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Investment banks are bracing for a crunch year in which they must deliver a step-change in deal fees to justify record share prices and expensive hires made during a two-year downturn.
The six listed independent investment banks — Evercore, Lazard, PJT, Moelis, Perella Weinberg and Houlihan Lokey — reached record highs in recent weeks as investors anticipate a long-awaited recovery in mergers and acquisitions activity under Donald Trump’s second presidency.
Perella roughly doubled in value in the last year, while shares in bulge bracket investment banks including Goldman Sachs, Morgan Stanley and JPMorgan Chase also touched fresh highs in November and December.
“Barring some disaster in the economy, we should have just a nice upswing in activity across most parts of investment banking,” said Christian Bolu, senior analyst for US capital markets at Autonomous Research.
But the extent of the run-up in banks’ stock prices adds to the pressure on executives and their new recruits to deliver revenues in 2025.
The price-to-earnings ratio of the public boutique firms has jumped to 30 to 40 times, nearly double the historical range. Boutiques’ M&A advisory fees edged just 1 per cent higher in 2024, according to LSEG data.
One longtime banking chief executive warned over excessive exuberance. “I can’t imagine it works out for everybody. It is a limited pie of deals. There is going to be a reckoning,” the executive said.
The independent investment banks have hired heavily in the past two years, taking advantage of the downturn to pick up star bankers to position themselves for a recovery in dealmaking. But it makes them reliant on those recruits to deliver substantial revenues in the upswing.
Evercore increased its base of managing directors — a senior title on Wall Street — by 27 per cent from the end of 2021 to the third quarter of this year; Moelis grew its number of managing directors by 26 per cent; Jefferies by 46 per cent.
Brian Friedman, Jefferies’ president, said 2021 to 2023 were his company’s most active period for outside hires since the two years following the 2008 financial crisis.
“Historically, periods of disruption and dislocation create opportunities. We capitalised on that opportunity,” said Friedman.
Wall Street groups paid handsomely for some dealmakers. After the pandemic-era boom investment banks guaranteed packages worth upwards of $9mn a year for two years to persuade high-profile personnel to move, according to senior investment bankers, although packages of $4mn were more common.
“The compensation numbers are staggering in some instances,” said Julian Bell, global head of the banking and markets group at headhunter Sheffield Haworth.
“It’s a consequence of banks protecting or growing market share in an industry where people are making such amounts that you can’t make good hires if you don’t offer big packages.”
Splashy hires included Jefferies’ recruitment of Chris Roop from JPMorgan in 2022, Santander’s hiring of David Hermer from Credit Suisse to run its US corporate and investment bank in 2023, and Evercore, which poached Goldman Sachs partner David Kamo in 2024.
Evercore chief financial officer Tim LaLonde said: “Heading into a strengthening market, we’re pleased we invested.”
The recruitment binge pushed up the median remuneration ratio — the proportion of a bank’s revenues eaten up by pay — by about 10 percentage points across Evercore, Lazard, Moelis, Houlihan Lokey and Jefferies compared with before the pandemic, according to Morgan Stanley analysts.
Chief executives have resisted calls to cut back on expensive hires in anticipation of a recovery in revenues in 2025 that would bring the ratio back to its historical 55 per cent to 60 per cent benchmark.
Lazard’s compensation ratio was 66 per cent in the first nine months of 2024, and the investment bank has set a target for it to fall back to 60 per cent in 2025.
Kevin Mahoney, managing partner at recruiter Christoph Zeiss Partners, said banks faced a tension over how much they were willing to guarantee a star banker to attract them, when it could take more than a year for them to start to deliver substantial fee-generating business.
“There is always the question of how much you can afford to warehouse people, knowing you’re paying big guarantees for the best of them who will likely contribute little to no revenue while they ‘ramp up’ — a process that typically takes 12 to 18 months or more.”
But he added banks often had little choice. “That’s how firms achieve long-term success in investment banking, particularly M&A.”
Many of the dealmakers hired at the tail-end of the last boom or start of the downturn will come off their guarantee period early in 2025, and will instead be paid based on the work they bring in.
“The vast majority of those people are coming off guarantees,” said one senior Wall Street investment banker. “All these people are going to be walking into 2025 and need to prove their worth to keep getting paid.”
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