The Business Model of Evercore Inc. (NYSE: EVR)
This is the first article of the series in which I analyze the company, Evercore Inc. (NYSE: EVR), an independent investment banking advisory firm headquartered in New York. This first article would focus on introducing the firm and breaking down its business model.
Evercore Inc. (NYSE: EVR)
Evercore is an independent investment banking advisory firm founded in New York in 1995. They have approximately 1,800 employees in 11 countries such as the United States, the United Kingdom, China and Japan. It operates through two segments, investment banking and investment management.
As of 12/31/2020, they have advised on more than $4 trillion M&A deals since their founding. In 2020, the firm received “The Deal of the Year” and several other awards from “The Deal”, a media company covering corporate transactions. According to Evercore’s annual report, the firm had the highest dollar volume transactions among independent firms in both the U.S. and the world…
Okay, lots of numbers and jargons were thrown around in the previous paragraph. Let’s just clarify a few things just so we can better understand what exactly do Evercore do.
First and foremost, what is investment banking? It has the word bank in it but it is not the kind of bank we deposit and withdraw money in our everyday life. Investment banking is more like an intermediary between buyers and sellers in the capital market. They help sellers such as corporates that want to raise money by selling their corporates shares or bonds find buyers, such as investors who are looking for attractive returns, a business formally known as underwriting. Investment banking also helps corporates initiate mergers & acquisition, aka M&A, which involves a company buying another company.
One thing worth mentioning is that investment banking does not equal to investment bank. Strictly speaking, investment banking is only a business line in an investment bank and it provides underwriting and M&A advisory services, which is why sometimes it is referred to as the investment banking division, or the “IBD”.
We can further divide investment bank into two categories, full-service investment bank and boutique investment bank (aka independent investment bank). A full-service investment bank also offers services other than those in the IBD, such as sales & trading and asset management. Examples of full-service investment banks include household names such as Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS). A boutique investment bank, however, only offers investment banking services and usually focuses more on the M&A business. Examples include Lazard (NYSE: LAZ) and the focus of this article, Evercore (NYSE: EVR).
On top of that, Evercore is not an ordinary boutique investment bank. It is often referred to as one of the elite boutique investment banks or “EB” because even though it does not offer the full range of services as Goldman or Morgan Stanley does to its clients, it is still able to compete and involve in the same size of M&A deals as Goldman and Morgan Stanley do.
Investment Management, the other business line of Evercore, is a lot easier to understand. It is about helping individuals or corporations manage or construct their portfolios in the form of stocks, bonds or even real estate. Some of the well-known names of investment managers include Blackrock (NYSE: BLK) and Vanguard.
According to Evercore’s latest 10-K, the two business lines, investment banking and investment management, generated $2.2 billion and $54.4 million or 98% and 2% respectively for the company in 2020. Even though the management team mentioned that the firm is trying to grow its business in investment management, the percentage contribution towards total revenue from investment management has been quite stable around 2% to 3% for the past three years with no significant growth. Therefore, in the future, Evercore is still expected to generate most of its income through its investment banking business.
And when it comes to investment banking, Evercore is definitely one of the industry leaders. The firm had the highest dollar volume M&A deals among independent investment banking firms in both U.S. and the world and advised some of the largest M&A deals, including AstraZeneca’s acquisition of Alexion, Microsoft’s acquisition of Nuance Communications. The size of transactions matter a lot to investment banking firms because usually the fees that the firm receive are a certain percentage of the actual transaction value. Therefore, the fact that Evercore engaged in those large deals not only shows that the firm is able to win big clients but should also lead positively to the firm’s financial performance.
But how did Evercore win those clients and get those deals? The fact is that investment banking is a very relationship-based industry. Sometimes if one important managing director from an investment bank left, he or she would be able to bring the clients with him or her to a new firm. Therefore, we can basically say the most valuable asset of an investment banking is the employees, which is why when we get to the financials of Evercore, salaries and wages will be the firm’s largest expenses and the firm is striving to retain talent through ESOP or other compensations.
However, now with a clearer understanding of Evercore’s business model, the one thing that should stand out is that this business model does not seem very stable or predictable. Lots of the fees the firm is getting are one-time event. You would not expect to receive fees from Microsoft every month or every year unless Microsoft actually has that many M&A deals to execute. Therefore, the top line of the firm is very dependent on the activities of the capital and financial markets. In the period when the market is booming, enterprise valuation is high, Evercore would be able to find more M&A deals and receive more fees. In the period when there is a recession, the firm probably would have less M&A deals but would engage in more restructuring or debt transactions.
This is the end of the first article about the firm Evercore and its business model. The next article will focus on the firm’s financials and its stock performance. Please don’t hesitate to comments or bring up any suggestions!
