them whether we should go to war in the first place. If you ask the Pentagon, they are always going to say yes because they want to play with their toys."