Behemoth investment firms – collectively known as the “bulge bracket” – represent the vast majority of global capital management. From multinational corporations to personal nest eggs, the range of clients and interests is practically limitless.
But the benefits of working with bulge bracket firms come with many drawbacks; affordability, consistency, and familiarity get matched by aloofness, broadness, and a deficit of imagination. Smaller clients often feel left out and ignored.
The alternative to bulge bracket capital management is known as a “boutique” investment firm. As the name suggests, these are smaller firms. Many of them specialize in servicing individuals and small businesses.
In addition to focusing on a specific client niche, boutiques will often zero-in on particular investment opportunities. For example, The Chernin Group (TCG) aims to acquire and manage various media and tech brands. TCG doesn’t stray far from the industries they know best, from up-and-coming streaming services to cutting-edge apps and digital journalism.
Other examples of boutique investment firms include Evercore, Inc., masters of mergers and acquisitions, Lazard, Ltd., which specializes in institutional capital management on behalf of labor unions, pension funds, and charitable foundations, and Jefferies, a firm renowned for its healthcare sector insights and expertise.
If one goes back far enough, every bulge bracket investment firm was once an entity not unlike the boutiques mentioned above. What’s to stop today’s boutique from becoming tomorrow’s bulge bracket?
The answer is nothing. In theory, TCG, Evercore, Lazard, Jefferies, et cetera have the potential to outgrow their existing skin. However, several factors contribute to the notion that boutique firms have a reason to stay where they are rather than level up.
For one thing, the current trend among the bulge bracket is to consolidate even further. The takeaway from that is there is little to no room for any more members; they can barely exist alongside each other and are increasingly merging as a result.
Another reason why today’s boutique firms are unlikely to abandon their stations in favor of broader opportunities is the high demand for their specific services. Clients big and small are in love with the quality of service provided by the leading boutique firms.
The third reason why firms like TCG aren’t going away or expanding is because of the runaway diversity happening across the business world. It’s becoming too burdensome and impractical for money managers to sink their teeth into any industry that presents an investment opportunity. Zeroing-in on a specific sector makes their expertise more valuable and makes them harder to replace.
Will the current dynamic between bulge bracket and boutique get uprooted and altered in the coming decade? It’s difficult to project, but the future of capital management will be an interesting mix of super-sized firms and relatively small-scale outfits. There will likely be even less midsized options available. Those that remain will feel increasing pressure from both sides.
It is not all roses in the boutique investment space. One of the biggest problems facing boutique investors is having all their eggs in one basket. If you are in advertising, your business is based on consumers paying attention to media. Any media will do if you are an advertising generalist. As long as they are viewing media, you have a way to thrive.
If, however, you are a niche advertiser who only does radio, then everything that is not radio is an existential crisis. People only have so much attention to give to media. The more attention they give to television, the less they have for radio. Try as you might, you can’t stop the popularity of TV. The radio is not coming back. If you can’t pivot to something else, you’re done. By specializing, you have left yourself little time to learn new skills needed to make the pivot.
Another problem for the niche strategy is that every competing product or service is the enemy. You have to think of them as fundamentally bad things because if they are good things you can’t offer, you go out of business. With that mindset in place, you become an obstructionist to progress instead of one that embraces progress. You are the buggy and whip manufacturer that wanted faster horses instead of cars. Not only will you lose that fight, history will not remember you well.
The bulge bracket doesn’t have to worry about either of those problems because they have irons in every fire at once. If one goes out, they just keep going with the others. If one technology is supplanted by another, they can embrace the new without hurting their bottom line. They also tend not to get complacent in the same way as a boutique investor might. The boutique investor can do the same thing for so long that they feel they know everything there is to know about that market. The bulge bracket is constantly taking on new things and can never feel too comfortable with their expertise. There is always something new to learn.
So is it better to be a boutique investor or a generalist? Like so many things, the truth lies somewhere in the middle. Both strategies offer proven paths to success. However, it might be worth it to fight for that elusive middle ground.
You really don’t want all your eggs in one basket. And you really don’t want progress to be an existential crisis for you. So it makes sense to have some diversification. This is true for businesses of all kinds as well as individuals. Don’t just be a construction worker. Learn to program on the side so that if construction work dries up where you live, you will have other skills.
It also makes sense for the large conglomerates to scale back. No one can specialize in everything. Spreading yourself too thin means you can’t truly know any market very well. Have enough diversification to never be captive to one thing. But keep enough diversification to know where the next, big thing is coming from so that you can embrace it when it arrives.
One thing is for certain: investors see a return of power and influence previously lost in the decades where bulge bracket firms seemed to take over every square foot of money management. Those days are thankfully over.