Boutiques back in fashion as small is beautiful again

IT IS the 1990s all over again in financial services circles - boutiques are back. Headlines are full of the woes of the bulge bracket investment banks whose business has evaporated over the past year or two.

So you might think the middle of a technologyindustry meltdown would be the worst time anyone could choose to set up a small, independent investment banking boutique specialising in tech deals.

Yet 20 have recently been launched in San Francisco.

Although US stocks are drifting sideways, New York has seen the emergence of several aggressive investment and research houses.

Big firms may have slashed their workforces amid slumping revenue but boutiques are growing.

ThinkEquity, which focuses on the "knowledge economy" - covering everything from the media to education - turned $15 million (pounds 10.5 million) in revenue in its first year and expects to double that in its second. "You have to be determined and patient," says Paul Deninger, managing director at Broadview, a small tech mergers and acquisitions specialist.

Boutiques were fashionable in the early 1990s when the theory was that smaller and nimbler was better. Houses such as Robertson Stephens, Montgomery Securities and Hambrecht & Quist proved this by capturing much of the business generated by the tech boom in San Francisco. Then the big banks wanted in on the action and got it by buying the boutiques, including all of the above. For the past five or six years, it has been a rapidly shrinking sector.

But now there are thousands of unemployed bankers who have fallen foul of rampant cost-cutting at big firms. As one boutique banker puts it, you can either become a taxi driver or build your own bank from scratch. Building from scratch is easier than usual.

The pool of talented and experienced out-of-work bankers has not been this deep for a decade.

Demand for boutiques is growing because big investment banks have discredited themselves in many people's eyes. The tech bust and accounting scandal at failed US energy trader Enron showed just how bad and tainted with conflicts of banking interest their equity research could be.

Last week, for instance, New York Attorney General Eliot Spitzer said he was taking Merrill Lynch to court for recommending stocks that its own analysts did not believe in.

In this climate, institutional investors are looking for reliable, untainted research, preferably not from some deal-making machine.

This may, indeed, be part of a progressive unbundling of some key investment banking activities over the next few years.

No one expects all of the boutique start-ups in San Francisco to survive.

Even Thomas Weisel, one of the Montgomery Securities superstars who set up his own bank two years ago, is struggling.

But it is clear the tide is rising for them. Because many of the same conditions apply here as in the US, London is likely to see a burgeoning of smaller companies, too.

Collins Stewart, an established smaller broker, showed that way by outperforming its larger brethren last year and increasing staff by nearly 30% this year when most banks and brokers are still cutting.

Examples such as this are proving the big-is-beautiful philosophy no longer applies. Instead, the small guys may inherit the earth - until the next turn in the cycle.

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