Benjamin Norman for The New York TimesDavid Knowlton founded Three Ocean Partners last December after about three decades in banking.When courting new business, Wall Street’s deal makers often point to their long client lists as proof of deep industry knowledge.
Three Ocean Partners takes the opposite approach. The three-month-old boutique firm pitches clients on the promise of exclusivity, pledging to take just one account per industry.
That strategy makes it virtually impossible for Three Ocean to climb to the top of the prized league tables that tally up the standings in mergers and acquisitions. But the firm’s founder, David W. Knowlton, a longtime banker, says the goal is to stay small. “We’ll never be a big firm,” he said. “We never want to be more than 25 or 30 people.”
In many ways, Three Ocean, which operates out of a historic Art Deco building in Midtown Manhattan, resembles the original Wall Street model, when the industry was dominated by close-knit partnerships. Started last December, the advisory shop now has nine professionals, most of whom will have a personal stake in the firm. Employees are also encouraged to invest in deals.
The pay packages also echo the past. At a time when investment banks are cutting compensation and shifting to stock bonuses, Three Ocean plans to pay bonuses entirely in cash. It is also offering other perks like unlimited vacation days and monthly wine tastings.
“For the person who is a true entrepreneur, this is a unique opportunity and structure to do better than Wall Street,” said Mr. Knowlton. He said his firm had been fielding hundreds of calls from bankers and headhunters.
Boutique firms — which tend to focus on investment banking — have their own drawbacks. Many small financial firms struggle to pay their overhead while others are dependent on a handful of rainmakers to bring in clients. Kaufman Brothers, a boutique bank founded in 1995, closed this year after a slowdown in deal flow and trading activity.
“When you’re on a smaller scale, you have to fight for every deal,” said Devin Ryan, a managing director at Sandler O’Neill & Partners.
But boutiques are gaining traction, capitalizing on big banks’ bruised reputations since the financial crisis. The market share of the 10 largest firms, by fees, dropped to 36.3 percent last year, from 42.2 percent in 2007, according to data from Thomson Reuters.
“The industry is suffering from a reputation problem,” said Roy Smith, a professor at the Leonard N. Stern School of Business at New York University. “This creates an opportunity for boutiques.”
Mr. Knowlton never imagined he would end up on Wall Street. As a teenager in Urbana, Ohio, he planned on running the family’s construction business or going into public service. While a student at Kenyon College, he majored in political philosophy and had an internship at the Joint Economic Committee in Washington.
But after graduation, he gravitated toward finance. In late 1980, Mr. Knowlton felt the economy was starting to turn a corner, he said. Eager for some finance experience to apply to the family business, he joined the training program at Manufacturers Hanover Trust, a New York-based bank that ultimately became a part of JPMorgan Chase after a string of mergers. Later, at Chemical Bank, he trained under James B. Lee, the firm’s noted deal maker and JPMorgan’s current vice chairman, who often told him, “Never tell your client you can’t get it done; always find a solution before you go back to the client,” Mr. Knowlton said.
After a stint at Gleacher & Company, Mr. Knowlton started his own firm, Watch Hill Partners, in 2003. Over seven years, the firm — a group of roughly 25 — advised on more than $30 billion of deals, working with Hershey Trust on its attempted takeover of Cadbury and with the Hicks Sports Group on its sale of the Liverpool Football Club.
In 2009, he sold the business to FBR Capital Markets. But FBR, a larger operation with an equities arm and other units, was ultimately a mismatch for Mr. Knowlton, who wanted to focus solely on mergers and acquisitions.
“When you sell your firm to another firm, the culture you had inevitably changes,” he said.
Mr. Knowlton, 54, saw Three Ocean as an opportunity to start over again.
He had three priorities for his new firm: find a patient investor base, focus on a small group of clients and think globally. While the firm is still raising funds, it has signed up several prominent backers, including the Galvins, the founding family of Motorola, and Sanford Robertson, the founder of Robertson, Stephens & Company, a once high-flying technology boutique bank.
Three Ocean has five clients, which are considering transactions ranging from $100 million to several billion. One major financial firm has tapped Three Ocean to lead the sale of up to $2 billion worth of assets over the next few years. As the firm was still taking shape, Three Ocean advised MidOcean Partners, a private equity firm, on its $650 million purchase last June of PrePaid Legal Services.
While the Three Ocean Partners sales pitch may prove attractive to clients, it also comes with some big challenges.
Mr. Knowlton, for example, is intent on building a global operation and is establishing a London office. But with a small staff, he can build only so many satellite offices. Instead, Three Ocean will have to rely on international partnerships with other firms, which could come with conflicts.
Its one company per sector policy means it will miss out on lucrative assignments. Two weeks ago, Mr. Knowlton decided to turn down the opportunity to pitch one business, because it was already courting a competitor. In the end, Three Ocean may not win either deal.
But Mr. Knowlton is willing to give up some opportunities now as he aims to build a long-term business.
“We’ll have to turn down business, even if a bigger company comes along,” he said. “If we won both deals, it would breach what we stood for.”