Inevitable Downfall of IB
Just had a thought recently about the future of investment banking and the reason why bankers feel poorer relative to the 2000s and why this will go further downhill unless things change in the industry. hear me out.
M&A has had its ups and downs since the late 90s (which is when M&A became very popular). there were peaks in 99, 07, 16, 21. But the total global deal value of these peaks are very similar. Each high had a subsequent following years of recovery and following resurgence. But if we average the value of deals in these cycles, they are similar. What I am saying is there isnt a clear upwards trend in M&A deal value since 99. See this link: https://www.statista.com/statistics/267369/volume…
Yet, banks are charging the same comission fees on average since the old ages. ~2% of the deal value on average. But if there isn't a sustained upwards trend in deal values over time, then on average, over these cycles, bankers will be receiving a similar nominal amount. For example, 2007 (peak) deal value was 5tn globally. In 2021 (peak), it was 5.2tn globally. Yet, assuming an average 2% deal fee across banks, the bankers in the 2007 era earned the same nominal amount as in 2021. DESPITE close to 40% in inflation between these periods. So these bankers at the peaks in 2007 and 2021 are earning the same nominal amount (whole market), but they are 40% poorer in real terms.
If bankers keep using commission structures, this will be a long run downwards trajectory. How can banks avoid this???
And that’s why banks never raise their base salaries unless forced to.
Your statement is correct if you assume sellside M&A is the only way banks can make money and they've always taken 100% of that pie. In reality banks will (and are) address this by doing more work on buyside engagements, debt / minority equity financing, secondaries, private placements, etc. On the second point, many banks have much better industry coverage than they used to, i.e. more deals are getting done with intermediaries involved (at least in my market segment).
interesting take - doesn't that just diversify revenue streams rather than increase it nominally over the long run (understand that it could increase revenues in the first couple years to a new base level)? i.e., they could be doing all these different assignments, but given limited capacity and a highly commission fee structure, they would still be earning similar in the long run even if its at a higher level
facts. not to mention the total number of people working in IB has also increased materially compared to ‘07, meaning downward pressure on those fees being split across more heads.
I think you're right, but for (mostly) different reasons.
1) I'm afraid I can't view the Statista chart, but I'm using this data: https://imaa-institute.org/mergers-and-acquisitions-statistics/
2) I'm pretty sure that if you take long-term average it's up and to the right, and at a broadly inflationary level (cheating a bit by excluding 2023 / 24 but those have been very down years). I do think there's a sustained upward trend (although it might even be below inflation)
3) Another user pointed this out, but fee pools are more than M&A and don't necessarily need M&A (financings, IPOs, capital raisings, share buybacks, risk solutions, etc.)
So revenue pools are up, BUT you're still right I think:
4) More people in IB as another user pointed out (industry is MUCH more competitive than it used to be - I work on much more co-advisory mandates than I used to). This is probably the biggest point.
5) Costs have increased (more people in support functions (and they are paid more) like Compliance, more CRM and analytics tools like FactSet, Salesforce, increased regulatory costs like licenses, etc.)
6) Taxes only go in one direction, and that certainly will make you feel poorer (I don't think you intended to address this point though)
7) We're dealing very much with global M&A data, and countries such as China and India have grown enormously. Now, there are culturally lower fees in, for instance, APAC (and even Europe) versus the US, but more M&A deal value is today allocated outside of US (and Europe) than it used to be, so I suspect (I have NOT dug into this) that US bankers at least feel poorer in part due to this
Overall though I think you have a good take.
Have had a similar thinking for a while now — in the job for close to 10y and fees have been up (nominally) only when EVs trailed upwards as well while relatively staying flat.
Would agree with the Count that there is an increase, which can be argued bottom-up and top-down. Top-down has been addressed already, bottom-up would include e.g. increased revenue potential of comparable businesses given inflationary price increases — the same software costs probably 3x as much as in the early 2000’s (given SaaS migration, inflationary + other price increases etc.).
