We need a new model. I am referring to the banking and finance segment of which I am a part. The old model, still largely the norm, is based on scale: scale of resources, scale of balance sheet, scale of operations, scale of transactions. The bigger firms do the bigger deals, the middle firms cover the middle, and the small firms gather up the rest. This is a model in which the transaction world, proceeding at a steady pace, is naturally ranked and prioritized by capital allocations and risk profile, with these two characteristics in inverse correlation. This world is changing. Size and risk are no longer so clearly opposed, and a model based on scale is outdated and suboptimal. A new model should (and probably will) emerge in the banking segment, reflecting an environment in which expertise – although as important as ever, or even more so – must now share top billing with flexibility, versatility, and nimbleness. My firm is of a new breed in this manner, and while this article may appear self-serving, the underlying assumptions hold and the logic stands.
My perspective is shaped not only by recent Wall Street experience but also by the digital media industry in which my colleagues and I participate. The headlines about record Wall Street earnings are deceptive, because these cover up a very different reality underneath the trading profits and finance activities propped up by an artificial government-set capital cost. While the largest issuers of equity and debt may be seeing some benefit from such cheap capital, there is a huge middle segment that is not benefitting in the least. There is a credit market that is still freezing smaller borrowers out, there is a private equity community that is challenged to find attractive returns, and a venture capital sector that is investing at roughly the same levels last seen in the early-90s, (i.e., when for all intents and purposes there was no venture capital industry). The headlines about the Comcast acquisition of NBC-Universal and all that this media giant will do to introduce new consumer offerings, in some ways underscore and in other ways disguise a sector reality in which the advertising market is still unsure about its future, and the consumer media outlets are still struggling to keep up with changes that seem unceasing and that few completely understand.
With so much of Wall Street, Madison Avenue, and for that matter Main Street, in a state of transition and volatility, we see a great deal of inefficiency in the investment markets. On the other side, we see business executives and entrepreneurs who require creativity, and an ability to do more with less, to a greater extent than ever before. An investor’s or advisor’s ability to be responsive in such an environment is not only a function of expertise but nimbleness and flexibility, and scale sometimes stands in the way of this. As counterintuitive as the statement may seem, it is a current reality… because scale is a function of cost, and high cost limits one’s ability to maneuver.
The new firm, the firm designed precisely for this environment, has to combine expertise and low cost. This firm has strong access to resources, as needed, without the baggage of resources when these are only weight. This firm is in a position to work on transactions and structures in response to circumstance, rather than set policy. This firm is not held back by liabilities or by legacy infrastructure. In short, the model for this new firm approaches – within reason – the virtual.
