Best and worst groups in a recession?
Curious as to where people think the best place is to be in a collapse / slowdown? Presumably RX and Sponsors still have dealflow, with ECM being a pretty poor spot as IPOs halt
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Obviously, RX is the best group. I think that one of the groups that will be tough this time around is tech, as a lot of the pullback is concentrated in that area.
In tech IB and think things will likely be generally fine. There’s so many PE $ at work in the space now that deal flow has to continue. Look at the funds that are being raised now earmarked for tech - Thoma, Insight, etc all have mega-billions set aside exclusively for tech companies. I agree mega cap deals will slow as strategic public company market caps get hit, but the truth is most IB fees (unless your at Qatalyst or Allen) are made on $2B PE sell-sides, not Microsoft mega deals, and there’s too many PE funds chasing deals to stop. Maybe values slide a bit but I don’t think the thesis changes
Power & Utilities is pretty non-cyclical, as well as Aerospace & Defense.
Not for all recessions, but O&G should be okay for this one
Why? Not doubting just genuinely curious
Genuine advice: if you have to ask this, you need to catch up on your current market knowledge.
I'll bite. Amidst what is looking like an impending recession, energy commodity prices have skyrocketed due to a combination of fundamentals, and a scarcity that is exacerbated by the Russia/Ukraine conflict. With triple digit oil prices, and boosted natural gas prices, O&G companies are literally printing money. While this is bad for any sort of financing activity in the sector, this wall of cash flow can essentially go towards debt pay-downs, dividends, buybacks, but most importantly, M&A and asset purchases.
The market is mature, which means consolidation is inevitable. Lots of the smaller players who have been looking to exit the space since the crash are now able to sell at decent valuations, and the larger players have the dry powder to pay for them.
Thoughts on Levfin?
I’d imagine balance sheet banks that have LevFin doing DIP financing work might be alright? I mean somebody has to work on the restructuring situations.
They do ok but definitely get a lot of deals put on hold due to a more volatile environment (already seeing this when working with our lev fin desk). Companies don't want to make the concessions that investors want and who are much pickier on what they will invest in the recession for obvious reason, there's also less capital going into the space given the riskier nature of high yield debt. Also, sponsor deals go down a bit in this environment and can't put on as much debt, usually 1-2x fewer turns than when things are good (obviously depends on the particular company / industry).
Thoughts on FIG?
FIG does fairly well compared to other groups as banks and insurance companies always need more capital, many of the larger firms have annual pref or IG debt offerings. Its relatively low margin given basically all banks and insurance companies have very high investment grade ratings given the regulatory environment. The other sectors probably don't do as well, especially fintech which is generally more cyclical (especially anything ecommerce driven). Some crypto/blockchain companies are still getting pretty good valuations as the space grows but the exchanges are getting crushed.
Thanks for the insight
Hot take: Commercial Banking front office and the less prestigious finance jobs will probably do fine
Debt becomes more attractive during times of downturn no? Because equity prices are low they'd have to give up more for less?
Maybe proportionally of a smaller total but investors will also shy away from riskier debt as well and demand better terms on most debt issued which companies will be hesitant to agree to. Also, in hard times, investors will be less likely to invest in higher leverage companies / support acquisitions financed with debt so less debt will be issued than if market is doing well.
Best: Restructuring
Worst: Tech
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