Introduction

Investment banks are preparing for a pivotal year in 2025, aiming to justify record share prices and high-profile hires made during a challenging two-year downturn. Independent firms such as Evercore, Lazard, and Moelis are banking on a recovery in mergers and acquisitions (M&A) activity to deliver much-needed revenue growth.

Surge in Bank Valuations

The past year has seen a surge in the valuations of boutique investment banks, with some, like Perella Weinberg, nearly doubling in value. This growth is fuelled by optimism surrounding a potential M&A rebound under Donald Trump’s second presidency. Larger banks, including Goldman Sachs and Morgan Stanley, have also experienced fresh highs in share prices, adding pressure on executives to deliver results.

The Recruitment Push

To position for a market upswing, investment banks have been on a hiring spree. Evercore increased its number of managing directors by 27% since 2021, while Jefferies grew theirs by an impressive 46%. Banks offered lucrative packages, sometimes exceeding $9 million annually, to attract star dealmakers.

This aggressive hiring strategy has significantly raised compensation ratios, with firms like Lazard reporting a 66% remuneration ratio in 2024. Banks now face the challenge of balancing these expenses while striving for higher revenues.

M&A as a Key Driver

A resurgence in M&A activity is seen as the cornerstone of revenue growth in 2025. However, industry leaders caution against overconfidence. While independent banks expect improved activity, one executive warned, “It is a limited pie of deals. There is going to be a reckoning.” Banks must ensure their investments in talent translate into measurable returns during this crucial year.

Compensation Challenges

Many dealmakers hired during the downturn are nearing the end of their guaranteed pay periods. From early 2025, their compensation will depend on the revenue they generate. This shift heightens the pressure on these recruits to deliver significant deal fees. As Kevin Mahoney from Christoph Zeiss Partners notes, “That’s how firms achieve long-term success in investment banking, particularly M&A.”

Outlook for 2025

While optimism abounds, challenges remain. The record price-to-earnings ratios of boutique banks, ranging from 30 to 40 times earnings, highlight the high expectations placed on the sector. Additionally, rising competition and the need to secure profitable deals mean that only the most strategic players will thrive.

Conclusion

2025 is set to be a defining year for investment banks as they navigate the dual pressures of rising valuations and the need for substantial revenue growth. Success hinges on the effective deployment of star talent, a robust M&A market, and careful management of costs. As banks gear up for this critical period, their ability to adapt and execute will shape their performance in a rapidly evolving financial landscape.

Source: (FT.com)