“Industry Expert” vs. “Generalist” Investment Banks

We are often asked whether we are industry experts, and we welcome this question. As you consider hiring an investment bank, this can be an important factor in your decision-making process. While many other elements will certainly influence your decision, we wanted to examine this topic to help give you a base understanding of the key differences between each investment banking approach.

Background & Definitions

“Industry expert” investment banks typically either have a sole focus on one sector or industry (such as telecom or oil & gas) or enlist a network of industry specialist managing directors who only service deals for their firm that fall within their specific target industry.

“Generalist” or “industry-agnostic” investment banks serve clients regardless of their industry. Their focus instead typically revolves around the geography or the size of their clients. Their attention is on process, reach and coverage.

Examining Industry Experts

Industry ExpertsPotential Benefits

  • Industry experts have deep relationships within an industry and the respective strategic buyers.
  • They can draw on past experience regarding typical deal structures and terms within an industry.
  • They have close knowledge of current and historical industry valuations.

Potential Pitfalls

  • Industry experts may not be inclined to put their strategic acquirer relationships in jeopardy.
    • According to Deciding to Sell Your Business: The Key to Wealth and Freedom by Ned Minor, “industry experts may not be willing to play hardball on your behalf because they are reluctant to ruffle the feathers of the same buyers who they want to sell to in the future. When hardball is exactly what your deal requires, this deficiency may cost you a significant number of dollars.”
  • Owners or CEOs of companies in niche or emerging industries can fall out of the purview of industry expert investment banks.

Examining Generalists

GeneralistsPotential Benefits

  • Generalists take a 40,000-foot view of how an industry fits into the larger M&A picture and trends.
    • The article All Hail the Generalist, which appears on the Harvard Business Review, likens the specialist mentality to “a collection of individuals studying bark [on a tree],” while often overlooking the fact that “the tree is embedded in a forest.” In more literal terms, our “highly interconnected and global economy means that seemingly unrelated developments can affect each other,” and generalists are better positioned to make these connections (e.g., Amazon bought Whole Foods when Amazon may not have been on the short list of an industry expert).
    • The article cites a 20-year study of 284 professional forecasters that found that generalists are able to more accurately “predict the probability of various occurrences both within and outside of their areas of expertise.”
  • Generalists can draw on experience working with other businesses of a similar size or with owners who have similar exit priorities, but may happen to be in a different industry.
  • They utilize their wide-ranging scope to supplement “known” strategic company buyers with off-the-radar buyers who may be seeking horizontal expansion.

Potential Pitfalls

  • Generalists may not have as many industry relationships that can be utilized during an M&A transaction.
  • Industry-specific trends and valuation metrics may need to be compiled fresh by generalists during each transaction.

A Blended Approach

Each of the traditional investment banking approaches above provides benefits and pitfalls, but business owners shouldn’t settle for a partial solution. We believe in a “hybrid model” that prioritizes developing industry knowledge in several areas, but still approaching each client engagement with a tailored process that meets and exceeds the owner’s objectives.

Characteristics of Our Hybrid Model:

Industry Expertise

  • We have strong relationships and expertise in several industries and attend numerous industry-specific events and tradeshows every year.
  • We rely on carefully researched industry data and market conditions to drive thoughtful advice for business owners.

Generalist Mindset

  • We maintain connections with a large set of buyers, which is not limited by a focus on one or two industries.
  • We serve business owners based on size and growth attributes, regardless of industry or geography.

Conclusion

This is an important decision for business owners and CEOs. All three business models can be successful, and your ultimate decision should likely center around your transaction objectives, and which approach you feel will best help you meet those objectives.

At SDR, our company’s purpose is to help business owners define and achieve their financial aspirations, and we enjoy doing so across a wide range of industries. However, we know that industry-specific knowledge and expertise is valuable and can be a well-placed priority for business owners seeking an investment bank.

With that priority in mind, we are continuously building strong industry relationships and we produce quarterly M&A and capital market reports that examine a number of spaces and outline key trends and activity that affect business valuations. Ultimately, we believe a “best-of-both-worlds” solution aptly serves most of the business owners we meet and helps them achieve their financial aspirations. To start the conversation, please feel free to contact us at 720.221.9220.