Why does the US have so much more investment banking activity than the rest of the world?

Why does the US have so much more investment banking activity than the rest of the world? Why more M&A? Why more capital markets (both debt and equity) activity?

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Comments (69)

  • Analyst 2 in IB - Cov
Mar 7, 2021 - 12:47pm

The United States is the world's largest economy with a GDP of approximately $20.513 trillion, notably due to high average incomes, a large population,7 capital investment, low unemployment,[8] high consumer spending,9 a relatively young population,10 and technological innovation.

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Mar 9, 2021 - 8:12pm

Solid read, can confirm.

Quant (ˈkwänt) n: An expert, someone who knows more and more about less and less until they know everything about nothing.

  • Intern in IB - Cov
Mar 7, 2021 - 9:58pm

The US was the pretty much the only major western nation to come out of WW2 unscathed. During the 1980s, a lot of very corporate friendly policies were passed such as lower top marginal tax rates and corporate tax rates. Supply side economics worked really well for the corporations in the 1980s and onward. Today, many western nations in Europe like France have had strong democratic-socialist policies which aren't really friendly toward mega-corporations. The European Union has also capped banker bonuses which makes a lot of top talent want to work in the United States. 

If you want to go back even further, the US had a *lot* of untapped potential in the late Reconstruction Era (1865 - late 1870s) which eventually began to become more utilized which resulted in explosive growth during the Gilded Age (late 1870s - around 1900). This explosive growth slowed during the Progressive Era (around 1900 - 1929) due to progressive policies such as Roosevelt's trust busting and labor laws. Obviously it all went to shit in 1929 which marked the start of the depression era (1929-1941) and people realized that complete unfettered capitalism may not be the best idea. (This next part is arguable): New Deal Policies combined with the complete utilization of American manufacturing resources jumpstarted the US economy which leads us to where I started this comment. The post war era wasn't the most conductive to big business due to lingering New Deal policies that strongly reduced income inequality and prevented the formation of large monopolies like those seen during the Gilded Age. Then like I said Reagan came into the pictures. The policies of his era allowed banks to take on far more risk than they could since the pre-New Deal era. Even Jimmy Carter was more lax than people remember him to be regarding banking. Later in 1999, Bill Clinton repealed FDR's law that separated commercial and investment banks which is attributable to the growth seen in 2000-2008. Then everyone knows what happened next.

Not to get too political or anything, but my personal opinion on all this is that there definitely needs to be a balance of regulation and freedom in finance. The free market can go too far like as was seen in the Gilded Age with child labor and the sort, but regulation can also go too far as well like totally banning any prop trading by banks.

Anyway, that's all from a regulatory and fiscal policy perspective. I don't really know enough about monetary policy history to give an answer from that perspective. 

Mar 11, 2021 - 5:00pm

j_cbr

I get this, but I am trying to get to the root of why the US is the largest and most attractive. What underlying conditions have enabled it?

Everything that's been said so far plus legal and regulatory framework that allow for easier / faster business transactions. Best example the takeover rules for US vs the Code for the UK or the respective for other countries. In the US is - on average - much easier to go after a hostile takeover.

Laborare Pugnare Parati Sumus

  • 1
Mar 12, 2021 - 4:13am

Higher level education institutions (colleges) - no other country / area of the world has the quantity of elite-tier universities. Fosters development of intellectual capital internally (across a huge population, no less, so massive talent pool to pull from a la Katy in the 90s) while attracting and retaining hyper-bright kids from around the globe that get employed in the states and stay. Pretty much impossible to replicate too.

Hear me now, children, for my occupation is of much import. For 82 years I have been an oil man, a ‘baron’ some have called me. Now what does an oil baron do? The answer - crush your enemies! Grind their bones into dirt! Make them regret that they were ever born! Oil is not for the weak - it is the Earth’s milk, and only the strong may suckle at Mother’s teat!

  • 1
Mar 8, 2021 - 2:21am

Just because we have the biggest economy (for now) does not mean "most of the rest of the world is shit."  The US is a shithole in comparison to OECD countries in a number of categories, with some of the highest poverty rates, highest incarceration rates, highest obesity rates, lowest early childhood education outcomes, and lowest life expectancy numbers. Americans think 99% of the world is a shithole but really only like 65% of the world is a shithole. 

  • Analyst 1 in IB-M&A
Mar 8, 2021 - 3:37am

Lloyd BIankfein

Just because we have the biggest economy (for now) does not mean "most of the rest of the world is shit."  The US is a shithole in comparison to OECD countries in a number of categories, with some of the highest poverty rates, highest incarceration rates, highest obesity rates, lowest early childhood education outcomes, and lowest life expectancy numbers. Americans think 99% of the world is a shithole but really only like 65% of the world is a shithole. 

