Dealmaking in U.S. investment banking is showing signs of revival, with the big five banks reporting a 27% increase in first-quarter fees from mergers and fundraising activities compared to last year. Bank of America leads with a 35% rise in revenue, but the sector’s recovery remains uneven. Key drivers include robust bond and loan sales, spurred by anticipations of interest rate cuts. However, challenges persist, particularly in private equity and regulatory environments, hinting at a potentially turbulent 2024 for the industry.
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By Paul J. Davies
DealmakingĀ is back! At least thatās what it looks like after the big five US investment banksĀ reported a 27% increase in first-quarter fees from mergers, takeoversĀ and fund raising than the sameĀ periodĀ last year. Beneath the surface, the recovery is patchy and the bullish outlook of many Wall Street executives relies on private-equity firms getting back into the game. ___STEADY_PAYWALL___
Bank of America Corp. saw the strongest rebound with investment banking revenue up 35% versus the first quarter last year, it said on Tuesday. Morgan Stanley, which also reported Tuesday, had the weakest growth of the five, but its fees were still 16% better than last year. Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co., which all reported earlier, also saw growth after nearly two years of depressed activity.
Still, not all cylinders are firing. Debt markets have been strongest, while stock sales recovered well, but dealmaking remains tough, especially with private equity being so quiet. Thereās plenty to keep executives and investors nervy given conflicts in the Middle East and Europe, the wave of elections coming including the US presidential race, and the paths of inflation and interest rates.
The biggest driver of first-quarter banking revenue came from companies borrowing in bond and loan markets after 2024 began with expectations of multiple US interest rate cuts, which pushed down the cost of debt funding and brought forth a flood of refinancing. Investment-grade, blue-chip borrowers led bond issuance, but riskier, junk-rated companies (including many owned by private equity funds) also replaced costlier private credit and older loans with cheaper bonds and leveraged loans.
Private credit lenders have enjoyed a boom over the past 18 months or so, but this was a fallow period for traditional loans, which are sold (or syndicated) to mutual funds and investment vehicles known as collateralized loan obligations. As interest rates peaked, the CLO market reopened, creating demand for new loans.
Denis Coleman, chief financial officer of Goldman Sachs, said on Monday that the syndicated loan market was finally functioning and healthy again in the first quarter. āThe vast majority of the activity was actually refinancing,ā he said. āA lot of that was refinancing private credit capital structures, with the more attractive pricing available in the broad-based syndicated market.ā
Overall, debt capital market fees within investment banking were nearly 50% higher than in the first quarter of 2023 for the big five banks combined. Citigroup led the pack with a 62% jump in revenue.
New stock market listings have suffered as deep a famine as leveraged loans, but with Reddit Inc., Galderma Group AG and Amer Sports Inc. among the big initial public offerings in the first three months of 2024, the market has seen a relative boom. The big five combined reported a 74% increase in fees. Both Bank of America and Morgan Stanley more than doubled their equity capital market revenue versus the first quarter last year. However, total equity raising fees still lag most quarters in 2019 and are way behind the explosive activity of 2020 and 2021.
The good thing, according to Morgan Stanley CEO Ted Pick, was that stock sales had come from across industrial sectors and Silicon Valley. The one big source of business not on his list was private equity firms, which are still struggling to exit investments and return cash to their backers.
Private equity firms have provided up to 30% of fees for equity, debt and merger and acquisition bankers for about the past decade. Their absence explains why M&A fees failed to rebound. Only Goldman Sachs saw good growth with its advisory revenue, up 24% in the first quarter. Revenue at Citigroup, JPMorgan and Morgan Stanley was down between 17% and 28%.
Citigroup CEO Jane Fraser said that financial sponsors, another name for private equity firms, were likely to return to providing 20%-30% of global investment banking fees in time. āFinancial sponsors are sitting on $3 trillion of estimated firepower, which they are incentivized to deploy,ā she said on Fridayās earnings call.
David Solomon, Goldman Sachs CEO, is also pinning his hopes on financial sponsors and the pressure they are getting from their own investors to start returning more cash. āThe sponsor activity is still muted, but I would say itās definitely picking up,ā he said Monday. More conversations with these funds were happening than any time during 2023, he said, although still at a lower level than was typical.
JPMorganās CFO Jeremy Barnum was the one executive to sound cautious. Equity and debt markets were well-set for deals in the first quarter and that probably pulled forward a lot of activity from later in the year, he said. On M&A, which is important not only for dealmaking fees but also for the equity and debt market activity that goes with takeovers, Barnum pointed to the āchilling effectā of a tough US regulatory environment and the potential influence of politics. āIn the end, weāre just going to fight really hard for our share,ā he said.
Private equity firms do need to get busy buying and selling companies again ā itās their reason for existence after all. The second quarter could see more deals get going, but to my mind it still looks like 2024 will be a very bumpy year for sponsors and the investment banks that rely on them. Hold the champagne.
Read also:
- š Which investments do best ā and worst ā in a recession ā with insight from The Wall Street Journal
- Investment masterclass, a Disney view, must-read book, from āsecond levelā Sean Peche
- Redefining AI investment: Why value investing trumps āPicks and Shovelsā ā Sean Peche
Ā© 2024 Bloomberg L.P.