But would agree with OP that fees are somewhat locked in — in Europe rather at 1% — and it won’t be easy to counteract this commoditization, especially given the many smaller boutiques trying to take market share. We see fierce competition from 100m upwards already and this is barely value-accretive given longer time needed to sign/close, much more random stuff to be done (client requests, 100 turns of IM, ad hoc analyses), so it does not look like the salary per head will trail up by much in the coming years. If looking at bonus data from some of the NA banks, it looks a bit worrying…
My experience after 25 years
Median comp is down about 25-30% in inflationary terms
The top 10% is up 30-50% in inflationary terms
The top 1% is unrecognizably higher
Deal wallets are cyclical but have consistently gone up
The industry has made much more conscious differentiation (and rightly so in my view).
Also BBs have become highly commoditized and the best paid bankers sit in the boutiques and the MMs. If I look at the top 5 bankers in my industry vertical on comp, only one sits at BB and the others range from the elite (EVR, CVP) to the random MMs. I work at a MM and the idea that I would make 2x my counterpart at MS / JPM would have been unthinkable 20 years ago, but the industry has paid on performance and BBs have realized that their offering comes down to banks not bankers.
Can you expand on the last point? You mean the BBs realize their performance is based on the bank itself (brand, balance sheet, etc) rather than the individual talent of the banker?
That's the gist
I think the wider point is that the REALLY talented bankers realise that they can get paid a lot more at a boutique or MM than a BB. Any one banker's contribution to the budget of a BB IB division is, on average, a rounding error. They'll be paid more than average, but the overall IB bonus pool won't budge must on the performance of one banker.
At a MM / boutique, if you are bringing in 40% of the bank's entire fees, you'll be paid like a king / queen (and probably get to act like one too). It can be better to be a big fish in a little pond than a little fish in a big pond.
Everyone is feeling poorer thanks to libtards running economy. If you think bankers have it bad, look at doctors and healthcare professionals. Their salaries have barely budged in the last 20 years.
This is a good point. Basically any wage job has not risen in pay (other than certain tech roles) in the last 20 years… it’s not just banking
Yes wages in software has gone up because the zero interest rate environment led to a big push in VC / tech investments in areas that make zero money, but stimulated demand for software engineers. If you look at careers in the real economy, nearly all wages have gone down. Civil / mech / electrical engineers make $80-$100k/year.
Geopolitics and the end of globalization will drastically impact cross-border M&A
Yeah. It will lead to a lot of multinational companies selling their businesses in... "undesirable" geographies
Im out of free statista views for the day, but I'd be thoroughly surprised to not see a rise in average deal value.
That being said there are a couple things that could contribute to this:
-the rise of M&A over the past 30 years has created a lot of consolidation making larger deals not available and forcing consolidation of smaller companies for inorganic growth
-Larger regulation around megadeals lately siginificantly impacting "Total Valuations" of the M&A industry
It was my understanding that back in the day bankers were able to charge larger fees for deals and that was what has changed from a comp standpoint - due to the over saturation of banking competition today
From first principles.. any fee based business structure will have fees decrease with increased competition and innovation. In the future where markets for services and labour are hyper liquid globally, cost for everything comes down. Ownership of real assets and equity will be only place for outsized returns, time for money exchange in service based businesses will go to the lowest bidder
Focus needs to be on value creation, not value extraction
Velit enim voluptates accusantium laudantium quo libero. Aut officiis et molestias sit totam. Quia deleniti rerum ea odit id in aut.
Deserunt maxime minus reiciendis. Numquam voluptatem ut dolorem iusto sit ut. Officia repudiandae nostrum odit omnis accusamus enim. Nisi quo ipsum odio rem ea nisi. Ratione rem voluptatem ducimus modi facilis. Quis sed vel iste. Autem eos eveniet blanditiis dolorum qui.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...