Soft-landing for deal making in Q4?

Following the sharp contraction in deal-making activity during 2022, the first nine months of 2023 has presented few glimmers of hope for recovery, as investment bankers navigate a difficult macro-economic environment, rising interest rates across much of the developed world, a risk-off sentiment and continued geo-political instability.

1. Europe leads worldwide retreat as Q1-3 M&A slumps to $2trn.
2. Global IPOs fall to a seven-year low.
3. Investment-grade ticks up just shy of $7 trillion.

For M&A bankers, the heady days of 2021 are a distant memory. A disappointing 2022 has only worsened so far this year, with world-wide M&A activity falling 27% in the first three-quarters of 2023 to hit $2trn – the slowest market since 2013.

The steepest declines have been among mega deals of more than $10bn, which are down 42% to total $374bn. Meanwhile, the number of transactions is also down, by 8% to 41,000, as fear permeates even smaller entrepreneurial transactions.

Europe has led the retreat, some 45% lower than the first nine months of 2022, to register just $392bn in aggregate acquisitions of companies with European headquarters, marking a ten-year low. The fall in Asia-Pacific was a relatively modest 26%, while the US decline of 23% saw it take a 44% share of total worldwide M&A.

Financial sponsors, typically a balancing factor in the market, have also retreated from the market, as their own access to funds becomes log-jammed. Private equity backed buyouts dropped 40% year-on-year to total $403bn. However, their share of of the total M&A market stands at 20%, which remains historically high. Fees earnt from financial sponsors fell 16% compared to a year ago, accounting for $8.7bn globally.

In terms of sectors, energy & power deals have emerged as the most acquisitive part of the global economy, to account for 14.5% of all deals (albeit falling in absolute terms by 21% on the same period last year.) Technology M&A was just behind, having fallen 55% year-on-year, while healthcare now accounts for 13% of M&A.

Meanwhile, deal activity involving sustainable companies dropped 15% to touch a three-year low of $111bn. By number of deals, China led the market for sustainable M&A activity, taking an 18% market share.

In terms of global M&A advisory rankings, Goldman Sachs looks set to retain its clean streak at the top of the table this year, while JP Morgan and Morgan Stanley switch positions from the same period last year to take second and third places, respectively. Meanwhile, independent boutique firm Centerview Partners has burst into the global top 10 to take sixth place.

The market for equity issuance remains moribund, with world-wide equity issuance up 8% from the low-bar set in the first nine months of 2022. So far this year, 3,500 equity offerings have raised $403bn and there are few reasons for cheer, with third-quarter issuance falling 13% since Q2.

The US offers one bright spot, with equity issuance up an impressive sounding 69% year-on-year, although in absolute terms, this isn’t much more than bouncing along the bottom of historic levels. Europe rose a more modest 23% while Asia-Pacific diverged from the pack and saw equity issuance garner just $159bn, a 24% fall year-on-year.

US IPOs more than doubled compared to the same period in 2022, and yet remained one of poorest showings this decade. Worldwide IPOs were down 23% to a seven-year low, to raise just $90bn.

Elsewhere, follow-on offerings ticked up 16% to raise $240bn globally and sustainable companies raised $21bn, an increase of 6% year-on-year.

Interestingly, stronger interest in convertible issuances from the energy & power and technology sectors saw this market grow 44% to raise $72bn and take 18% of the global equity market in the first nine months of the year.

In the league tables, Goldman Sachs is global number 1 for equity mandates, followed by JP Morgan and Morgan Stanley in second and third places.

Chartists may observe a pattern of declining DCM activity as recent calendar years progress, although 2023’s intrayear falls have been relatively modest, allowing global debt issuance to tick up 2% year-on-year to reach $6.9trn. The number of new offerings also ticked up 3% to 22,150.

Investment grade issuers have been leading the way, with a 5% increase in proceeds to reach $3.4trn – albeit the slowest nine-month period for high-grade corporate debt since 2019.

By contrast, the global market for high-yield corporate debt is more like a slippery-slide, with the heart-stopping plummet since early 2021 converting to a somewhat soft-landing so far this year. To-date, these lower-rated corporate borrowers have raised $170bn, an increase of 51% year-on-year. Between them, the US, Canada and Germany shared three-quarters of the market.

Notably, much of the gains in the market have been led by real-economy sectors, such as consumer products, media & entertainment, consumer staples and energy & power – all enjoying double digit increases. Meanwhile, the marketshare held by Financials and Governments fell slightly, from 79% to 77%.

Sustainable finance bonds raised $621bn so far in 2023, an increase of 4% year-on-year. Issuance within its largest segment of green bonds, increased 16% to raise $353bn – although a tougher environment heading into Q3 leaves the market in a downward trajectory heading into Q4.

So far this year, the investment banking fee haul has proven more resilient than the capital markets themselves. The global wallet stands at $78bn, 12% short of last year’s income and a seven-year low.

Deal-makers in Europe suffered a mere 7% aggregate pay-cut, to take home $18bn, while their counterparts in the Americas took a 16% hit to earn $36bn. Bankers focused on the technology sector have been hardest hit, with fees down 41% compared to the same period last year.

JP Morgan maintains its top place for overall investment banking fees globally, with $5.5bn in the first nine months of 2023, to take a 7% market share, with Goldman Sachs coming in second with 5.5% of the market.