Investment Banking Deal-Making Resurgence: Is It Sustainable?

Current Trends in Deal-Making

Investment banking deal-making is currently influenced by a mix of factors. While M&A activity is increasing, regulatory challenges and market uncertainties persist. Despite some gains in market share, overall activity remains below historical averages, indicating a cautious yet opportunistic environment.

"You can see this in our market share trends over time. In Investment Banking from 2019 to 2023, we lost share in ECM, but that was partially offset by gains in M and A." --- (JPM, event transcript, 2024/05/20)

"So, if you put it all together, I think we expect the rate environment and the financing markets to continue to be accommodative and as well as to a continued deal-making with M&A being a bit larger in the overall mix, although some of the regulatory elements have put a damper on part of that." --- (C, earning call, 2024/Q2)

"We're still early in the cycle. We're watching it of course. To the earlier question on when the green [shoes] (ph) come through on the high-margin M&A product, the reality of seasonality, the uncertainty of rate path, geopolitics, US elections, it's hard to put a pin on what the returns will be in a given forward quarter until we kind of see some normalization in those uncertainties, not to mention some of the regulatory stuff that we are dealing with as we speak, Basel namely.But yes, you're right to point out that we are seeing some real operating leverage in the Investment Bank." --- (MS, earning call, 2024/Q2)

"And so that will come out. And at some point as we work through that, over the next 12 to 24 months, we'll continue to make progress on that for the returns in the first-half of the year would be a little higher exit.And then on top of that, as we've said repeatedly on the call and have given a bunch of information, we're still operating meaningfully below 10-year averages in terms of investment banking activity." --- (GS, earning call, 2024/Q2)

"Our growth in low share markets, where we have less than 5% share today, reflects our ability to acquire new customers as we've entered new markets.And we've been able to gain share significantly in high share markets where we have greater than 15% share today, driven by deepening with existing customers and acquisition." --- (JPM, event transcript, 2024/05/20)

Macroeconomic Conditions Impacting Deal-Making

Macroeconomic challenges such as geopolitical tensions, inflation, and interest rate changes are creating uncertainty and negatively impacting various industries, client preferences, and revenue streams, which in turn affect investment banking deal-making activities. Despite these challenges, some firms have managed to sustain revenue growth.

"Various macroeconomic challenges, including geopolitical tensions, inflationary pressures and elevated interest rates, have led to uncertainty in the U.S. and global economies and have adversely impacted, and may continue to adversely impact, a number of industries." --- (BAC, sec filing, 2024/Q1)

"The level and pace of interest rate changes and other macroeconomic factors continued to impact client preferences for cash allocation to higher-yielding products and the pace of reallocation of client balances, resulting in changes in the deposit mix and associated interest expense, as well as client demand for loans." --- (MS, sec filing, 2024/Q1)

"To consider the impact of a hypothetical alternate macroeconomic forecast, the Firm compared the modeled credit losses determined using its central and relative adverse macroeconomic scenarios, which are two of the five scenarios considered in estimating the allowances for loan losses and lending-related commitments." --- (JPM, sec filing, 2024/Q1)

"The amount and composition of our net revenues vary over time as these drivers are impacted by multiple interrelated factors affecting economic and market conditions, including volatility and liquidity in the market, changes in interest rates, currency exchange rates, credit spreads, equity prices and commodity prices, investor confidence, and other macroeconomic concerns and uncertainties." --- (GS, sec filing, 2024/Q1)

"Banking and wealth, however, were negatively impacted by macro uncertainty, which led to an NIR decline that you see at the bottom of the slide. But one of the key takeaways on this slide is that despite the challenging macroeconomic environment, we were still able to deliver revenue growth." --- (C, Investor Day, 2024/06/18)

Sector-Specific Deal-Making Trends

Investment banking deal-making is seeing sector-specific trends driven by the need for financing in technology and clean energy sectors, strategic capital raising and allocation, and industry-specific coverage. Notably, there is solid revenue growth in FIC and equities, indicating a resurgence in these areas.

"But broadly speaking, these technologies require certain things, including infrastructure, power, and these things require financing to drive the scale that's going to be necessary for people to execute on the investments that they see as important to keep their businesses competitive at pace." --- (GS, earning call, 2024/Q1)

"We remain focused on our best-in-class talent and building out best-in-class infrastructure to support ongoing growth across wealth and investment management and institutional securities. I wanted to reiterate our strategy, which is clear to advise individuals and institutions around the world in raising, managing, and allocating capital." --- (MS, earning call, 2024/Q2)

"In line with this approach, we have set interim 2030 targets across our financing activities related to certain high-emitting sectors (2030 Financing Activity Emissions Targets), operations and supply chain, all of which are further supported and complemented by our $1.5 trillion sustainable finance goal (which is aligned with the 17 UN Sustainable Development Goals) of which $1 trillion is dedicated to supporting the transition toward a low-carbon economy, including capital mobilized across clean energy sectors and tailored financial solutions for emerging areas of the low-carbon economy." --- (BAC, sec filing, 2024/Q1)

"The idea is because we're one organization now, that client can get industry specific coverage benefiting from the real specialists further up the chain at a very early stage." --- (JPM, conference, 2024/06/12)

"And while certain transaction volumes are still well below their 10-year averages, we remain very well positioned to benefit from a continued resurgence in activity. We saw a solid year-over-year revenue growth across both FIC and equities as our global broad and deep franchise remained active in supporting clients' risk intermediation and financing needs." --- (GS, earning call, 2024/Q2)

Regulatory Environment's Role in Deal-Making

Investment banks are navigating a challenging regulatory environment, balancing efficiency with compliance (BAC), facing tough day-to-day regulatory constraints (JPM), making trade-offs within this broader context (C), and dealing with significant regulatory changes and headwinds (GS). Managing regulatory risk and providing structuring advice are crucial (MS).

