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Investment banks are bracing for a tough year in which they must gradually change deal fees to justify record stock prices and expensive hires made during the two-year recession.
The six listed are independent Investment banks — Evercore, Lazard, PJT, Moelis, Perella Weinberg and Houlihan Lokey — have reached record highs in recent weeks as investors anticipate a long-awaited rebound in mergers and acquisitions activity under Donald Trump's second presidency.
Perella's value has almost doubled in the past year, while shares in bullish investment banks including Goldman Sachs, Morgan Stanley and JPMorgan Chase also reached new highs in November and December.
“Barring some catastrophe in the economy, we should have a good rebound in activity across most parts of investment banking,” said Christian Polo, senior U.S. capital markets analyst at Autonomous Research.
But the extent of the rise in bank stock prices increases the pressure on new executives and employees to generate revenue in 2025.
The price-to-earnings ratio for public small companies jumped to 30 to 40 times, nearly double the historical range. Boutiques Mergers and acquisitions Advisory fees rose just 1 percent in 2024, according to LSEG data.
One long-time banking chief executive warned against too much enthusiasm. “I can't imagine it's for everyone. It's a limited pie of deals. There will be a reckoning,” the executive said.
Independent investment banks have hired large numbers of staff over the past two years, taking advantage of the economic downturn to attract star bankers to put themselves in a position to make a deal-making recovery. But it makes them dependent on these recruits to generate significant revenue in the bullish period.
Evercore increased its managing director base — a senior title on Wall Street — by 27 percent from the end of 2021 to the third quarter of this year; Moelis increased its number of managing directors by 26 percent; Jefferies By 46 percent.
Brian Friedman, president of Jefferies, said 2021 to 2023 was his company's most active period for external hires since the two years following the 2008 financial crisis.
“Historically, periods of disruption and dislocation create opportunities. We took advantage of that opportunity,” Friedman said.
Wall Street groups paid large sums of money to some dealmakers. After the pandemic-era boom, investment banks have secured packages worth more than $9 million a year for two years to convince high-profile employees to move, according to senior investment bankers, although packages worth $4 million have been more common.
“The compensation numbers are staggering in some cases,” said Julian Bell, global head of the banking and markets group at headhunter Sheffield Haworth.
“It's a result of banks protecting or increasing market share in an industry where people make so much money that you can't hire good employees if you don't make great offers.”
Impressive appointments included Jefferies' hiring of Chris Robb from JP Morgan in 2022, Santander's hiring of David Hermer from Credit Suisse to run the US corporate and investment bank in 2023, and Evercore, which acquired Goldman Sachs partner David Camus in 2024.
“Going into a strong market, we are pleased to have invested,” said Tim Lalonde, Evercore's CFO.
The hiring spree has lifted the median pay ratio — the proportion of a bank's revenue that is eaten up by wages — by about 10 percentage points at Evercore, Lazard, Moelis, Houlihan Lokey and Jefferies, compared with before the pandemic, according to Morgan Stanley analysts.
CEOs have resisted calls to cut back on expensive hires in anticipation of a revenue rebound in 2025, which would return the ratio to its historic benchmark of 55 percent to 60 percent.
Lazard's compensation rate reached 66 percent in the first nine months of 2024, and the investment bank set a target for it to decline to 60 percent in 2025.
Kevin Mahoney, managing partner at recruitment firm Christoph Zeiss Partners, said banks had been nervous about how willing they were to secure a star banker to attract them, when it could take more than a year for them to start offering significant fee-generating work. .
“There's always a question of how much you can afford to stock people, knowing that you're paying big guarantees for the best of them who will likely contribute little or nothing to revenue as they 'scale up' – a process that typically takes 12 years 18 months or more.”
But he added that banks often don't have much choice. “This is how companies achieve long-term success in investment banking, especially mergers and acquisitions.”
Many dealmakers who were hired at the end of the last boom or the beginning of the downturn will exit their guarantee period in early 2025, and instead will be paid based on the work they provide.
“The vast majority of these people are getting guarantees,” said a senior Wall Street investment banker. “All of these people will be walking until 2025 and need to prove their worth to continue getting paid.”
