Investment banks prepare for 2025 crunch

Get free updates

Register easily Investment bank myFT Digest — delivered straight to your inbox.

Investment banks are bracing for a difficult year in which they will have to deliver a step-up in deal fees to justify slumping share prices and high rents during a two-year slump.

Six are listed independently. Investment banks — Evercore, Lazard, PJT, Moelis, Perella Weinberg and Houlihan Lokey — have hit record highs in recent weeks as investors anticipate a long-awaited recovery in merger and acquisition activity during Donald Trump’s second term as president.

Perella has roughly doubled in the past year, with shares including Goldman Sachs, Morgan Stanley and JPMorgan Chase hitting new highs in November and December.

“Barring some risk in the economy, we should have a good uptick in activity for most investment banks,” said Christian Ballou, senior analyst at U.S. Capital Markets.

But the size of the advance on banks’ share prices will increase the pressure on executives and new recruits to deliver earnings by 2025.

The price-to-earnings ratio of public boutique companies jumped to 30 to 40 times, nearly double the historical range. Boutiques M&A Consulting fees are expected to rise by 1 percent in 2024, according to LSEG data.

One longtime bank executive warned against over-exuberance. “I can’t imagine this will be for everyone. It is a certain cake of discounts. A reckoning is forthcoming,” said the executive.

Independent investment banks have been heavily recruited in the past two years, taking advantage of the recession to lift the star banks and offer themselves to the recovery of the relationship. But it also makes them dependent on those recruits to provide significant revenue growth.

Evercore’s base of managing directors – the highest rank on Wall Street – from the end of 2021 to the third quarter of this year by 27%; Mollis has increased the number of management directors by 26 percent. Jefferies At 46 percent.

Jefferies President Brian Friedman He said 2021 to 2023 is the company’s most active period for foreign hires since the two years since the 2008 financial crisis.

“Historically, periods of disruption and displacement create opportunities. We took advantage of that opportunity,” Friedman said.

Wall Street teams paid handsome prices for some traders. According to senior investment bankers, during the boom, investment banks were guaranteeing packages worth more than $9 million a year.

“The compensation numbers are surprising in some cases,” said Sheffield Haworth, head of the global banking and markets group.

“In an industry where people make a lot of money, it’s a result of protecting or growing banks. If you don’t offer big packages, you can’t get good hires.”

Splashy hires include Evercore, which tapped Jefferies’ Chris Ropp from JPMorgan in 2022, Santander’s David Hermer from Credit Suisse, the American corporate and investment bank in 2023, and Goldman Sachs partner David Camon in 2024.

“We are pleased to make this investment as we move into a strengthening market,” said Evercore Chief Financial Officer Tim Lalonde.

The hiring rate increased the median pay ratio – the amount of the bank’s income consumed by wages – at Evercore, Lazard, Moelis, Houlihan Lokey and Jefferies by 10 percentage points compared to before the pandemic, Morgan Stanley analysts said.

CEOs have resisted calls to cut costly layoffs in anticipation of a recovery in earnings by 2025 that would bring the ratio back to a historic 55 percent to 60 percent benchmark.

Lazard’s payout ratio was 66 percent in the first nine months of 2024, and the investment bank has set a target for it to drop to 60 percent by 2025.

Kevin Mahoney, managing partner at recruiter Christoph Zeiss Partners, said banks were straining how much collateral they were willing to offer to attract a star investor when it could take more than a year to deliver a high-paying business. .

“There’s always the question of how much you can afford to save people, knowing you’ll be paying a big guarantee for something good and you have the opportunity to not contribute any income while you’re ‘growing’ – a process that usually takes 12 to 12. 18 months or more.

But he added that banks often did not have much choice. “This is how companies achieve long-term success in investment banking, especially M&A.”

Most of the tradesmen hired at the end of the last boom will have their warrants expire in early 2025 and will instead be paid based on the work they bring.

“Most of those people will bail out,” said one senior Wall Street investment banker. “All these people will go to 2025 and they will have to prove their worth to continue paying.”