A cadre of crypto investment bankers is gearing up for a dealmaking frenzy

2020 has shaped up to be a landmark year for cryptocurrency dealmaking, and in the background, a group of fledgling investment banking teams is waiting in the wings for further consolidation and acquisitions. 

In traditional capital markets, investment bankers at Wall Street's bulge-bracket banks advise companies on large acquisitions, mergers and initial public offerings, among other areas. In crypto, this kind of capital market infrastructure is just beginning to emerge in earnest, with specialized boutique firms preparing for a ramp-up in deal flow. 

To date, the market has already seen a string of notable deals, including the recent acquisition of crypto data tracking app Blockfolio by FTX. Other notable deals this year include Coinbase's sub-$100 million acquisition of Tagomi and Binance's acquisition of crypto data provider CoinMarketCap. 

Niche expertise 

Galaxy Digital, which advised Blockfolio on the $150 million deal, is one such firm that's operating in the crypto M&A space. Led by former Goldman Sachs banker Ian Taylor, the firm's IB strategy paints a picture of how a number of firms are positioning themselves. 

"This is a complex and incredibly dynamic sector – the challenge comes less from its nascency and more from the fact that unless you live and breathe it every day, it is very hard to really understand the way it all fits together (and to keep up with the pace of advancement)," said Taylor.

Taylor is leaving Galaxy at the end of the quarter to return to Goldman as its new head of equity capital markets for Australia. The firm is currently searching for a replacement, as The Block previously reported. Still, Galaxy has set up a standard for the market that will persist after the Australia native returns to the Wall Street titan.

"You start first of all with an exercise to map the landscape. For our investment banking business, we view the sector in three broad categories," he said.

Those categories include digital asset infrastructure companies, spanning exchanges, trading platforms, lending firms, and custody providers. The second category covers enterprise blockchain, such as "companies applying blockchain and or token structures to a variety of industries." The third category is bitcoin mining, which the firm views as a fundamental pillar of the bitcoin ecosystem. 

This granular view of the market isn't too dissimilar from how so-called boutique investment banks in traditional markets break down their respective sectors. Deep industry expertise is what these businesses tout as distinguishing themselves from larger bulge-bracket banks, which sell themselves on their large networks. Galaxy's model looks similar to other companies in the crypto investment banking market, such as Spartan Group. Spartan started out as a token advisory company during the 2017 ICO boom but pivoted to M&A advising in the middle of last year.

It cut its teeth advising Blockstack on a few fundraising deals and its expansion into the Asia market. The firm also advised Blockfolio in its acquisition deal alongside Galaxy. 

"In general, but in M&A in particular, you have to have the technical skillset to do it," said Casper Johansen, founder of Spartan Group, referring to the development of models that calculate the valuations at which a company should be acquired. There's also the know-how in tax, cross-border corporate law, and how to structure deals. 

Johansen is a previous executive director at Goldman Sachs. 

"But in crypto if you show up and don't understand the business, you will be shown the door immediately," he said.

That was echoed by Galaxy's Taylor: "You need to be relevant and there are three things to help achieve that. The first is to build sector expertise, such that the way you think about the space aligns with the way founders and sponsors think about their companies and sectors."

Imperii Partners is another upstart in the crypto M&A market. Led by former KBW managing director Tony Scuderi, the firm has not been previously covered by media—reflecting the press-shy nature of bankers. Imperii Partners's strategy is to work closely with the industry's venture capital firms, which are eager to find exits for their respective portfolio companies. 

"In simple terms, we plan to continue to do a great job for our clients, who happen to be portfolio companies of VCs," Scuderi said. "Optimum results for the companies means optimum returns for the VCs and a stronger crypto industry, which benefits all of us. The strategy is not unique, but our focus, expertise, network and information in crypto certainly is."

Specifically, insiders say that bankers kickoff a process wherein they walk a company through different potential acquirers and what they would mean for the firm. Through various exercises, the bankers help the company understand how different firms might value it from a business and financial perspective. 

"It's all administrative work, putting together financial projections and sales decks. They need to be bulletproof. It's a lengthy process that takes number of meetings. It's nice to have bankers because there is a lot of nuance."

Strong pipeline

All three M&A firms report a strong pipeline of deals with many large crypto companies viewing M&A as a way to accelerate growth inorganically, as Taylor noted. 

They're not blowing smoke. Digital Currency Group recently posted a job ad for legal counsel who, if hired, would "participate in M&A activities." Thus far in 2020, DCG has acquired crypto exchange and wallet service Luno and, by way of Genesis, custodian Vo1t.

A similar story is playing out at crypto exchange Kraken, which has an open position for a Director of Strategic Finance who would "provide support on M&A and Financing activities." 

"There are a lot of great niche companies in crypto that could be worth multiples of their standalone value to the right acquirer," Scuderi said. "I see acceleration ahead with strong markets, fierce competition and the inevitable entry of enterprises."

Shepherding companies through deals, of course, can fetch them a pretty penny. Insiders say advisors can command more in fees than traditional investment bankers since the crypto market is smaller and more specialized. As for smaller deals, one source said they have "heard of other companies selling for $20 — $80m, where the banker says they’ll only do it for $1m plus."

Another insider said fees could approach more than 5%, which is very meaty relative to traditional markets. 

As for who will be doing the acquiring, Matt Walsh of Castle Island Ventures said he wouldn't be surprised if traditional banks and broker-dealers move in to buy.

"What I haven't seen yet but expect to see are banks and B/Ds [broker/dealers] moving more aggressively into custody and wallet infrastructure," he said. "I would expect BitGo, Anchorage, and a bunch of the other brokerages and custodians to be pretty well-positioned if that were to happen."

In a previous interview, Galaxy's Chris Ferraro said he expects larger-cap exchanges to drive most of the inorganic growth.

"Expect to see the larger cap exchanges and platforms being the most active acquirers, with a focus on adding inorganic user growth, additional services (e.g., Prime), and opening up new markets. We are also seeing a willingness to consider consolidation via mergers in the small-to-medium segment of the market," he said.