Investment banks prepare for 2025 crunch

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Investment banks are bracing for a crisis year in which they must make a step change in contract fees to justify record share prices and costly hiring during a two-year recession.

Listed are six distinct Investment bank — Evercore, Lazard, PJT, Moelis, Perella Weinberg and Houlihan Lokey — hit record highs in recent weeks as investors anticipate a long-awaited recovery in merger and acquisition activity under Donald Trump’s second term in office.

Perella’s value has nearly doubled in the past year, while shares of bulge bracket investment banks including Goldman Sachs, Morgan Stanley and JPMorgan Chase also hit new highs in November and December.

“Barring some headwinds in the economy, we should see a nice pick-up in activity across most of investment banking,” said Christian Boulu, senior analyst for U.S. capital markets at Autonomous Research.

But the runoff in the bank’s stock price adds to the pressure on executives and their new hires to deliver revenue in 2025.

Public boutique firms’ price-to-earnings ratios have risen to 30 to 40 times, nearly double the historical range. boutiques M&A According to LSEG data, advisory fees are expected to increase by just 1 percent in 2024.

A longtime banking chief executive warned against over-exuberance. “I can’t imagine it works for everyone. This is a limited transaction. There is going to be a reckoning,” the executive said.

Independent investment banks have done a lot of hiring over the past two years, taking advantage of the downturn to pick up star bankers to reposition themselves. But this makes them dependent on their employers to provide significant revenue to the rise.

Evercore grew its base of managing directors — a senior title on Wall Street — by 27 percent from the end of 2021 through the third quarter of this year; Moelis increased its number of managing directors by 26 percent; Jeffries by 46 percent

Jefferies President Brian Friedman said 2021 to 2023 was his company’s most active period for outside hiring since the two years following the 2008 financial crisis.

“Historically, times of disruption and dislocation create opportunity. We capitalized on that opportunity,” Friedman said.

Wall Street groups paid handsomely for some dealmakers. In the pandemic-era boom investment banks guaranteed packages worth $9 million a year for two years to persuade high-profile employees to move, according to senior investment bankers, although packages of $4 million were more common.

Julian Bell, global head of banking and markets group at headhunter Sheffield Haworth, said: “In some cases the compensation figures are staggering.

“It’s a consequence of banks protecting or growing market share in an industry where people are earning so much that you can’t hire well unless you offer big packages.”

Splashy hires include the hiring of Jefferies from JPMorgan in 2022, Santander’s hiring of David Harmer from Credit Suisse to run its US corporate and investment bank in 2023, and Evercore, which poached Goldman Sachs partner David Comeau in 2024.

Tim Lalonde, Evercore’s chief financial officer, said: “Going forward in a strong market, we are pleased to have made the investment.”

According to Morgan Stanley analysts, the hiring binge pushed the median remuneration ratio – the proportion of bank revenue eaten up by salaries – across Evercore, Lazard, Moelis, Houlihan Lokey and Jefferies by about 10 percentage points compared to before the pandemic.

Chief executives have resisted calls to cut back on expensive hiring in anticipation of a revenue recovery in 2025 that would bring the ratio back to its historic 55 percent to 60 percent benchmark.

Lazard’s compensation ratio was 66 percent in the first nine months of 2024, and the investment bank targets it to fall to 60 percent in 2025.

Kevin Mahoney, managing partner at recruiter Christophe Zeiss Partners, said banks faced a tension over how much guarantees they were willing to offer star bankers to attract them, when it could take more than a year for them to start delivering enough fee-generating business. .

“There’s always the question of how much you can afford to warehouse people, you know you’re making big guarantees for the best ones who will probably contribute little to no revenue while they ‘ramp up’ — a process that usually takes 12 to 18 months or more.”

But he added that banks often had little choice. “This is how firms achieve long-term success in investment banking, especially M&A.”

Many dealmakers hired at the tail-end of the last boom or the beginning of the recession will have their guarantee period come to an end in early 2025 and will instead be paid based on the work they bring.

“A lot of these people are coming off guarantees,” says a senior Wall Street investment banker. “All these people are going to walk in 2025 and have to prove their worth to continue paying.”