These are difficult times for investment banks.
I will spare readers a painful rehash of the past three months, but suffice it to say that the days of the centrally-planned, highly conglomerated uber-IBanks are clearly numbered. To survive going forward, investment banks must embrace a doctrine of strategic
differentiation. The future financial landscape will be bipolar in nature, comprised of giant pools of capital roaming the earth in search of above-market returns on one side, and the actors who facilitate its efficient allocation on the other. Quite simply,
IBanks must embrace a new business model - either that of capital aggregator-manager by leveraging the traditional IB strengths of trading, research, and execution, or capital agent by devoting themselves to the traditional investment banking role of providing
financing solutions and strategic advice. The ongoing competitive threat from hedge funds, pension funds, private equity, and boutique shops brought on by advancements in information and communications technologies ensures that the present business model is
Large investment banks are no longer powerful gatekeepers in the advisory/underwriting space. Value-added expertise – deal origination, design, and deployment of financial strategy - is increasingly the province of boutique investment banks. The reality
is that for large IBanks, the business of advising, underwriting, and distributing securities offerings is no longer the high-margin business it once was, and the frequency with which companies choose to engage smaller
boutiques that are willing to provide highly focused and personalized service is on the rise. While still viable and able to hold their own in the short term by virtue of their global franchise and enormous capital base, larger IBanks will find it increasingly
difficult to compete with these smaller boutique shops in the advisory role. Moreover, the continued existence of real or perceived conflicts of interest will further drive clients away from the bulge bracket to smaller shops.
Technological innovation is making it easier than ever for capital to be independently managed and to flow freely between and among actors. It is technology that will ultimately provide the catalyst for the evolution of the modern investment bank. An intriguing
question: will (has) a mutation occur(ed) in this process of differentiation which will ultimately drive this evolutionary process forward? Perhaps it is the
strategic investment bank . . .