That's most bro. Only about a third of the world is even relevant 

Mar 11, 2021 - 4:13pm

Lloyd BIankfein

Just because we have the biggest economy (for now) does not mean "most of the rest of the world is shit."  The US is a shithole in comparison to OECD countries in a number of categories, with some of the highest poverty rates, highest incarceration rates, highest obesity rates, lowest early childhood education outcomes, and lowest life expectancy numbers. Americans think 99% of the world is a shithole but really only like 65% of the world is a shithole. 

Population (mm)

World 7,700

US 328

Canada 38

EU 446

Japan 126

AU 25

NZ 5

South Korea 52

Total ex World 1,020 (13.25%)

  • Analyst 1 in IB-M&A
Mar 7, 2021 - 4:47pm

The US is the best version of the Liberal Market Economy, which relies on markets and prices to co-ordinate economic activity. In Coordinated Market Economies, like Germany, companies are much more reliant on lending from their bank, as opposed to going to the market for financing. Thus, when you combine the size of the US economy, along with the nature of financing, the amount of ECM and DCM activity is not surprising. M&A is likely a result of this as well due to the pricing mechanism and the lack of reliance on coordination / collaboration to do business (you'd just buy the company instead).

Basic facts about financial structure throughout the world - smart site

  • Analyst 1 in IB-M&A
Mar 9, 2021 - 8:22am

It's the percentage of sources of external funds for non-financial companies. The percentages indicate nothing about absolute market size.

Mar 7, 2021 - 5:06pm

Besides all the macro factors there's also a culture of growth and M&A that does not exist anywhere else. If you look at Latin American and Asian conglomerates, they are usually family owned and only make a minority % publicly traded. Then the Board is led by people related to the family. They are not risk takers (notable exceptions are Korean chaebols like Samsung) and usually diversify across the same type of businesses which require some type of government permission (telecom, mining, energy, food & bev).

This is a gross generalization but I have had the opportunity work in emerging markets and is always the same. Owners don't want to transact and see their companies as something they build for their kids to inherit and are weary of different capital structures so are usually 100% equity. The US is not like that, in the US people dream about making a company public or selling it.

  • Analyst 1 in IB - Gen
Mar 7, 2021 - 6:41pm

Because it is an "integrated" liberal market which fosters deal activity, unlike places like the EU where regulation, competition and national interests are more prevalent and customer interests are seen as more important vs. US where consolidation is easier. 
 

Also due to being the worlds largest economy and having a large private pension system, there is a large pool of capital to be invested, which, combined to the above also attracts FDI and results in a growth cycle. 
 

Also, having the largest market in the world allows companies to invest more in R&D, which fuels higher growth. That combined with having the largest tech first movers like Amazon and Microsoft which have cash cows position in their markets thus cash to invest in new ventures and you have a recipe for deal activity. 

Controversial
Mar 7, 2021 - 7:00pm

It is actually much more simpler than what others are saying. The US is not even close to being the most liberal country (its around 17 on the Economic Freedom Index), nor that young vs other developed nations, nor its unemployment is that low nor its policies are that much different than those of the EU (if anything the US is becoming more and more like the EU these past few years).

The reason the US is the epicenter of M&A is three simple reasons: purchasing power (enabled by the technological gap that the US had in the past century across industries) and a slowing down of growth over time (the ugly face of the concept know as catch-up growth) and most importantly, a culture of networking.

From an industrial organization perspective, there is a clear correlation between a decrease in growth and an increase in M&A. At its simple level: decreasing profits due to oversaturated market = further incentive to have more control of the market to be able to charge more. This is why most industries in the US are oligopolies, far from a free market and liberalized mecca. This is further enabled by companies that have a lot of power at hand due to its massive growth in the past, as the US succeeded in that its rise was also the rise of the world. In other words, American companies were selling globally as the world developed but bringing those profits home.

Finally, the number 1 driver of M&A is actually "hungry" MDs. If you actually take a look at you average transaction many times the stock of the acquirer goes down over time whereas their ability to increase prices is not materialized as you would need to acquire many more companies to have a high HHI to make it worth it. This is obviously impossible given the anti monopolistic laws in the US. The US economy has had a series of "waves" over the years (we are on wave 7) of M&A, and the number one driver of those waves has always been bankers looking for profits.

I know you probably had a seizure reading that, but it is a lot of content to type from my phone. I took a class in college that touched on this subject and it was really eye opening

  • Analyst 1 in HF - Other
Mar 8, 2021 - 3:28pm

Lmao so the waves of M&A end because bankers stop looking for profits? Pretty dumb argument. 

Mar 8, 2021 - 3:45pm

I'd say pretty dumb reading comprehension.

