Commercial banks’ appetite for M&A boutiques gains momentum

Commercial banks are increasingly evaluating opportunities to buy boutique M&A firms as they look to add capabilities in dealmaking areas like healthcare, according to a senior banker at Freeman & Co, a boutique firm which specializes in selling other boutique investment banking franchises.

If he had to choose, the healthcare, technology and consumer industries are the three most-asked-for verticals among bank acquirers right now, said Gagan Sawhney, a managing partner of Freeman. Freeman, based in New York, recently agreed to be acquired by Los Angeles global investment bank Houlihan Lokey.

“More and more banks, particularly commercial banks, are waking up to the reality of having advisory capabilities and are looking to add them,” Sawhney said. He emphasized that interest is not limited to any one industry. “In our processes, the commercial banks are stepping up more than they were a year back, and much more than they were two years ago.”

Whether that suggests we’re at the top of the market is a matter of opinion, but Sawhney said he expects to see a greater pace of bank transactions in the months ahead: “Every time we run one of these processes, they say this is the top of the market.”

Still, industry bankers say the timing is noteworthy that Freeman, an expert in advising the asset management, broker-dealer, financial technology, real estate, specialty finance and insurance verticals, agreed to be acquired by Houlihan Lokey less than a couple weeks ago.

Sawhney said banks’ yearning to get more out of existing relationships is driving the deal activity. Many firms that have been active as lenders are acknowledging the fact that they came in very late in the game, he said.

In healthcare, two marquee deals over the last few years fall into that category, he said.

One is the sale of healthcare boutique Cain Brothers to KeyBanc Capital Markets, of which Freeman offered sell-side advice. More recently, SVB Financial Group in January completed its acquisition of Leerink Partners, a life sciences-focused boutique advisory firm. The deal for Leerink called for a $280 million upfront cash consideration, in addition to a retention pool for employees of $60 million to be paid over five years.

Among other examples, Fifth Third Bancorp in February 2018 purchased healthcare-focused Coker Capital. In August, Regions Bank completed the acquisition of Highland Associates, which advises not-for-profit healthcare entities.

Another factor contributing to activity, Sawhney said, is more middle-market investment banks with an existing advisory practice seeking acquisitions to fill specific holes from an industry perspective.

As you bring these two factors into the healthcare world, it makes for a particularly attractive vertical for boutique bank acquisitions, he said. Given the industry’s technicalities—particularly in sub-sectors such as life sciences requiring a specific knowledge base—banks are recognizing healthcare is not an easy capability to build out, he said.

It’s not surprising that healthcare is an area of importance for many banks if you look at the overall U.S. economy.

Fueling the nation’s GDP, healthcare jobs are expected to grow at a rate of 18 percent from 2016 to 2026, outpacing the rate of the rest of the economy, according to the Bureau of Labor Statistics. Next is tech, with employment projected to grow 13 percent over the corresponding period, the BLS said.

Still, the logic of selling is tough if there’s single-person risk, he said, referring to advisory businesses that are largely a personal franchise consisting of one “star MD” and a few analysts.

“There may be a lot of these healthcare banks or other boutiques, but not all of them are sellable,” Sawhney said. “There’s a certain amount of scarcity value for scale players.”

An advisory firm doing $20 million-plus in revenue encompassing usually at least four to five managing directors typically becomes an interesting target, he said.

From a valuation perspective, Sawhney said every deal has a unique structure. Price typically includes some combination of payment for a certain level of employment, a performance-based payment in the form of an earnout, in addition to some element of an upfront payment, he said.

“To me, getting the right strategic fit is the most important thing,” he said.

For example, Freeman & Co gains access to Houlihan’s international footprint by joining the middle market investment bank, he said. At the same time, Houlihan inherits a team of about 13 managing directors that specialize within an area the bank wasn’t formerly as strong.

Both Sawhney and Eric Weber will join Houlihan as managing directors upon completion of the transaction.

“This is a people-intensive business. Getting the alignment of synergies and personalities is super important.”

Action item: Get in touch with Freeman’s Gagan Sawhney at