Q1 2024 M&A, IPO, Private Equity & Venture Capital Review

Hello and welcome to The Deal Room, and hope you had a great Easter if you did indeed have a break. And we're going to jump straight into a review of the first 3 months. Q1 is done, in the bag. So how have things been performing in the corporate finance world? So I've got our Director of Corporate Finance, Stephen, who's going to talk us through an update across the entire sphere from M&A, IPO, PE, and VC. So Stephen, where would you like to start on that list?

Yeah, let's, let's start with mergers and acquisitions. It's the thing that students tend to think about when they think about IBD, and it's obviously relatively exciting. And we've spoken a lot about big deals that have happened so far in Q1 2024. But I just wanted to, yeah, do a little bit of a reflection episode and just think, all right, what's going on across the world in these different areas of IBD? What are the trends and what are the good elements and what are maybe some of the structurally weaker elements as well? So starting with M&A, the story is relatively strong. There are a lot of reasons why the deal volume and deal value of M&A deals in Q1 2024 has gone up in almost every region. We're looking at the same screen in front of us at the moment. And M&A deal volume and value is up. So deal value is up 79% in Canada, 51% in the US, 58% in Europe, which translates into a 24% increase globally, weighed down interestingly by Asia, ex-Japan, down 40%. Japan down 54%, Australasia down 27%. I'm trying to get my head around why these deal volumes and values in Asia are down so much. Do you have any idea?

Perhaps it's been the surprised robustness of North America when everyone, if you think, go back, what, not even 12 months, was fearful of recession. Now the narrative already flipped some time ago to soft landing. Whereas there's still quite clear concerns about the situation in China and China being so dominant in the region. Perhaps there's just too much risk surrounding that and it, it ripple effect around that Far East perhaps.

Yeah, yeah, I would assume it's something China related. China has been soft for quite a long time and, and it just doesn't seem like there's a lot of interest in doing deals and obviously The big deals are the ones that are going to move the needle, and the US has seen 4 or 5 of those massive deals. I think we spoke about Capital One and Discover Financial and Synopsys and Ansys and Diamondback. These are all $25 billion plus deals. I think there were 14 transactions over $10 billion this quarter. So this is, you know, so this is the M&A market really starting to kick off. If we were having this conversation this time last year, we wouldn't really have anything to talk about because hardly any M&A was getting done. Now, why? The reasons behind this, I mean, firstly, interest rates stabilizing, nice conversation, nice tone coming out from the Fed, good tone coming out from Andrew Bailey at the Bank of England that it's looking like interest rates are not going to go up anymore and they're probably going to fall. As soon as there's stability, confidence starts to seep in. And let's remember interest rates, although they've been at their high, they, it was the quickest hiking cycle since the 1980s. You'll know this better than I, you know, 5.5% interest is not, it's not particularly high historically. And we've had extreme bull markets from an M&A perspective and from a stock market perspective when interest rates have been up at this level. This is not dramatic by any stretch of the imagination. So much like the stock markets, as soon as there is stability, confidence starts returning. So we've had this wonderful Goldilocks, not too hot, not too hot, not too cold economy. Inflation's been dropping nicely, but there hasn't been recession. Consumer spending has returned. House prices have started to kind of creep back up again. And remember, it's only 2 or 3 years ago that we had this huge, huge wave of helicopter payments and quantitative easing and zero interest rates. So there's trillions of dollars of cash still lying around on the balance sheets of these companies and on the fundraising of these private equity firms. So as soon as it almost feels like any excuse to go out and do these deals is going to be pounced upon. And just having this period of calm, you know, you've seen S&P break through records and the same is going to happen with M&A. I would predict that this trend of increased deal volumes and values is just going to continue for the end of the year, and if not, gain more and more momentum. I don't know what you think, Anthony.

Yeah, that's super interesting the way he describes it actually, because having lived through the sort of European crisis, the financial crisis, the recovery out of COVID has been so quick actually. I know it feels like such a negative time for so many people for so many different reasons with layoffs and cost of living crises and things of that nature. But the speed of which this is recovering now, it just seems like, yeah, like you said, it was only 2 years ago. In a heightened state of fear and anxiety and uncertainty in the market. And here we are, and yeah, stock market's record high, M&A deals are starting to fly back in. It's incredible the pace of change, actually. Yeah, I haven't seen it this quick.

Yeah, and it's going to be, it's going to be a mad year for M&A bankers. You know, you think about this combination, so there's a combination in the market at the moment of listed companies, listed corporates with relatively high share prices because there's been a decent run for the last year, which means if you're buying a company with in part your own shares, you know, that's going to be a better deal for you. The credit markets are opening back up again. So the availability of debt is A, more available and B, at a more reasonable cost. And on the flip side, and we'll talk about private equity later on, the availability of potential of companies that are up for sale is like there's never been before. There's going to be thousands of private equity exits coming on the market, potentially sold to these corporates that have got nice debt and a nice share price with which to go and buy these companies. So it really is, you know, it's going to be a mega year, I think from, you know, if you're a Goldman Sachs or JP Morgan banker, you're not going to get much sleep. But you are probably going to get paid quite nicely.

