Greenhill Exits Private Equity To Focus On Advisory Work

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Most of Wall Street loathes walking away from businesses in which they have invested their time, energy, and reputation. If they aren't busy securitizing assets today, it's not because they don't want to but because investor demand has dried up. If anything, the trend on the Street has been for investment banks and commercial banks like Citigroup to push their way into one new geographic or product area after another to establish as big a footprint as possible in order to keep their rivals at bay. Their goal, as bankers tell all and sundry, is to be able to serve their clients with everything they might need, from a loan to private-banking services. Need to issue junk bonds in Brazil and finance a merger in France? No problem! The challenge in growing an investment bank, though, is that when you are expanding in all these directions at once, your eyes can be bigger than your belly, notes Rose, himself a former banker at JPMorgan Chase.

Some investment-banking CEOs complain of feeling trapped. Bill Hambrecht, the veteran Silicon Valley banker, recalls a conversation he had with Stan O'Neal, the ousted CEO of Merrill Lynch & Co., in the summer of 2008. "He told me that to be a global investment banker, you have to have a worldwide signature; you have to have a global overhead," Hambrecht said. "And if you have this big overhead, he said, the only way you can cover it is through the proprietary trading and investing business. His premise was that that was the only thing that he could do to keep the company going."

Greenhill's leaders, in contrast, take a very different view of what is possible. The firm has already doubled the number of managing directors and offices over the last year, enticing disaffected bankers from all kinds of big firms to join them as well as picking up the best of those who were hit by massive Wall Street layoffs. Now, rather than allow themselves to be distracted by the need to focus on a business that would consume a lot of capital in return for a lot of risk, the firm plans to focus its efforts on the intermediary sign of the coin. So what if that isn't what Goldman Sachs is doing? It's trying to figure what is best for Greenhill, not emulate another firm's business model.

It remains to be seen whether Greenhill can pull it off. Bok views the advisory business as one offering significant growth, very high profit margins, and very modest capital requirements. So far this year, it is Wall Street's biggest institutions that are collecting the lion's share of merger advisory fees from clients such as Pfizer; Greenhill must prove that the single-business focus will pay off in the shape of a bigger share of that deal flow.

Still, Greenhill's discipline deserves plaudits in an industry that has been more characterized by a lack of the same quality. Just because the initiative is coming from a smaller institution where the lack of a competitive edge becomes apparent and problematic more quickly doesn't mean that it holds no lessons for the rest of Wall Street. Indeed, with everyone from the general public and regulators to bankers themselves pondering the issue of how some institutions became too big to fail, and even raising the topic of a government-launched forced breakup of some firms, maybe it would be wise for some Wall Street behemoths out there to follow Greenhill's lead and ask themselves some hard questions. What are the businesses in which they can truly claim to have a sustainable competitive advantage? Is Citigroup really good at running hedge funds or Morgan Stanley a best-of-breed proprietary trader? Certainly, a gradual unwinding of the kind that is about to begin at Greenhill at some of these giant institutions might transform some banks that are today oversized, unwieldy, impossible to manage or regulate, and downright mediocre in many areas into firms that are nimble and aggressive, as well as better at managing both their business and their risks. Oh, and they'd present much less systemic risk.

Strategic planning on Wall Street? Why not?

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