Investment Banking Update 9M’23: Capital Markets Remain Sluggish

Highlights – 9M’23

M&A activity falls to a 10-year low

In 9M’23, M&A deals across the globe declined by 27%, compared with last year, to USD2.0 trillion, marking the slowest first nine-month period for deal making since 2013. A similar trend was witnessed in Q3’23, during which deals decreased by 16%, compared with Q2’23, marking the slowest third quarter for worldwide deal making since 2012.

In terms of regional split, M&A activity in Europe, APAC, and the US was down 45%, 26%, and 23%, respectively, on a YoY basis. Growing inflation, high interest rates, and geo-political tensions continued to weigh on M&A activity. In terms of sectoral trend, energy and power, technology, and healthcare led the mix and accounted for 15%, 14%, and 13% of deal making activity, respectively, in 9M’23.

Debt capital markets remain solid

In 9M’23, global debt capital market (DCM) activity stood at USD6.9 trillion, up 2% compared with 9M’22, making it the strongest opening period for DCM since 2021. Meanwhile, the number of new DCM offerings increased by 3% YoY to a two-year high. During 9M’23, investment-grade corporate debt issuances were up 5% YoY; also, high-yield issuances continued their strong momentum and were up 51% on a YoY basis. Green bond issuances totaled USD353.5 billion, up 16% YoY, although Q3’23 was a laggard, down 41% compared with Q2’23. In terms of sectoral activity, while the media and entertainment, consumer, and energy and power industries registered double-digit percentage increases compared with year-ago levels, the retail and telecommunications industries plummeted.

ECM activity reaches two-year high

Global equity capital market (ECM) activity stood at USD403 billion in 9M’23, up 8% YoY, marking the strongest first nine-month period in two years. The US accounted for 26% of overall issuances and recorded a growth of 69%, compared to 9M’22. China accounted for 27%, down 27% on a YoY basis. Global IPOs, excluding SPACs, stood at USD91 billion, down 23% YoY, marking the slowest opening period for global IPOs since 2016, despite a strong show from US listings, which doubled in the same period. Convertible offerings, which totaled USD72 billion, were up 44% YoY and accounted for 18% of ECM activity. Industrials, technology, and energy and power were the most active industries and accounted for 50% of overall issuance of convertible offerings.

Top five M&A deals

Announcement Date
Acquirer’s Name
Acquirer’s Location
Target’s Location
Value (USD billion)
Target’s Industry
Deal type
Mar 13, 2023
Sep 21, 2023
Cisco Systems
Mar 12, 2023
Black Spade
Hong Kong
VinFast Auto
May 14, 2023
Magellan Midstream
Cash & Stock
Jun 13, 2023
Cash & Stock

Unfavorable market continues to create headwinds for global investment banks

Investment banking revenues of all major investment banks declined YTD’23 due to weak market conditions globally, which led to a sharp fall across all areas of business. A halt in deal-making amid weak macroeconomic outlook, high levels of inflation, and geopolitical tensions were the main factors responsible for the decline. Going forward, market performance is expected to improve heading into 2024 due to pent-up demand for M&A and a strong pipeline, provided the macro environment remains stable.

9M’23 investment banking revenue and YoY change

Note: Revenue for Deutsche Bank and Barclays were converted into USD using the exchange rate as on September 30, 2023; Revenue for Deutsche Bank reflects revenue from Origination & Advisory services

Bulge bracket investment banks – Performance highlights

JP Morgan’s investment banking (IB) revenues and fees were down 6% and 3% YoY respectively in Q3’23, due to lower advisory fees, which were down 10%. However, underwriting fees were up 8% for debt and down 6% for equity. Advisory picked up pace, compared to the first half of the year, although year-to-date announced M&A remained significantly low, which is likely to be a headwind. In terms of outlook, the company was encouraged by the level of capital markets activity in September, and has a healthy pipeline going into Q4’23.

Goldman Sachs’ IB fees remain unchanged on YoY basis in Q3’23, due to higher net revenues from debt underwriting, driven by leveraged finance activity, and higher net revenues from equity underwriting, mainly from initial public offerings, offset by lower net revenues from advisory, reflecting a decline in completed M&A transactions. The bank expects its global markets and banking business to deliver returns in the midteens in 2023.

Morgan Stanley’s IB revenues were down 27% YoY in Q3’23. Revenues from advisory decreased compared to a year ago, due to a lower volume of completed M&A deals. Revenues from equity underwriting increased, mainly driven by higher block offerings, partially offset by lower revenues from IPOs. Revenues from fixed-income underwriting decreased, primarily due to lower event-driven non-investment-grade activity. The bank witnessed positive client activity during the quarter and expects the current encouraging conditions to continue in the last quarter and 2024.

