Boutique Banks Pinched

In a market downturn, boutique banks are most disadvantaged. Many of the boutiques specialize in one area of business -- mergers or IPOs, for example. Adding to the weakness, many boutiques specialize in advising smaller clients. Those clients are more apt to pull deals than the large-cap companies, simply because they aren't quite as secure.

"So-called blue chip investment banks may be cushioned slightly because their clients tend to be leaders in their respective industries and thus less prone to contract their growth plans in the face of a recession," says Robert Bruner, dean of the Darden graduate school of business at the University of Virginia.

Meanwhile, the competition in the boutique banking sector is stiffening. Joseph Perella, a former Morgan Stanley(MS) investment banker, is expected to launch his boutique bank imminently. Other small banks, such as Rohatyn, are also competing for business.

As deal flow thins, the banks have a smaller fee pool to peck over. More competition dilutes the shrinking fees.

"The challenge for smaller firms is to survive the troughs," Bruner says.

For investors, the equation can be tricky. The key is understanding the bank's clients, Bruner says, because a bank's size doesn't necessarily translate into quality. Many smaller banks have top-tier clients. Evercore, for example, advises AT&T(T), General Motors(GM) and Viacom(VIA), among others. The firm's expertise might be enough to get it through a downturn.

"The key judgment for the investor in looking at investment banks' shares is the strength of the market franchise with respect to other banks," Bruner says. "Does it have a gilt-edged client base or not?"

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