Boutique Banks Pinched

The market turmoil couldn't come at a worse time for some boutique investment banks.

Since last month, investors have sold stocks en masse, fearing that Federal Reserve rate hikes will tip the economy into recession. The selloff has slammed brokerage stocks: The Amex broker-dealer index is down 17% in the last month, far outstripping a 7.7% loss in the S&P 500.

If the swoon has been tough up and down Wall Street, though, boutique investment banks have had it worst. Since May 10, Thomas Wiesel Partners (TWPG) is down 31%, Greenhill (GHL) is off 30% and Jefferies(JEF) is lower by 25%.

The selloff is complicating plans by several boutiques to go public. Cowen, a subsidiary of the investment banking arm of France's Societe Generale, filed Monday for a $235 million IPO. Evercore and Keefe Bruyette & Woods said earlier this year they would try to come public this year, too.

Until recently, investment banks were thriving, driven by solid economic growth and strong merger and IPO action. Boutiques saw strong gains across the financial sector and believed they could get good prices for their shares.

But given the action in the last month, some observers wonder if these banks haven't missed their window.

"Given the damage that we've incurred, it would not be the most beneficial time for an investment bank to come public," says Marc Pado, chief market strategist at Cantor Fitzgerald. "The environment you want is low to stable interest rates with economic growth looking to expand, especially for an investment bank because that is the market you do best in."

Rising interest rates and slowing economic growth don't make a great environment for banks of any sort. Goldman Sachs(GS) and Lehman Brothers(LEH) reported strong earnings earlier this week, but shares sold off as investors worry about the future. On the Lehman Brothers call, management said that it needed to "keep an eye" on its pipeline for deals in the coming quarter, as worsening market conditions could "delay or defer transactions."