Bank of America’s IB fees grew modestly compared to the prior year, despite a pool that was down nearly 20%. Revenues from the advisory and debt underwriting businesses declined by 9% and 14% YoY, respectively, in 9M’23, whereas that of the equity business grew by 32% during the same period. Total Investment banking fee was up 2% YoY in Q3’23. These aspects indicate that the bank’s investment banking business is performing well, despite the sluggish environment.

Citi’s IB revenues increased 34% YoY in Q3’23, reflecting increased client activity across debt underwriting. Revenues of the advisory segment declined by 21% YoY, while that of equity underwriting increased by 32% YoY in Q3’23. Based on its strong pipeline, the bank expects client activity to improve, although the market environment remains challenging.

Barclays’ IB fees were down 16% YoY in Q3’23, due to a reduced fee pool across the advisory and debt capital markets, partially offset by an improvement in equity capital markets. While capital markets and investment banking profitability will reduce from the exceptional levels seen in the last couple of years, it is expected to remain in a sound position due to improving income from other businesses.

Deutsche Bank’s origination and advisory revenues grew 17% YoY in 9M’ 23 and threefold in Q3’23 vs Q2’23, which was impacted by leveraged lending markdowns. However, even excluding these, revenues still outperformed the fee pool on YoY basis. The bank’s debt origination business gained from a non-recurrence of leveraged lending markdowns and reflected a partial YoY recovery in the LDCM market share. The upside was partially offset by decline in revenues from the advisory businesses, which generated significantly lower revenues during Q3’23, reflecting a lower fee pool and underperformance.

In Q3’23, UBS’ global banking revenue increased by 112% YoY, largely attributable to the consolidation of Credit Suisse revenues, which included accretion of PPA adjustments on financial instruments. The bank also witnessed a 19% decrease in its market fee pool. Revenue from the advisory business grew by 40% in Q3’23 YoY, mainly due to a 41% jump in M&A transaction revenue and partially offset by 33% drop in the global M&A fee pool. Excluding Credit Suisse accretion, capital markets revenue increased by 33%, mainly due to higher revenue from leveraged capital markets driven by a 95% increase in fees and non-recurring mark-to-market losses.

Advisory firms struggle under challenging market conditions

Similar to investment banks, major advisory firms witnessed a decline in revenues 9M’23. Most advisory firms acknowledged the increased risks associated with the current geopolitical, economic, inflationary, and market scenarios; however, they see improvements in the availability of debt capital and are cautiously optimistic about deal making over the remaining part of 2023 and heading into 2024.

9M’23 advisory revenues and year-on-year change

Note: Houlihan Lokey’s fiscal year ends in March (represents numbers for six months).

M&A advisory firms – Performance highlights

Houlihan Lokey’s revenues were down 3% YoY in H1’24, primarily due to a decrease in the number of transactions closed, driven by softness in the M&A market. However, the firm’s restructuring business continued to benefit from higher interest rates and a fast-approaching debt maturity wall. Since the restructuring cycle was not the result of a one-off crisis, the company continues to expect financial restructuring to achieve elevated revenues over the next couple of years.

Evercore’s advisory fees decreased by 23% YoY in 9M’23, primarily reflecting a decline in revenues earned from large transactions during 2023. Its private capital advisory and fundraising business was resilient, as continuation fund activity continued to gain strength. Of the 11 Advisory Senior Managing Directors that committed to Evercore year-to-date, five have started since the last earnings announcement. While M&A activity continued to be slow in the global advisory business, the company has started to see increased momentum in client activity.

Lazard’s financial advisory revenues decreased by 30% YoY in 9M’23 due to an overall decline in M&A completions globally. It continues to be impacted by the ongoing slowdown in M&A activities and the latest results reflect the lagged state of M&A announcements from several quarters ago. While its Q3 results reflect challenging conditions for M&A, the company believes market is poised for a recovery in the quarters ahead.

Moelis’ 9M’23 revenue was down by 18% YoY but its Q3’23 revenue was up by 19% YoY. The surge was driven by an increase in fees earned from restructuring and capital markets transactions compared with the prior year period. In this period, it recruited five managing directors who will focus on strategic areas such as technology, industrials, M&A, capital structure advisory, and capital markets. Year-to-date, the firm has appointed 24 managing directors.

