Who gets hit harder - BBs or middle-market banks?
When there's a slowdown in deal flow, who are the first to close up shop: the firms that do upper-market deals or the firms that do mid or lower-market deals? I've heard that the dealflow at BBs is more stable because, well, they are the bulge bracket banks and they're not going anywhere.
But then I've also heard that it's easier to push a small M&A deal through because it's under the radar, less resource-consuming, and not plastered across headlines.
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BB get hit worse no doubt. This is simply because BB are usually public therefore when there is no deal flow shareholders want costs cut, which is why some shareholders dont derserve a say, and banks have to act and there goes a lot of people. MM there is a lot of activity when things are slow because smaller deals get pushed through quicker and also most small banks are getting eaten up at a discount by slightly larger banks also they are private therefore no one is forcing the board to do stupid things.
Middle-market deals generally involve relatively lower, more conservative leverage that is held by a limited number of parties (i.e., the financing doesn't have to be syndicated). As a result, the leverage on these deals is less affected than that of larger, more aggressive transactions, so M&A deal flow doesn’t get hit nearly as hard as it would for larger (i.e., BB) banks.
BBs are getting hit harder right now specifically for a couple of reasons, mainly because the leverage multiples on large deals going through in the last few years have been close to absurd while the leverage multiples on smaller mid market deals have remained modest. Now bc of the crunch, less capital is available, and the big deals that were being financed by such leverage multiples are not going through because the financers are not willing to put up those multiples anymore. Mid market deals in the meantime, are still feeling somewhat of a crunch, but bc leverage multiples have still been modest in recent years its not nearly as much of a change and theyre not effected as much. In essence its mainly the big deals that are getting crunched by the lack of available capital.
MM banks generally didn't stick their necks out on these.
Not sure I agree that smaller deals are conservative and tend to have less leverage. On the contrary, you can probably find a hedge fund that will buy debt on a crazy-leveraged deal, if they believe in it. It's harder for a BB to place billions worth of funny paper on a monster deal, but you could probably find a hedge fund somewhere that will take the super-risky slices of debt on a small deal. (for the right price)
I would have to disagree with your assertion - while most of my PE experience has been with larger deals, I have had significant exposure to smaller deals and have observed that there is almost always relatively lower levels of leverage on these deals (if for no other reason then that many lenders are providing leverage based on assets, not cash flow). Not to say that a hedge fund wouldn't lever its own equity investment in an LBO (seperate from leverage at the operating company-level), but this an entirely different scenario that wouldn't affect a portfolio company.
The BBs get hit significantly harder. My bank (MM) has seen minimal, if any, disruption in our deal flow as well as our ability to close deals.
This is just funny. These are the kind of rumors that make everyone think BBs are the i-banking gods. I'd be dreadfully unhappy if I was at a BB right now ... doing endless idea pitching and not being able to close deals.
I wouldn't get too complacent. If the mega deals dry up Goldman and the others will not sit on their hands. They'll come for the MM business. And they will compete vigorously for it.
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