How does all of this affect IBD?
I've been reading many articles, such as the following, that spell death for the investment banking industry.
http://www.ft.com/cms/s/0/ccc6d456-8fd7-11dd-9890-0000779fd18c,dwp_uuid=11f94e6e-7e94-11dd-b1af-000077b07658.html
Yet, it is really S&T that they are talking about. After all, M&A only boutiques and middle market firms seem to be doing alright. So what does that really mean for IBD's outlook? Is Corp Fin going to regain its position in the forefront? How will the banking industry as a whole recover and regain its luster?
I think what we will see in future is a greater segregation of the S&T side and the M&A (IBD) side of the business. I am thinking that M&A bankers will be pretty annoyed that their S&T counterparts have been the ons that have been causing these write-downs but yet they have to pay for it.
M&A should be ok going forward (sure there will be reduced head count due to over-hiring during the boom times), but M&A work is still needed and would be needed in the future. Also, compared to S&T, it is a relatively capital free business - you need a few warm bodies and a few computers with excel/powerpoint installed and you're set up for business. None of these capital ratios and blah blah to worry about...
Now, you may think that I am of the view that the boutiques and MM firms will step up to the plate. In my opinion, that is a difficult one to answer. One can see the argument where the M&A only firm provides pure advice. But my opinion is that their public market takeover capabilities are diminished when compared to an integrated bank with a S&T function. There are a lot of synergies between the IBD and the flow trading side of S&T - esp in a public market takeover. Having access to the information flow from the market is a great synergy and advantage - not to mention having the ability to do hostile raids etc etc. And having the ability to go out and actually talk to major shareholders on what their views are of company XYZ is invaluable (a la the corporate broking functions that is common in the UK).
Maybe a solution would be for a boutique to tie up with a stockbroking firm whom it relies on for public markets feedback. But I am not sure that it can be practical. What will probably happen is the client retains 2 sets of advisers - one the "independent" and the other an integrated firm.
So what are my conclusions: 1. M&A teams will still be needed (at a lesser headcount) 2. I do not think necessarily that boutiques will step up and fill the role of the BBs - though you will have more people trying to play up the role of the boutique in their marketing campaigns. 3. Prop trading will be less of a priority in the near future 4. Flow trading will still be ok 5. An increased emphasis on traditional merchant banking where BB's become more like PE. This is where their outsized returns will come from in future.
Just my thoughts
There already is a huge separation between IBD and S&T...
MM and boutiques "doing alright" is a relative term and may have been true 6 months ago but deal flow has still slowed in the $50M - $600M range.
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I think the primary synergy obtained from a universal bank is their ability to throw down their balance sheet. In this market, this is nearly meaningless as the banks are not willing to do this.
Do you guys think that M&A/equity deal flow will continue to be slow? One thing that many bankers at my firm have been counting on is the flood of PE portfolio companies that are starting to pass the 5 year mark, that will have to be let go sooner or later.
My fund is approaching our anticipated divestiture timeline for several portfolio companies but as I am sure you can imagine we are not going to sell in this type of environment under current valuations. Instead we are focused on survival, rationalizing RE portfolios and recapitalizing operating companies to ensure that they have enough liquidity to survive the downturn. I think deal flow will continue to be slow based on the lack of financing and the aforementioned bid-ask spread between valuations.
How long do you think you can reasonably hold on to those companies? IRRs must be getting destroyed. I presume that there will be more of a focus on operational improvements as well, since this is the only viable driver of value at the moment.
What do you think PE hiring will look like 2-3 years down the road? I know it is anyone's guess at this point, but just curious what your views are.
Believe me, IRRs are getting destroyed but we think our operational improvements and consolidation of certain entities will create value over the course of the next 1-2 years.
As far as hiring, despite the downturn and slowdown in deal flow PE opps should only decline slightly as PE shops run a very lean operation (relative to IB) so the supply is more static than that of IB. With that said, I think there will be a general movement into other fields as regulation and taxation (F the democrat's tax plans)make PE/VC less profitable. I think new developments in tech will make it the next hot sector (along with energy) as the internet continues to evolve at a rapid pace. PE peaked in 05/06 and will likely not return until the next business cycle 3 - 5 years as WS has a very short memory and will likely leverage up again.
Silly traders lost all that money trading those fancy derivatives. Oh well atleast they went to a target.
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