Ken Moelis, the preeminent investment banker with a storied career at numerous bulge-bracket firms, believed he could create a better banking structure. Investment banking is an industry that is heavily reliant on attracting and retaining quality people who can source and close deals. Ken recognized an opportunity to form his own boutique investment bank, Moelis & Company (MC, Financial), during the depths of the financial crisis. The financial recession significantly lowered deferred compensation of target employees who were attracted to Ken’s idea of building a premier boutique investment bank. Recognizing inherent flaws in the bulge-bracket banks that have dominated the industry, Ken created a bank void of conflicts of interest, reducing regulatory focus. Without sales, trading and lending, Moelis can focus solely on advisory services and earn the coveted “seats at the table” from management and boards who value their advice. Without the business lines that create conflicts, Moelis’ employees, in our opinion, are properly incented to deliver for their clients.
Investment banking is an undeniably cyclical and lumpy industry. There is little consistent year to year recurring revenue in these businesses. However, there is the opportunity to build loyalty over the long term with clients by providing unbiased advice. Moelis provides such advice. Further, Moelis is well positioned in the current environment to take advantage of increased acquisition activity. Companies are finding organic growth difficult and major acquisitions are supplementing stagnant outlooks. Financial sponsors are also increasing their activity due to the ease of raising funds and low interest rates to execute leveraged deals. Additionally, shareholders and management teams of target firms have been increasingly willing to sell their companies due to improved multiples and profitability. Not only do we feel the mergers and acquisitions environment is poised for growth, but we believe that Moelis should continue to win share amongst its rivals. (Michael Baron)
From Baron Funds' second quarter commentary.
