Without ambition, Wall Street would be nothing. Many people are fighting their way up the ranks of the large investment banks; quite a few more have left them entirely to set up small boutiques, in the hope of making a lot of money by providing specialist services. Roberto Mendoza and Peter Hancock, however, both highly successful executives at the pre-merger JP Morgan, have decided to go further, to set up a fully fledged investment bank called Integrated Finance Ltd (IFL). The idea, according to a friend of the pair, is to create a new player in the banking industry, a shop roughly the size of Lazard.
In fact, IFL has ambitions even beyond this. It's looking to go public in as little as three years. Within five or six years, it hopes to have a stand-alone single-A credit rating, which it can leverage to take on substantial risk. So IFL is not your standard advisory boutique: its founders are going to compete head to head with the big guys.
IFL is actually plan B for Mendoza, Hancock and their partner Robert Merton, the Nobel Prize-winning economist who came famously unstuck at Long Term Capital Management. Plan A was to hit the ground running with a large institution that had already been built up over many years - General Re Financial Products, a firm that its owner, Warren Buffett, was quite happy to see go to rocket-scientists such as Hancock and Merton. Talks started in January 2001, but the deal fell apart after September 11. IFL's story is that after doing due diligence, they determined that Buffett wanted too much money. Others in the market say that they had difficulty raising the nine-figure sum required. Certainly, there was a difference of opinion on the value of Gen Re's derivatives portfolio.
IFL, by contrast, is a much smaller operation. The three partners put in $5 million capital each. Another $30 million was provided jointly by ACE insurance in Bermuda and NIB Capital.
NIB, a Dutch merchant bank owned by ABP and PGGM, two of the world's largest pension funds, is providing more than just $15 million: it also has a double-A credit rating. When necessary, NIB has promised to guarantee IFL's ventures, allowing the new firm to take on a risk book of its own.
The connection with ACE is easier to see. Both Mendoza and another ex-JP Morgan man, Scott Levine, were involved in founding it. Levine, after an ill-fated stint at imploded Latin American advisory boutique Violy Byorum & Partners, has now moved to IFL as its COO.
Big firms lose best talent
IFL is by no means the only shop to be set up by executives who have left a major investment bank and think they can provide better service in a smaller setting. One investment-bank CEO says that "there's more talent outside the industry than there is inside it".
Gene Ludwig, the founder of advisory boutique Promontory Financial, agrees: "The constant churning in the banking system has left a lot of talented people on the street," he says. "It's also changed the view of a lot of people as to where they want to work. JPMorgan and Goldman Sachs sounded safe, but people's view of job security is different today. Assuming the enterprise will always be around is asking for trouble."
The growing number of small investment-banking shops, then, is a function of both supply and demand. A lot of 40- and 50-something executives are leaving the likes of Morgan Stanley and JPMorgan convinced they have one last big job left in them. And many clients are dissatisfied with precisely the same large banks, which might lack highly specialized skills, might not have seamless coordination between product groups, might not put their brightest stars or top executives onto the job, might have nasty conflicts of interest, and might well charge obscenely high fees.
Most of the enterprises that spring from this situation, however, are high-value-added propositions that are narrowly focused and aim to do one thing extremely well. Merton and Hancock's former colleague, Nick Rohatyn, for instance, has decided that his aim is to set up the world's best emerging-market hedge fund. Promontory specializes in giving financial institutions advice on risk management.
"Our secret has been that we try to do one thing, and do it well," says Promontory's Ludwig, who has found a gap in the market which he's well qualified to fill, he says. "There aren't many people who've been regulators, heads of risk management departments and bankers."
One corollary of Ludwig's approach can be seen in the art of not doing deals. IFL is quite proud of its impartial advice. While many big banks will peddle all manner of complex operations because they do wonders for the P&L, IFL takes a different approach. It, too, will specialize in constructing such deals, but the difference is it will usually then tell its client to go elsewhere for the actual execution. Only in the most abstruse cases, where it might be constructing instruments that have never been seen before, will it fill the gap in the market and write the tickets itself.
Even so, IFL intends to do much more than structure highly complex derivatives transactions, and will happily take on bread-and-butter M&A advisory mandates, for example, as well. In this, it stands in contrast to Promontory where, says Ludwig, "we've turned away just about as much business as we've accepted".
IFL, on the other hand, wants to do just about anything that its clients might want it to do. One source high up in the company says that it's trying to do "what John Pierpont Morgan himself would do, espying the wasted landscape" - providing "highly ethical, transparent, conflict-free advice driven by the client's best interests". They hope to grow fast - from 30 professionals by the end of this year to more than 200 in a couple of years' time, before an initial public stock offering shortly thereafter. "The main risk is that we can't penetrate the market in an important way over a two-to-four-year period," says the source.