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Investment banks are gearing up for a crucial year in which they must bring about a significant change in job fees to justify record share prices and a hiring spree during the two-year crisis.
Six listed independents investment banks — Evercore, Lazard, PJT, Moelis, Perella Weinberg and Houlihan Lokey — have hit record highs in recent weeks as investors anticipate a long-awaited rebound in merger and acquisition activity under Donald Trump’s second presidency.
Perella has roughly doubled in value over the past year, while shares of major investment banks including Goldman Sachs, Morgan Stanley and JPMorgan Chase also hit new highs in November and December.
“Barring a disaster in the economy, we should only have a good pick-up in activity in most parts of investment banking,” said Christian Bolu, senior analyst for US capital markets at Autonomous Research.
But the scale of the rise in bank share prices is increasing the pressure on directors and their new hires to deliver revenue in 2025.
Price-to-earnings ratios for public boutique companies have jumped to 30 to 40 times, nearly double the historical range. Boutiques’ M&A consulting fees rose just 1 percent more in 2024, according to LSEG data.
One long-time bank executive warned against exuberance. “I can’t imagine that it works for everyone. It’s a limited pie offer. There will be a showdown,” said the CEO.
Independent investment banks have been hiring heavily over the past two years, using the crisis to snap up star bankers to position themselves for a rebound in dealmaking. But this makes them dependent on these recruits to generate significant revenue on the rise.
Evercore grew its CEO base — Wall Street’s top title — by 27 percent from the end of 2021 through the third quarter of this year; Moelis increased the number of CEOs by 26 percent; Jefferies by 46 percent.
Brian Friedman, chairman of Jefferies, said 2021 to 2023 is his firm’s most active period for outside hires since the 2008 financial crisis.
“Historically, periods of disruption and dislocation create opportunity. We took advantage of that opportunity,” said Friedman.
Wall Street groups paid dearly for some dealers. After the pandemic boom, investment banks guaranteed packages worth more than $9 million a year for two years to persuade high-profile staff to relocate, 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 the banking and markets group at headhunter Sheffield Haworth.
“It’s a consequence of protecting the banks or increasing market share in an industry where people are earning such sums that you can’t get a good deal unless you offer big packages.”
Splash’s hires included Jefferies’ hiring of JPMorgan’s Chris Roop in 2022, Santander’s hiring of Credit Suisse’s David Hermer to lead its US corporate and investment bank in 2023, and Evercore poaching Goldman Sachs partner David Kamu in 2024.
Evercore Chief Financial Officer Tim LaLonde said, “Going into a strengthening market, we are pleased to have made the investment.”
Excessive hiring has pushed up the median leverage ratio — the share of bank revenue eaten up by wages — by about 10 percentage points at Evercore, Lazard, Moelis, Houlihan Lokey and Jefferies compared with before the pandemic, according to Morgan Stanley analysts.
CEOs have resisted calls to cut expensive hiring in anticipation of a 2025 revenue recovery that would return the ratio to the historical benchmark of 55 percent to 60 percent.
Lazard’s payout ratio was 66 percent in the first nine months of 2024, and the investment bank has set a target of returning to 60 percent in 2025.
Kevin Mahoney, managing partner at recruitment firm Christoph Zeiss Partners, said banks face tensions over how willing they are to guarantee a star banker to attract them, when it could take more than a year for them to start delivering significant fee-generating work. .
“It’s always a 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 or no revenue as they ‘scale up’ — a process that typically takes 12 to 18 months or more.”
But he added that banks often have no choice. “That’s how companies achieve long-term success in investment banking, especially mergers and acquisitions.”
Many of the traders who were hired at the end of the last boom or the beginning of the downturn will have their warranty period expire in early 2025 and will instead be paid based on the work they put in.
“The vast majority of these people are losing their guarantees,” said one senior Wall Street investment banker. “All these people are going to walk into 2025 and they’re going to need to prove their worth to keep getting paid.”
