The Resurgence of Investment Banking sees a Rise in Boutique Banks

2012 has been a turbulent year for investment banks and in light of the recent economic recession many financial institutions have been affected worldwide. Nevertheless, despite this setback a number of banks – particularly boutique banks, are maintaining their success within the investment banking industry, as high-end investors continue to place their trust, and their funds, in investment banks.

investment bankingThe investment banking industry has experienced continued instabilities however the first half of 2012 saw more and more affluent investors placing their money into this lucrative industry. As banks and other financial institutions fine-tune their services in an attempt to escape the turmoil experienced during the global economic recession (2008 – 2012), an increasing number of high-net-worth individuals continue to turn to investment banks in the hope that they can make a significant return on investment.

Investment banking is a specific strand of banking that involves a focus on ‘higher finance’ – namely, a higher bracket of wealth. Investment banks assist individuals, companies and governments with developing and implementing their financial plans. They guide them on how to access the capital markets in order to buy and sell bonds and other products, and ultimately yield a return on investment. The primary focus of investment banking is therefore to assist clients in raising funds.

Whether you are operating a business or are an individual looking to make an investment, understanding where to place your funds during a post-crisis financial market can be a complex and confusing decision. Market analysts suggest that there are many areas of investment banking where a lucrative return on investment can be achieved, particularly within the trading of securities. Another strand of investment banking that remains rife is in dealing with pension funds, mutual funds and hedge funds, where investors continue to place millions of dollars into these profitable money-making vehicles.

The rise in prominence of alternative investment banks

The last five years have seen a number of changes occurring within the investment banking industry. Since the onset of the recession a unique sector of investment banking that emerged was boutique investment banking, which specializes in specific areas of investment. Boutique banking differs significantly from traditional investment banking, as outlined below:

BOUTIQUE BANKS

TRADITIONAL INVESTMENT BANKS

Specialize in smaller deals worth US$1 billion or less Specialize in larger deals worth US$1 billion or more
Focus on advisory services within certain geographic locations Provide investment services to clients located across the globe
Has a more specialized focus on either one of more products or industries, such as healthcare, media, industrials, technology or energy Branches out into services like financing, trading, research and lending
Avoid branching out into services like financing, trading, research or lending Take bigger, more calculated risks
Traditionally much safer in nature and have a better reputation for being highly objective when dispensing financial advice Reputed as being more subjective when dispensing advice to clients

 

boutique investment banksThe impact of the recession saw a larger number of individuals and companies flocking to boutique investment banks for wealth management advice. As a result they have gradually increased in popularity amongst investors and are gaining augmented recognition within the financial advisory market. As a high-net-worth investor, if your intention is to focus in on a specific investment tool, then it is far more advantageous to place your wealth within a boutique bank.

Another strand of investment banking that has recently emerged is sustainable investment. Also known as socially responsible investment (SRI), this innovative concept involves a greater focus on social, environmental and governance factors during the investment analysis and decision making process. It is gradually becoming more reputable within the investment banking industry, with many financial services firms reforming the way that they operate in order to meet the needs of a more niche clientele.

The risky side of investment banking

Although boutique banks are rising in popularity amongst investors, the investment banking industry overall does pose a number of risks if incorrectly managed. In particular many of the larger institutions, also known as bulge bracket banks, have experienced disintegration as a result of placing heavy risk on high value deals. Risk, ranging from market risk and credit risk, to inflation, purchasing power risk and regulatory risk is an ever-present concept amongst investment firms of all types and sizes. However those working with larger deals will naturally encounter greater risks.

In September 2008 The Lehman Brothers announced a $6.58 billion loss as a result of borrowing large amounts of money and distributing that money at such a fast rate that they were unable to keep up with falling prices. In addition, the bank continued to sell assets whilst lacking in readily available cash, thus resulting in a huge loss of funds. The collapse of the Lehman Brothers demonstrated the fragility of investment banking and the risks involved in generating monumental profits. It also resulted in a loss of confidence amongst high-net investors, leading them to boutique banks as a result.

Despite the success of boutique investment banks and SRIs, some of the biggest investment banks, including Goldman Sachs and J.P. Morgan, continue to maintain their dominance within the investment banking industry. As one of the top investment banks in the world, Goldman Sachs currently ranks first internationally for global advice on mergers and acquisitions (M&As) and is often credited with being one of the smartest investment banks in the world. J.P. Morgan – another leading financial services firm– ranks first in the global rankings for investment banking revenue.

Investment banking making a comeback

Evidently, in any economic environment, high-end investment banking remains prolific, as the top 1% continues to feed the investment banking industry in an attempt to augment their funds. Although there is greater risk associated with the bulge bracket banks, high end investment banking amongst boutiques and SRIs continues to remain successful, enabling investment banking to maintain its stance as a reliable way to yield a positive return on investment.

 

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