Greenhill: Alignment Through Simplicity
Greenhill’s business model and operating structure are perfectly aligned to maximize profitability by driving fee based revenue while minimizing headcount and overhead
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.
Organizational Structure
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.
http://www.greenhill.com/sites/default/files/greenhill-fact-sheet-2015.pdf
http://www.greenhill.com/investor/letter
http://www.greenhill.com/sites/default/files/november_19_2015_goldman_sachs_investor_presentation_0.pdf
Very interesting post! One question I have is how Greenhill decides how to hire people for their lean middle management positions. Is it based on intelligence and capacity for work (as they would hire an analyst), or more on potential for bringing in clients later in more senior positions? Or does the firm assume that intelligence and willingness to work hard will reap rewards in the form of bringing in business down the line? Would be interesting to know what the firm values for these positions.
I would echo Leigha’s question – if Greenhill is recruiting industry experts from larger investment banks, what happens to the capable mid-level employees? How do they stay motivated, aside from compensation (which is definitely not everything)? In addition, I wonder how Greenhill can be competitive to win mandates when other competitors that have equally talented bankers can lead with their balance sheets. Further, I wonder how the operating model holds up given the importance of the restructuring practice – when there are periods of fewer bankruptcies, how is are resources utilized to drive revenue in other parts of the business?
Keeping mid-level employees is definitely challenging. The way Greenhill handles this is by having very few midlevel employees (starting with hiring small associate classes) and promoting those who have star potential to management positions. Although the firm has 75 Managing Directors (most senior position), the firm only has 20 Principals (second most senior). Further, in a given year only about a third of those Principals will come up for promotion. However, two of the firm’s most senior managers, its President and CFO, are relatively bankers who started at the firm as associates. Whereas Managing Directors hired laterally are hired primarily for relationships and are allowed considerable autonomy and financial upside, internally developed talent have tremendous opportunity to take on management roles in the firm and are rewarded commensurately.
Great post Jacob! Having worked for two pure advisory firms as well, I think the benefits of the model from a no conflicts of interest perspective make sense. The issue my firms commonly dealt with was the perception that they lacked the right relationships, which many of the larger firms are assumed to have, which were crucial to winning mandates, particularly the larger fee ones you mentioned. I’m curious if Greenhill had well regarded senior advisors and bankers in order to combat this or did the firm rely more on industry or situation/transaction expertise?
This is definitely a major issue for boutique banks. I’ve seen many bankers who developed their careers inside boutiques struggle to successfully generate business after being promoted to Managing Director, as they never had access to a large firm’s institutional clients. Greenhill deals with this largely by hiring outside talent with existing relationships. The ratio of internally developed senior bankers is much lower than at competitors. Of course the risk with this is that you must remain successful in recruiting talented senior bankers whose clients are loyal to them rather than their previous employers.
It obviously at first seems counter intuitive, but this relationship between tenure, cost structure, and incentive is pretty interesting. I still wonder whether Greenhill views junior bankers as long term investments despite their departure from the company after only two years. In other words, do those departures go off and join firms or start their own firms, with whom Greenhill is then well positioned to do business? Or is this simply viewed through the lense of economic expedience?
Junior bankers are not viewed as long-term investments, but this does not mean that the relationship entirely revolves around economic expedience. The relationship between junior and senior bankers can be rather symbiotic when both parties recognize value in the relationship. While junior bankers rely on senior bankers for recommendations and other help landing their next job, senior bankers see this role as an opportunity to both motivate current employees and develop relationships with potential sources of future business. However this is done on an individual basis by more senior bankers who see this as an opportunity to build their personal relationships (which translations into individual success and compensation) rather than a formal firm program.