It is interesting to see how sentiment towards a sector can take down just the sector as a whole, but also companies within that sector that have no direct exposure to the issues that traders and investors are concerned with. Obviously, regulatory and business risks have hurt the consumer banks for some time-- the investment banks have faired no better. While investment banking revenue of the majors, who derive a lot of their earnings from trading revenues-- like Morgan and Goldman-- have been the most impacted, other less known investment banks have also seen their share prices fall significantly.
While many investment banks have seen weakness in their trading and other banking markets, there has been some surprising strength in certain areas. With corporate balance sheets still very strong and capital very cheap, the backlog of smaller, but better run independent investment banks, like Lazard (LAZ) and Evercore Partners (EVR) have held up quite well. Now that indications show that Europe will not likely implode anytime soon, it is interesting to look further at some of these seemingly lower risk financial that historically have weathered down times very well.
Lazard is an investment bank that is a boutique sized firm with clients you would expect to see top flight firms have. The company specializes in mergers and acquisitions, but its business model is evenly dividend between a wealth management side and its investment banking division. While Lazard has taken its hits like most other firms in the industry, the company's asset management division has done very well. It manages around 136 billion dollars today, steadily increasing its assets under management over the last couple years.
Lazard's consulting business in mergers and acquisitions also saw an increase of 24% this year from last. The only investment banking division of Lazard that reported weaker earnings was its restructuring division, likely since fewer companies have been facing bankruptcies. Its asset management business also saw a nearly 5% gain in assets under management this year. Lazard does no trading whatsoever, and is impacted very little by most of the new Dodd-Frank Bill.
Likewise, Evercore Partners has reported similar strength in its underlying businesses. Evercore Partners reported a 35% increase in net income year-over-year, and specifically cited strength in its ability to hire in winter quarter earnings. The company also raised its dividend by over 20%. Evercore Partners, like Lazard, is a smaller and less known company than its larger and less profitable peers, but its clients include top companies.
In addition to working on mergers and acquisitions, Evercore Partners also works on restructuring efforts done by companies and government, private equity deals, and capital raises. Evercore partners recently worked on the roughly 12 billion dollar Google (GOOG) acquisition of Motorola Mobility, and International Paper's (IP) 4 billion dollar acquisition of Temple-Inland this past summer. Evercore Partner's asset management business did take a small hit with outflow of around 18%, but the strength in its core investment banking business more than offset that weakness.
One of the more interesting developments in the financial sector since Dodd-Frank was passed is the compensation has been structured in more long-dated options than up front base salaries. Also, since this new regulatory bill was passed, salaries and earnings at the consumer banks have been hit the hardest. This has enabled firms like Lazard and Evercore Partners to actually poach some of the senior investment bankers and their client relationships from firms who simply can't offer the same compensation benefits.
The uncertainty surrounding the future profitability of the financial sector has also led to multiple management changes at banks like Bank of America (BAC), creating uncertainty for many senior employees. These companies also have material exposure to the lending markets, as it doesn't have trading or investment divisions other than basic asset managements Since companies like Lazard and Evercore Partners interact almost exclusively with corporations and governments, the government's consumer protection provisions of Dodd-Frank really don't impact them at all.
To conclude, the most hated sectors are often the hardest to invest in. As new regulatory changes and financial challenges affect the banking sector, not all companies will be as negatively affected by others. While the sector as a whole will obviously be affected by many of the challenges and changes that companies worldwide face, some of the market share losses by the larger banks will be gains for smaller and better run companies.
Evercore Partners and Lazard are both very small companies compared to their peers, but their client list is just as impressive. With the negativity and pessimism towards the financial sector at all-time highs, it's worth considering some of the more independent and better run companies that won't likely be as impacted by many of the financial and regulatory changes the investment banking industry is facing.