I never said that they ended bc of bankers rather that bankers are the main drivers. This stems from the fact that from an IO perspective most M&As are a bad decision, and historical data backs that up (companies that acquire competitors see their stocks rise and then go down to pre A levels in most cases). This is not to say that all M&As are bad at all levels rather that the capital involved would better be used in R&D for example to obtain the same return or more.

Now if there is a recession the deal flow will obviously end as there are little incentives to invest when you are not even sure you have the capital for it. If M&As where indeed driven by the desire to obtain larger profits then times of major economic growth would see few deals as companies would be overpriced, while recessions would see a surge as assets are undervalued. And yet it is always at the height of growing economic cycles that M&As peak. To put an example it wasn't until 2012 that deal flow really took up.

Banking is a people business. Bankers know people. Bankers offer companies to people and get them on board. Are there other factors? Yes, of course. But don't forget what the role of the MD is.

Mar 8, 2021 - 7:03am

Higher equity multiples which leads to larger capital raised on a smaller number of shares issued.. this is likely because of the free market principles of the US stock market, better transparency and worldwide investor visibility, justifying the premium as compared to listing in other markets. You just look at Airbnb and Doordash lmao.. I work in Asia and the stock market here is pretty flat

  • Anonymous Monkey's picture
  • Anonymous Monkey
  • Rank: Chimp
Mar 8, 2021 - 9:51am

Aside from the historical / high-level breakdowns of why the US has a powerhouse economy, the US has several things that makes it an ideal place for banking activity. 

1) An extremely deep middle market. If you look at the EU / APAC / LatAm, their middle market is extremely underdeveloped. The US has thousands of random, midwestern industrial companies between $100mm and $1bn in revenue. Those companies are extremely rare in the EU, comparatively. This is also why BBs and B4 dominate banking in Europe - there's not enough of a middle market scene for smaller players to compete. 

2) There is no technology hub on earth that can compare to Silicon Valley, and also no media hub on earth like NYC / LA. Tech drives a ton of IB business both in capital markets and M&A, and the EU tech scene isn't even close to the US. This is also why EU PE firms are almost entirely buyout, with very few GE / VC funds operating there. 

  • Intern in IB-M&A
Mar 8, 2021 - 12:54pm

RT on 2). I worked during one summer in college at a middle market investment bank. One of the sell-side deals that I worked on closed recently, and while looking at the financials of the company, I was stunned to see how random founders of industrials companies can make a cool $20M after selling a company that's headquartered in the middle of nowhere in America. 

Mar 8, 2021 - 1:09pm

nontargetscum

Aside from the historical / high-level breakdowns of why the US has a powerhouse economy, the US has several things that makes it an ideal place for banking activity. 

1) An extremely deep middle market. If you look at the EU / APAC / LatAm, their middle market is extremely underdeveloped. The US has thousands of random, midwestern industrial companies between $100mm and $1bn in revenue. Those companies are extremely rare in the EU, comparatively. This is also why BBs and B4 dominate banking in Europe - there's not enough of a middle market scene for smaller players to compete. 

2) There is no technology hub on earth that can compare to Silicon Valley, and also no media hub on earth like NYC / LA. Tech drives a ton of IB business both in capital markets and M&A, and the EU tech scene isn't even close to the US. This is also why EU PE firms are almost entirely buyout, with very few GE / VC funds operating there. 

Great answer. I think it goes even further than just media/tech - American companies are leaders (or strong contenders) in most other industries too. Think of the COVID vaccines - American companies developed four of them. It may be a shit industry now, but American energy companies completely upended global oil & gas markets and fed deals and cap markets fees to banks for years. Or think of the financial industry itself - most dominant, global banks are American. Most global independents are American. 

  • Prospect in IB - Cov
Mar 8, 2021 - 11:31am

Capitalism, democracy, rule of law, incredible universities, consumer culture, superior geography, etc

Mar 9, 2021 - 5:01am

I can't believe this has been missed but I think it's much simpler than the above. Yes there are cultural factors that make Americans more risk seeking and this envelopes immigrants too (there is also a risk when migrating). But I would say number one is the single market with a single language and relatively homogenous culture (vs eg Europe where Germany and Spain are very different) covering a population of 350m people. Contrast other countries where English is the core language eg the UK, Australia and it is much more advantageous to grow by M&A because there are more synergies and a larger TAM. Much harder if you're in the UK (pre brexit let's forget about today!) to expand into Europe via M&A as you have a lot more work on the language and cultural integration. This goes way beyond just "hurr don't take a siesta" and into the depths of risk seeking behaviour, reward/gratification, values and communication. Then you can start to add on different regulatory practices and the presence of unions and social rights across Europe which alll make M&A less attractive. Much much easier to find synergies and savings in a relatively homogenous market with less regulator driven social protection.

