Stay informed with free updates
Just enter the Investment Banking myFT Digest — delivered straight to your inbox.
Investment banks are preparing for a tough year in which they must offer changes in pay contracts to justify record share prices and high-value hires made during a two-year slump.
Six are listed independently investment banks – Evercore, Lazard, PJT, Moelis, Perella Weinberg and Houlihan Lokey – have reached record highs in recent weeks as investors await a long-term recovery in mergers and acquisitions under Donald Trump's second term.
Perella has doubled in value over the past year, while shares in bulge bracket investment banks including Goldman Sachs, Morgan Stanley and JPMorgan Chase also touched new highs in November and December.
“To prevent a certain crisis in the economy, we need to have a good increase in activity in many investment areas,” said Christian Bolu, senior analyst for the US market at Autonomous Research.
But the size of the bank's rate hikes is increasing the pressure on managers and their new employees to deliver profits by 2025.
The price-to-earnings ratio of boutique public firms has jumped to 30 to 40 times, nearly doubling the historical range. Shops M&A Advisory fees are set to rise just one percent by 2024, according to LSEG data.
One longtime bank executive warned against overindulgence. “I don't think it works for everyone. It's a small pie of deals. There will be an issue,” said the manager.
Private investment banks have been hiring heavily over the past two years, taking advantage of the downturn to hire high-profile bankers to put themselves back in the dealmaking position. But it makes them dependent on their employees to bring in a lot of income from the hike.
Evercore expands its base of managing directors – the top topic on Wall Street – by 27 percent from the end of 2021 to the third quarter of this year; Moelis increased its number of managing directors by 26 percent; Jeffries by 46 percent.
Brian Friedman, president of Jefferies, said 2021 to 2023 was his company's most active period for outsourcing since the two years following the 2008 financial crisis.
“Historically, times of disruption and displacement create opportunities. “We took advantage of that opportunity,” Friedman said.
Wall Street teams pay well for certain vendors. After the pandemic, investment banks guaranteed packages worth more than 9mn a year for two years to persuade high-level employees to leave, according to top investment banks, although packages of 4 million dollars were more common.
“The compensation figures are shocking in some cases,” says Julian Bell, global head of banking and marketing at headhunter Sheffield Haworth.
“It's the result of protecting the banks or growing market share in an industry where people make such amounts that you can't hire well if you don't offer great packages.”
Splashy's hires include Jefferies' hiring of Chris Roop at JPMorgan in 2022, Santander's hiring of David Hermer at Credit Suisse to run its US business and investment banking in 2023, and Evercore, which poached Goldman Sachs partner David Kamo in 2024.
Evercore chief financial officer Tim LaLonde said: “We're going into a strengthening market, and we're happy to have invested.”
The recruitment of employees increased the average salary – the average of the bank's income eaten by salary – by about 10 percent at Evercore, Lazard, Moelis, Houlihan Lokey and Jefferies compared to before the pandemic, according to Morgan Stanley analysts.
Chief executives have resisted calls for costly job cuts in anticipation of a recovery in earnings by 2025 that could return the average to its historic 55 percent to 60 percent.
Lazard's rate of return was 66 percent in the first nine months of 2024, and the investment bank has set its goal to return to 60 percent by 2025.
Kevin Mahoney, managing partner at recruiter Christoph Zeiss Partners, said banks are facing pressure on how willing they are to ensure a banker attracts them, when it can take more than a year to start offering a large fee-generating business. .
“There's always a question of how much you can afford in a reserve, knowing you're paying big guarantees to the good guys who can contribute a little bit of income while they 'step up' – a process that takes 12 to 18 months or more.”
But he adds that the banks often have nothing to do. “That's how firms find long-term success in investment banking, especially M&A.”
Most salespeople who were hired at the end of the last boom or the beginning of the downturn will be out of their warranty period in early 2025, and will instead be paid based on the work they have delivered.
“Most of these people are given guarantees,” said one senior Wall Street banker. “All these people will come in in 2025 and they have to prove their eligibility to keep getting paid.”