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Investment banks are bracing for a crisis year in which they will have to make sweeping changes to trading fees to justify the high hiring made during record stock prices and two years of economic downturn.
Six publicly traded independent investment banks – Evercore, Lazard, PJT, Morris, Perera Weinberg and Houlihan Lokey – are on the rise as investors look forward to a long-awaited pick-up in M&A activity under the inauguration of Donald Trump’s second president. It has hit record highs in recent weeks.
Perera’s value has nearly doubled in the last year, and the stocks of bulge bracket investment banks such as Goldman Sachs, Morgan Stanley and JPMorgan Chase also hit new highs in November and December.
“Barring some sort of economic disaster, we should see a nice pick-up in activity across most sectors of investment banking,” said Christian Boll, senior U.S. capital markets analyst at Autonomous Research.
But the extent to which bank stock prices have soared has added to the pressure on executives and new hires to turn a profit in 2025.
Price-to-earnings ratios for publicly traded boutique companies have jumped 30 to 40 times, nearly double their historical range. Boutique M&A advisory fees rose by just 1% in 2024, according to LSEG data.
A longtime bank chief executive warned against over-enthusiasm. “I don’t think it’s going to work for everyone. It’s a limited edition pie. There will be a liquidation,” the executive said.
Over the past two years, independent investment banks have taken advantage of the economic downturn to land star bankers and hire heavily to position themselves for a recovery in trading. But it will rely on those new employees to bring in significant revenue during boom times.
Evercore increased its base of senior Wall Street managing directors by 27 percent from the end of 2021 to the third quarter of this year. Moelis increased the number of managing directors by 26%. Jeffries had a 46 percent lead.
Jefferies President Brian Friedman said 2021 to 2023 was the company’s most active period for external hiring since the two years following the 2008 financial crisis.
“Historically, times of turmoil and disruption create opportunities, and we took advantage of those opportunities,” Friedman said.
Wall Street groups paid high fees to some traders. After the pandemic-era boom, investment banks guaranteed packages of more than $9 million a year for two years to persuade high-profile talent to move on, but $4 million packages are more common, investment bank executives said. It is said that it was.
“In some cases, the amount of compensation is staggering,” said Julian Bell, global head of banking and markets at headhunter Sheffield Howarth.
“This is a result of banks protecting or expanding their market share in an industry where people earn a lot of money, and you have to offer big packages to get good jobs.”
High-profile hires include Jefferies hiring Chris Roop from JPMorgan in 2022 and Santander hiring David Harmer from Credit Suisse to run the US corporate and investment bank in 2023. This includes Evercore, which poached Goldman Sachs partner David Camo in 2024.
“We are pleased to have made this investment as the market strengthens,” said Evercore Chief Financial Officer Tim Lalonde.
Due to hiring overload, the median compensation ratio (the percentage of bank revenue that comes from salaries) at Evercore, Lazard, Moelis, Houlihan Lokey and Jefferies is about 10 percentage points below pre-pandemic levels, according to Morgan Stanley analysts. It is said that it has increased.
Chief executives are resisting calls to cut high-paying jobs in anticipation of a recovery in profits in 2025 and a return to historical benchmarks of 55-60%.
Mr. Lazard’s compensation ratio was 66% in the first nine months of 2024, but the investment bank has set a goal of returning to 60% in 2025.
Kevin Mahoney, managing partner at recruiting firm Christoph Zeiss Partners, said banks are not looking to hire star bankers as it can take more than a year to start a business that generates significant fee income. They said they are facing tensions over whether they intend to attract them with such guarantees. .
“There’s always the question of how much leeway we can afford for warehouse personnel. While warehouse personnel are ‘increased,’ we’re paying large sums of guarantees to good people who are likely to contribute little to the bottom line.” Knowing that, this process typically takes 12 years. Over 18 months. ”
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But he added that banks often have few options. “This allows companies to achieve long-term success in investment banking, especially in M&A.”
Many dealmakers hired at the end of the last boom or the beginning of a recession will have their guarantees expired in early 2025 and will instead be compensated based on the work they brought in.
“The vast majority of these people are getting their guarantees terminated,” said a Wall Street investment bank executive. “All of these people are coming into 2025, so they need to prove their worth to keep getting paid.”
