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How to set up a boutique

Low bonuses make striking out alone an increasingly popular option. But how can a senior corporate financier used to working in a large bank make the transition to independence? The unfortunate answer is, with difficulty.

Independent corporate finance operations come in two forms: small, informal affairs normally comprising one or two people; and larger full-service boutiques, which in the UK are regulated by the Financial Services Authority.

Although they deal with bigger clients and command higher fees, full-service corporate finance boutiques are a rarity. The FSA receives only 8 to 10 applications for such firms each year.

The regulatory process, which involves a 350-page form, a minimum of 10,000 of regulatory capital, advisory fees of 5,000 plus, and a wait of about six months, is considered onerous by many.

Neil McKay, a consultant at headhunter Sheffield Haworth, said that as a result most former corporate financiers formed unregulated one or two man consultancy operations instead.

Demand for the services of one or two man outfits is said to be high. One former corporate financier who now acts as a consultant said: ‘In tough markets, a lot of companies find it cheaper to use an ex-investment banker with whom they have an existing relationship, instead of the bank itself.

‘For simple work such as valuations, an individual will charge 10,000, while the bank would have charged 70,000. There’s a lot of call for it.’

However smaller operations sail close to the regulatory winds. The FSA requires that all companies providing corporate finance advice, raising capital, or making provision for other people to raise capital, be regulated.

One or two man operations seek to avoid this by asking that corporates employ them directly.

Rachel Kent, a partner at solicitors Lovells, said direct employment fudges the need for registration with the FSA, and may not always be within the law.

‘As long as you are employed by and engaged in the business of the employer, registration is unnecessary. But this is a very difficult line to draw. For tax reasons, a lot of individuals actually establish their own consultancy business. That makes it difficult for them to claim they are engaged in the business of the client company.’

Paddy McGwire, a former venture capitalist with 3i, and founder of the boutique Cobalt Corporate Finance, said unregulated consultants risk being rapped by the regulator:

‘The empowering of the FSA meant a tightening of the regulatory environment. Nowadays you need to be regulated. If you’re not, you will just be playing around the edges.’

McGwire said the regulatory process is less cumbersome than it is rumoured to be. He worked as an independent advisor for nine years, before forming Cobalt, which became registered with the FSA in 2001.

Jim Fallon, a director of McQueen, a boutique formed in 2002 by former HSBC bankers Fallon, Luke Withnell and Shaun Browne, said the FSA’s demand for a six-month delay need not always be painful.

McQueen largely avoided it because Browne left HSBC a few months before the others, who joined him once registration was complete.

However, achieving FSA regulation is not the only hurdle for a would be corporate finance boutique. Capital is aso required. Fallon, Withnell and Browne invested their own money and re-mortgaged their homes.

Fallon said the risk has been worthwhile. McQueen advised on the 86 million Dairy Crest acquisition of the St. Ivel Spreads business in September 2002.

Acting on such a large deal would not have been possible were McQueen an operation run from someone’s spare bedroom, he said

Robert Hamburger, managing director of the boutique AGI Corporate Finance, and a former head of corporate finance for Smith Barney in Europe, started his first boutique, H&M Partners, in an attic room.

He said the right image was important, but a strong contact list most important of all.

‘No matter how prestigious its offices, nor how much capital there is behind it, a boutique will have to have clients. Unfamiliar clients will not contemplate dealing with a new firm. The founders of all the really successful boutiques brought their clients with them.’

Fallon confirmed that strong corporate contacts were essential. ‘As a boutique, your success will depend a lot on your existing client base. You need very close client relationships. People will not be calling you out of the blue.’

Building close contacts can be a problem. Corporate financiers usually work in teams, meaning that no individual has ownership of a client account.

David Charters, a former managing director at Deutsche Bank and now a partner at the corporate finance boutique Barchester, says most investment bankers are more reliant on large institutions than they think.

‘People underestimate the importance of their employer’s name on their business card, and their own dependence on the bank’s infrastructure.’

Clients may have followed in previous career moves, but it is a different matter when corporate financiers branch out on their own, says Charters.

Moreover, restrictions built into contracts of employment often prohibit corporate financiers from contacting former clients. As a result, there is period of twiddling thumbs while the founders of new boutiques wait for clients to contact them.

When they left HSBC, Fallon, Withnell and Browne benefited from the absence of these restrictions: ‘Once I terminated my employment I was completely free to call up all my old clients,’ said Fallon.

The rewards can be huge. Famously, Dresdner Kleinwort Wasserstein bought the US mergers and acquisitions boutique Wasserstein Perella for $1.4bn in January 2001, just as the M&A market turned down.

But conditions now are tougher. Hamburger said: ‘ No matter how prestigious its offices, nor how much capital there is behind it, a boutique will have to have clients. The founders of all the really successful boutiques brought their clients with them.

‘Look long and hard in the mirror before you do this. Do you have what it takes to be successful? To start a boutique and to fail is not good.’

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