"Then it gives you the opportunity to continue to make those investments. And then at the same time, absolutely, you're constantly looking to make sure that you're running things as efficiently as possible, but not so efficiently that you start to lose out on compliance and on all the regulatory issues." --- (BAC, conference, 2024/05/08)

"We did that in the past and we will continue to do that going forward. And the last point on regulatory environment, it is a tough environment as you can see day in and day out." --- (JPM, Investor Day, 2024/05/20)

"And so that's kind of how we're operating in terms of making that trade-off on a regular basis, in addition to obviously the broader regulatory environment that we're in." --- (C, earning call, 2024/Q1)

"I'd say secondarily, the regulatory environment changed massively and has also raised the bar and created headwinds in a different lens with which we look at the expansion of these kinds of activities." --- (GS, earning call, 2024/Q1)

"They may need to take regulatory risk. There may need to be structuring and financing advice around that so called solutions where we think we're strong." --- (MS, earning call, 2024/Q1)

Technological Innovations in Investment Banking

Investment banks are driving technological innovation through strategic investments in start-ups, continuous technology upgrades, and acquisitions of tech-enabled companies. This focus on innovation is enhancing client experiences, expanding customer bases, and modernizing platforms, as highlighted by Citigroup, Goldman Sachs, Bank of America, and Morgan Stanley.

"Through investments in start-ups and early-stage companies, MSI promotes the development and adoption of new technologies, market structure and solutions to drive innovation." --- (C, press release, 2024/05/08)

"You think about our investment banking business and the ability in our investment banking business to have what I'll call the factory of the business prepare information, thoughtful information for clients, the revolution's there." --- (GS, earning call, 2024/Q2)

"By leveraging our technology and continuous investment in that technology and putting customers at the center of everything we do, we have successfully deepened our relationships and expanded our customer base across all our businesses." --- (BAC, earning call, 2024/Q1)

"Investment funds managed by Morgan Stanley Capital Partners ("MSCP"), the middle-market focused private equity team at Morgan Stanley Investment Management, today announced it has acquired Resource Innovations ("RI" or the "Company"), a leading tech-enabled services company focused on energy efficiency and sustainability." --- (MS, press release, 2024/04/02)

"The underlying growth in both businesses is a result of our continued investment in product innovation, client experience, and platform modernization that we highlighted during our Services Investor Day last month. Expenses increased 9%, largely driven by an Argentina-related transaction tax expense, a legal settlement expense, and continued investments in product innovation and technology." --- (C, earning call, 2024/Q2)

Challenges to Sustaining Deal-Making Resurgence

Economic challenges such as massive deficits and high debt-to-GDP ratios, along with internal governance issues and reputational risks, pose significant hurdles to sustaining the resurgence in deal-making within the investment banking sector.

"It's not priced anywhere, but exists. The second one is, as this process of shoring the economy from COVID and all the other challenges, we have a massive deficit pretty much in every country and a massive amount of debt to GDP. So how that one is going to play out in a geopolitical well that is very different than what it was is another area that we all have to keep an eye on." --- (JPM, Investor Day, 2024/05/20)

"The need for an independent chair is further exemplified by the controversies and challenges that have emerged affecting the company's reputation and potentially long term stability." --- (GS, AGM, 2024/04/24)

Future Outlook for Deal-Making Sustainability

Investment banks like Goldman Sachs and JPMorgan Chase are focusing on sustainable economic growth, environmental justice, and inclusive development to ensure the future sustainability of deal-making. By managing headwinds and improving operational efficiency, these banks aim to drive long-term value and align their activities with global sustainability goals.

"It will help the bank better meet current and future expectations of investors, regulators and other stakeholders on environmental justice concerns and it will reduce the company's contribution to the systemic risk of inequality and" --- (GS, event transcript, 2024/04/24)

"To support the U.K.'s increased policy focus on sustainable economic growth, JPMorgan Chase is expanding its philanthropic and business investments by applying its unique expertise, insight and resources across the firm to help further drive inclusive economic development. Today's £40 Million Announcement Aims to:" --- (JPM, press release, 2024/05/14)

"We feel good about our position as a prime and lend-centric issuer. We will continue to take mitigating actions to manage through the headwinds, [lap] (ph) the credit cycle, and drive more value from retail banking and retail services, while improving the overall operating efficiency of the business, all of which will ultimately result in a higher returning business over the medium-term." --- (C, earning call, 2024/Q1)

"We commend the company's commitment to achieve net 0 finance emissions by 2,050, aligning its finance activities within netzerotwo,050 pathway and deployed $750,000,000,000 across its financing investment and advisory activities by 2,030 to accelerate the climate transition and advance inclusive growth." --- (GS, event transcript, 2024/04/24)

"About Sustainable Investing at Goldman Sachs Alternatives Goldman Sachs (NYSE:GS) is one of the leading investors in alternatives globally, with over $450 billion in assets and more than 30 years of experience." --- (GS, press release, 2024/05/23)