PJT’s advisory revenues surged by 24% YoY in 9M’23, principally due to an increase in restructuring revenue. However, the upside was partially offset by a decrease in revenue from strategic advisory and private capital solutions. Despite the current state of M&A activity, 2023 is shaping up to be the year with the lowest levels of deal making in nearly a decade. When measured as a percentage of global GDP and market capitalization, M&A activity is at unprecedentedly low levels. The firm’s strategic advisory business is not immune to a revenue slowdown, but it is still putting up a modest performance, as the dip in revenue is meaningfully lower than the slowness in overall M&A activity.

PWP’s revenue decreased by a modest 3% in 9M’23, mainly due to an increase in M&A activity on a YoY basis. Its financing and capital solutions revenues dipped due to higher financing and restructuring fees than the year-ago period, reflecting a slowly recovering global M&A market and demonstrating the resiliency of the firm’s advisory business.

Greenhill’s revenues decreased by 7% YoY in 9M’23 due to decrease principally resulted from a reduction in M&A transaction fees, offset by an increase in retainer fees. During 2023, the firm has recruited 4 additional client facing managing directors. With these recruits’ firm has expanded the teams focused on the energy, industrial and technology sectors and financing advisory and restructuring.

The road ahead

Well-capitalized companies to make bold strategic moves

During the global financial crisis in 2008–09, numerous industry-defining deals positioned acquirers for faster and more profitable growth. Likewise, in the current situation, companies with a strong market position, high cash on hand, and large debt capacity will have the upper hand in executing transactions. Nearly every sector has a few cash-rich market leaders that stand to gain. Energy, industrials, and technology stand out as industries in which the top players have solid balance sheets and can make bold moves. Companies with strong balance sheets and an M&A track record will be best positioned to complete the largest deals and generate profit in the long run.

Revival in demand for advisory services

The momentum within the underwriting and advisory business is expected to continue into the next year, albeit at a slow and varying pace, driven by strong market sentiments, lower volatility, and more attractive valuations. The persistently elevated cost of debt is expected to further drive demand for IPOs and other equity issuances. Much of the recovery in 2024 will be triggered by a combination of refinancing, sustainability-led initiatives, and event-driven acquisitions. Therefore, revenues from issuances and advisory is expected to outpace that of the trading division, going forward. More stable monetary policies and lower market volatility in many regions should compress trading revenue growth. Nevertheless, investment banking revenues may not reach the highs of 2021 in the near term.

Rise of activist campaigns

Following a brief decline during the pandemic, shareholder activism rebounded to pre-pandemic levels in 2022, despite volatile markets, depressed share prices, and macroeconomic uncertainty. The US and APAC witnessed the maximum activity in this space. A depressed market valuation may encourage prominent activist investors to launch new proxy fights, which may boost M&A volumes in the coming quarters. Shareholder activism may increase further due to the presence of many companies with components (non-core assets that can be sold / spun off; accumulated cash that could be better deployed for stock buybacks; etc.) that are favored by activists.

Small-to-midsize deals to continue

Historically, small-to-midsize deals (valued at less than USD500 million) have made up the bulk of global M&A activity. The trend is expected to continue in FY’23 as well. These deals are usually easier to complete, given their relatively lower risk, low reliance on financing, and limited regulatory scrutiny. However, regulators may show more tolerance for large consolidation deals in sectors that have struggling assets (banks in Europe, telcos in developing economies, etc.). In FY’23, so far, only a few mega deals have taken place due to heightened scrutiny from different groups of regulators across the world.

Financial sponsors to deploy available capital

In the last decade, private equity firms have become more specialized in industries and sub-sectors and gained better understanding of how businesses perform in different market cycles, which has helped them make investment decisions with a higher degree of confidence. This, along with the availability of a record amount of uninvested capital, may drive more M&A activity, despite choppy debt financing markets. The availability of high levels of dry powder could provide flexibility and the ability to take advantage of opportunities; however, it could also create pressure on firms to deploy funds and overpay for acquisitions.

Separation and divestitures could reshape portfolios

Down cycles and economic uncertainties will likely push most companies to accelerate strategic reviews and re-evaluate their portfolios. Divestiture could become more common, as it can help fund new investments. The trend of spin-offs may also drive consumer products businesses, as quick sales unlock capital and enable the leadership to focus on specific businesses. In 2022, advisory firms remained resilient primarily because of restructuring activity, which is likely to remain at elevated levels, going forward.

Talk to One of Our Experts

Get in touch today to find out about how Evalueserve can help you improve your processes, making you better, faster and more efficient.  

Deepak Singh
Manager, Corporate and Investment Banking LoB Posts
Jaskaran Singh Bhinder
Lead Analyst, Corporate and Investment Banking LoB Posts

Latest Posts