When people think of investment banks, they typically think of large integrated banks with numerous divisions and a large balance sheet. Most employees of these firms don’t even know what their employers’ lines of business are, let alone how the different business lines interact. However, Greenhill & Co. operates under a much simpler business model and is thus able structure its entire operating structure in the pursuit of one goal: maximizing advisory fees.
What is Greenhill and How Does it Make Money?
Greenhill is a global independent investment bank focused entirely on providing financial advice on M&A, restructurings, financings and capital raising to corporations, partnerships, institutions and governments. It does not trade, invest, underwrite, make loans or write research reports. The only way that Greenhill generates revenue is through fees from advisory assignments, which are typically some combination of a retainer, a fixed monthly fee and a success fee, which is calculated as percentage of the total deal value (with retainers and monthly fees often credited against this). Further, Greenhill maximizes the fees it generates per transaction by emphasizing larger transactions, which involve the same amount of work as smaller deals but pay far larger fees.
So, How Does Greenhill Attract Clients?
As the firm’s only product is advisory, it can only attract new clients and retain existing clients by offering high quality, independent advice. There is no ability to win assignments by offering cheap financing or other products. Thus, the firm focuses on three key differentiators: independence, expertise and service. Since advisory is the firm’s only business line, there are no inherent conflicts of interest. The firm is so focused on maintaining this point of differentiation that it spun out its private equity fund, Greenhill Capital Partners, in 2009, in order to maintain true independence. By employing managing directors that are experts in their field (many former group heads at bulge bracket firms) and having them dedicate significant time to their clients, Greenhill is able to market superior expertise and service.
In addition to maximizing advisory fees, the other key goal of the business model is minimizing overhead costs. As a pure-play advisory firm, employees are both the sole driver of revenue and the most significant component of the cost structure. In order to optimize this, Greenhill’s organization is designed to be shaped like an hourglass, with many senior bankers who are responsible for managing relationships and generating all of the fees that drive the firm’s revenue, and many junior bankers, who are the least expensive resources and are responsible for the vast majority of deal execution tasks. Greenhill employs very few mid-level bankers, as they are cost ineffective workers and do not generate any fees of their own. The few mid-level bankers are simultaneously staffed across numerous projects and are responsible largely for managing junior staff. Further, hiring practices ensure that this employee mix is maintained. Junior bankers are hired on two year contracts with the expectation that they will leave for other opportunities at that point. The firm then helps analysts land private equity and hedge fund jobs, ensuring that junior bankers are motivated to work hard (often very long hours) for the senior bankers helping them land jobs, yet preventing the expectation of a long-term career at Greenhill. Further, the majority of senior bankers are hired from outside the firm, filling any talent voids and bringing in new clients.
Keeping Everyone Motivated
Given Greenhill’s lean deal teams, it is crucial that employees are properly motivated. Greenhill achieves this by having a compensation structure that is aligned with its business model. Performance-based pay makes up the vast majority of compensation for all bankers at the firm, with salary representing approximately half of the compensation of junior bankers and a far lower percentage of total compensation for senior bankers. In rough terms, managing directors keep one third of the fees they generate, with another third paying for firm overhead and the final third going to shareholders. This ensures that managing directors are focused on signing new clients and generating fees. On the other hand, junior bankers’ performance bonuses are set based on their performance reviews, ensuring that they work hard and uphold high standards when executing transactions. This is crucial to make sure that Greenhill is able to maintain the high quality and responsiveness that keeps existing clients happy and allows managing directors to continue to win new business.