What’s feeding the growth spurt at investment bank William Blair

William Blair & Co.’s strategy to expand its investment banking business by scooping up refugees from shrinking rivals paid off big this year.

The challenge is to do it again next year.

The Chicago-based private company estimates that by year-end, it will have advised on 70 mergers and acquisitions worth $15 billion, up from 32 deals worth just $2 billion in 2009.

Long known as a conservative Midwest stalwart, William Blair has grown to 215 banking professionals, from 130 in 2008, including traditional client relations bankers and sector specialists.

Many rivals, by contrast, have contracted under the weight of increased regulatory scrutiny, their own debt and trading strategies gone awry.

“There’s no need for us to think about things the way some of the others in the industry have,” chief executive John Ettelson said. “Those same pressures just aren’t affecting us.”

Mr. Ettelson said that he plans to expand the bank this year, though U.S. economic uncertainty, slowing Asian growth and Europe’s struggles could shave profits.

William Blair participated little in the mortgage securities and derivatives markets that were at the root of the financial crisis. As a result, it hasn’t had to deal with the expense and distraction of federal regulatory probes many of the larger banks did, and it is less affected by the Dodd-Frank Act, which was designed largely to address those issues.

The firm is also debt-free.

The 175 partners who own William Blair think that without debt, the value of the firm fluctuates less with the public markets and allows it to use cash-based compensation to better attract talent, said Mark Brady, global head of mergers and acquisitions.

William Blair also hasn’t suffered the fallout of its own bad bets, as it doesn’t trade for its own account. JPMorgan Chase & Co.’s “London Whale” gamble on synthetic credit securities cost it billions of dollars.

Some of these regulatory and market issues led a few midsize peers, such as New York banks Jefferies Group Inc. and Keefe Bruyette & Woods Inc., to merge with other firms last month.

GOING GLOBAL

With 150 investment bankers in Chicago, William Blair’s investment banking arm is second only to BMO Capital Markets in the city. Globally, it is dwarfed by the major New York banks, but they have been pulling back in Chicago and elsewhere.

William Blair has expanded in Boston, London and San Francisco, and it opened an office in Sao Paulo last year. Next year, it plans to add 25 to 40 professionals and open an office in Frankfurt.

“On the face of it, it’s clearly ambitious,” said Chris Allen, an analyst at another fast-growing investment bank, New York-based Evercore Group LLC.

Although it formerly specialized in deals of less than $150 million, William Blair’s sweet spot is higher now, from $200 million to more than $1 billion, thanks to bigger international deals this year. It advised on British buyout firm Charterhouse Capital Partners LLP’s $1 billion-plus purchase of Bartec Holding GMBH of Germany and the sale of the chemical division formerly owned by Northbrook, Ill.-based Old World Industries LLC to Bangkok-based Indorama Ventures PCL for $795 million.

As foreign economies have sputtered, William Blair peers such as Piper Jaffray Cos. and Raymond James Financial Inc. have shuttered foreign offices this year. Through Nov. 15, worldwide deal activity had slowed 6% from the year-earlier period to $2.29 trillion, according to industry data and consulting firm Dealogic PLC.

“The midtier and midsized banks are finding out how difficult it is to compete in international markets,” said Michael Wong, a Morningstar Inc. analyst who covers investment banks.

Although he doesn’t cover William Blair, as it is a private firm, Mr. Wong suspects that that is the very reason it is faring better than some larger, publicly traded banks.

Partners at a private firm using their own capital are more likely to invest cautiously over a longer term and can afford to wait for the payoff, he said.

William Blair’s asset management business, which accounted for 57% of revenue last year, has been an anchor for the deeper foray into the more cyclical business of investment banking, which made up 26% of its income. Assets under management also are expanding, rising to $47.45 billion as of Sept. 30, from $41.16 billion at the end of last year.

The company won’t disclose its profits, but Mr. Ettelson said that the investment bank division is booking the biggest margin growth this year.

William Blair’s overall revenue rose 6.7% from the year-earlier period to $586 million last year.

All the company’s businesses, including equity research, sales and trading, have been expanding, albeit at a slower rate than investment banking. The 1,150-employee firm has more than recouped the 10% workforce cutback it made in late 2008, when it felt the brunt of the recession.

Mr. Ettelson, a former investment banker, expects to keep expanding the division at the same steady pace, even if profit growth slows next year.

“We’re happy with our return on investment,” he said.

Lynne Marek is a senior reporter with sister publication Crain’s Chicago Business.

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