Investment banks prepare for 2025 crunch

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Investment banks are bracing for a crunch year when they must phase out transaction fees to justify record share prices and high rents incurred during a two-year recession.

Six listed independently investment banks – Evercore, Lazard, PJT, Moelis, Perella Weinberg and Houlihan Lokey have hit record highs in recent weeks as investors anticipate a long-awaited revival of mergers and acquisitions under Donald Trump’s second presidency.

Perella’s value has roughly doubled in the past year, while shares in big-bracket investment banks including Goldman Sachs, Morgan Stanley and JPMorgan Chase also hit new highs in November and December.

“Barring some catastrophe in the economy, we should have a nice pick-up in activity across most investment banking,” said Christian Bolu, senior analyst for US capital markets at Autonomous Research.

But the extent of the rise in bank share prices adds to the pressure on executives and their new hires to deliver returns in 2025.

Public boutique firms’ price-to-earnings ratios have jumped to 30-40 times their historical range.Boutiques M&A: Consulting fees are up just 1 percent in 2024, according to LSEG data.

One long-time bank executive warned of over-exuberance. “I can’t imagine it’s going to be a limited transaction pie,” the executive said.

Independent investment banks have been paid handsomely in the past two years to take advantage of the downturn to bring in star bankers to position themselves for recovery deals, but that leaves them reliant on those recruits to generate significant returns during the upswing.

Evercore has increased its base of top-ranked Wall Street CEOs by 27 percent between the end of 2021 and the third quarter of this year; Moelis increased the number of its CEOs by 26 percent. Jefferies by 46 percent.

Jefferies Chairman Brian Friedman said the 2021 to 2023 period was his firm’s most active period for external hiring since the two years following the 2008 financial crisis.

“Historically, periods of disruption and displacement create opportunities. We took advantage of that opportunity,” Friedman said.

Wall Street groups paid handsomely for some deals.In the wake of the pandemic-era boom, investment banks guaranteed packages worth more than $9 million a year to persuade top staff to move, according to senior investment bankers, although packages of $4 million were more common.

“The compensation figures are staggering in some cases,” said Julian Bell, global head of banking and markets group at Headhunter Sheffield Haworth.

“It’s a consequence of banks defending or growing market share in an area where people are raising such sums that you can’t hire well unless you offer big packages.”

Splash hires included Jefferies’ recruitment of Chris Rupp from JPMorgan in 2022, Santander’s hiring of David Hermer from Credit Suisse to lead its US corporate and investment bank in 2023, and Evercore poaching Goldman to Sachs partner David Camo in 2024.

Tim Lalonde, Chief Financial Officer of Evercore, said: “Heading into a strengthening market, we are pleased to have made the investment.”

According to analysts at Morgan Stanley, the recruiting glut has pushed up the average pay ratio — the share of a bank’s earnings consumed by pay — by about 10 percentage points at Evercore, Lazard, Moelis, Houlihan Lokey and Jefferies, compared with until the epidemic.

Chief executives have resisted calls to cut expensive rents, anticipating a recovery in earnings in 2025 that would return the ratio to its historic 55-60 percent figure.

Lazard’s coverage ratio was 66 percent in the first nine months of 2024, and the investment bank has targeted it to fall back to 60 percent in 2025.

Kevin Mahoney, managing partner at Christoph Zeiss Partners, said banks faced a tension over how much they were willing to vouch for a star banker to woo them when it could take more than a year for them to start making significant fees. cause.

“There’s always the question of how much you can afford to stock people, knowing you’re paying big guarantees for the best of them, who are likely to contribute little without income while they ‘grow up’, a process that usually takes is 12. 18 months or more.

But he added that banks often have little choice. “That’s how companies achieve long-term success in investment banking, particularly in M&A.”

Many of the tradesmen hired at the end of the last boom or the beginning of the recession will have their warranty expire in early 2025 and will instead be paid based on the work they do.

“The vast majority of these people are coming out of the guarantees,” said one Wall Street investment banker.