Offshore liffe
  • 3
  • Intern in IB - Gen
Mar 9, 2021 - 3:42pm

Pretty much this. The EU's economy is the same size as the US, but they're fragmented by culture and language. Makes it harder for business (and M&A) to thrive the way it does in the US as companies are more limited to their local markets

Mar 9, 2021 - 3:28pm

The shortest answer: capitalism.

The next shortest: an economic mindset that only accepts but welcomes change.

The next: the conditions are present for changing jobs and changing companies: "at will" employment agreements with few termination costs; easy company formation, as opportunities and talent find each other, enabled by ambition, risk-appetite, few regulatory roadblocks, and access to major supply factors: labor, capital, and technology, resulting in vibrant and dynamic real-economy activity.

The next: as the above-firms grow, existing firms feel the competitive pressure and not all of them can adapt: the conditions are present for orderly management of distressed/failing companies, by way of a clear bankruptcy management process, flexibility around acquiring companies vs assets and how you set the basis in them, how you handle employees, intellectual property, etc, with reams of specialized advisors to ensure the distress is managed smoothly.

The next: primary capital is available for the birth, death, and life in-between of companies, whether it's through friends & family, angel investors, venture capital firms, bank loans, or institutional investors, as all stakeholders understand there is a pie to grow and share, with clear property rights established by law and with predefined outcomes within a world of unpredictable real-economy events.

The next: that primary capital is available in large part because there is an ecosystem of take-outs and/or secondary markets that ensure liquidity and therefore reduce risk; early stage investors trust they can obtain liquidity preference through deal structuring, while for mature companies, an acquirer can pre-establish their position thanks to a bridge loan, and trust that the debt can be switched out and spread the risk to more creditors via a bond issuance, or when IPO buyers trust that the existence of a highly liquid secondary market for shares can allow them to get out of the risk they've bought themselves into.

If you can't figure out how the above is much more true of the US vs other markets, and how the above allows for deal-making to thrive, and how deal-making relies on professional advisory and balance sheet deployment, then I can't and won't help you any further. 

The truth is you're the weak. And I'm the tyranny of evil men. But I'm tryin', Ringo. I'm tryin' real hard to be the shepherd.
  • 5
  • Prospect in PE - LBOs
Mar 9, 2021 - 4:29pm

While I'm generally a huge free-marketeer and neolib shill, the rise of the US economy and the economies of the some of the most advanced economies in the world can be attributed to pretty protectionist policies. Arguably, the rise of the US, and even Japan, South Korea, and to some extent Modern China, can be attributed to the American School of economics which called for protectionist policies for certain "key" industries, a strong national bank, and government investment in infrastructure.

The US was essentially torn between being an agrarian post-colonial nation or a burgeoning industrial one, and for the latter to take place, Alexander Hamilton/those who followed in his philosophy argued that the US needed to impose heavy tariffs on the manufactured and industrial goods coming from the UK - since they had the most advanced manufacturing at the time. The intent was to impose a sort of "infant industry protection" where capital accumulation could occur in the industrial sector without being undercut by British goods. The problem is, it's very hard to know what industry to "protect" in the modern world for underdeveloped nations today, which is why the World Bank recommends broad free-market policies, since setting protectionist policies usually causes more economic damage than good.

The rise of the Chaebols in South Korea and the huge government-sanctioned conglomerates in Japan arguably would not have become competitive without significant government subsidies and favorable conditions early on. China seems to be attempting this in the High-tech sector today since they don't want to be relegated to the status of the world's factory forever.

I'd say the best thing to do would just be to focus on having strong legal and economic institutions with solid contract law and enforcement to attract foreign capital investment, rather than trying to get lucky by "hacking" growth, but who knows.

Mar 9, 2021 - 5:16pm

There's an interesting question buried in the op and the first responses itt were kind of awful lol.

Any economist would say the US financial services sector captures way more value than it creates. There's a picture of a banker next to "rent-seeking" in the economics dictionary probably. Why? Probably some mix of:

(1) the fed's implied subsidy (ie too big to fail) that lets banks finance themselves at an artificially low cost of capital,

(2) the fed's literal financing subsidies (eg the discount window),

(3) effective lobbying. I'd bet my life we don't see a return to Glass Stegall (thankfully) even with dems in control of the White House + congress

(4) corporate inertia/management incentives. there's no real incentive for a public company executive to save a little $ on a sell-side process/ipo/debt financing by bargain hunting on advisory fees. If anything goes wrong, they would look horrendous for hiring a no name bank instead of Goldman Sachs. It's not like they pay the fees personally, after all

(5) huge barriers to entry (economies of scale/regulation/relationships/reputation) that make it difficult for new entrants (including the advisory space) 

and so on.

Mar 11, 2021 - 1:45am

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  • Analyst 1 in IB - Gen
Oct 4, 2021 - 2:05pm

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