Yeah. So the question there, you know, you having done that very role in early part of your career, I'm assuming there's some different responsibilities and what's expected of you dependent on seniority of where you sit from MD all the way down to your kind of grad analyst. But I was reading a few things about, yes, it's looking good because then, yeah, the bonus pool gets topped back up. But a lot of the junior bankers were saying that back to a minimum 100-hour weeks, things of that nature. There's, there's, because of the reduction that you've seen in a lot of the more purist investment banks like Goldman Sachs, for example, there's just even more work put onto the fewer employees and the deal flow just keeps coming. So more gets expected. So how does that get balanced itself out?

Yeah. And obviously again, if we were doing this podcast this time last year, we'd be talking about layoffs. We'd be talking about Goldman Sachs axing a few hundred investment bankers and other investment banks following suit. So it is this, you know, there's probably, these are probably leaner divisions that are now going to have to face a much higher deal volume. And that will lead to longer hours for sure. I think the junior ranks have been culled a lot less than the senior ranks in these kinds of in these waves of redundancies. So I think we're okay from that perspective. I think it serves a wider point and we try and make the world of investment banking accessible and interesting and to an extent exciting through our simulations. But we also have to remind people that if they're up for a job in M&A, as much as we would love to say that there's work-life balance, when there's this much deal flow coming through, And working on a deal just to get even a small deal across the line is thousands and thousands of hours of work. It's hugely complex. So yeah, this is not a job for the faint heart. And it's probably going to be quite brutal for the next year.

So the mindset, I guess, that you would give as advice is that actually if you can pivot and survive the intensity, you're going to accelerate your exposure to deals, right? And your experience is going to double down. You're going to learn things quicker, faster. If you can get outside the other end, you're going to be in a really good place, surely.

Yeah. And as you get more senior, either in M&A or in, well, in any advisory, you are benchmarked by the deals that you've done. And if you are thinking about writing your own mini banking CV, it will be worked on X transaction with Y complexity and Z geography. And if you join an investment bank and all you're doing is pitching for a year, it doesn't look that good on your CV. So yes, it might be brutal, but if you could get 2 or 3 creds, 2 or 3 tombstones, as we call it back in the day, it'd be these, well, I'm sure they're still physical, little physical tombstones, physical little trophies to say that you have, you know, you have worked on a particular deal. You can get a few of those under your belt early in your career. Yes, it probably does set you up with the experience and knowledge, that maybe someone in a, in a less overwhelming market may not get.

Okay. So we said here M&A then is picking up pace. However, we tend to talk about IPOs nearly every episode, it would seem, and they do seem like they're picking up as well. But how does that look like as a balance between income for these bankers in terms of IPO deals, versus M&A deals.

Yeah, you put out a couple of good charts maybe last week or the week before on LinkedIn talking about year-to-date best performance across investment banks. And I think we chatted on the pod that JP Morgan and Goldman Sachs tends to top out both in terms of M&A specifically and investment banking more generally. But I'll share with you another chart. That looks at the split of investment banking revenue across these top 10 banks and across M&A versus equity, equity capital markets, bonds, debt capital markets, and loans, which usually is leveraged finance. So related to private equity. I'm just looking at JP Morgan, which is the number one bank in terms of overall IBD fee income, uh, 15% up relative to this time last year. And it does, it's made 32% of its money through M&A, 15% through equity capital markets, 27% through debt capital markets, and 27% through loans. Now Goldman Sachs is more heavily weighted to M&A with over 50% of its IBD income. But if you go down to the likes of Wells Fargo and BNP and Deutsche Bank and Barclays, They create, they generate the majority or a significant minority between 40 and 60% of their entire IBD income through bonds, through debt capital markets. And it is something that I think we need to dedicate a bit more time on it to the, you know, on the pod because it's a massive chunk of these companies' revenue, certainly in Q1 2024. That might change a bit throughout the year. But it's a significant source of fee revenue, and it's one that we tend to not talk about and tend to forget a little bit.

So, so just to give a little bit of insight, very top level, a lot of people listening, students, might not have even heard of debt capital markets. So how, how does that differ in terms of what you're working on and the pace and intensity to some of the other areas we've just discussed?

Yeah, so debt capital markets, I think the way, the way that I like to think about it is You have two ways of funding a business, right? Debt and equity. You have two types of equity, private equity, raising money for companies that are private, investing in private companies and public equity, raising money and investing in companies that are public. Same goes for debt. You have private debt, which is lending money in the private markets through normal loans. And then you have public debt, which is lending money to companies and governments through public loans or bonds. And debt capital markets is all about the origination and execution of high yield and investment grade bonds, which are subsequently very heavily traded as they, you know, much like secondary public equity markets. So it is a massive area. And it is one that is, it's got similar levels of intensity to equity capital markets. You still work extremely hard. I would say maybe there's slightly less, slightly less time pressure and deadline pressure in the world of debt capital markets, maybe relative to M&A where you need to get a bid in by the cutoff date and you need to get this deal done by the end of quarter or whatever it might be. And the exclusivity period runs out in 30 days' time or whatever it might be. So maybe it's not quite as intense as M&A, but it's certainly on a par with equity capital markets. You don't necessarily quite get the excitement of an IPO, but all of the other stuff you do is really, really quite interesting.

So yeah, I mean, actually, when, as you described, if you're talking about a BNP or someone like that, you are the moneymakers.

Oh yes, absolutely. And I used to work at HSBC and I quickly realized, having done M&A for the first bit, I quickly realized that lending was where it was at. For banks with big balance sheets, a lot of money that they can possibly lend, you want to go to the— you want to go where the bank is absolutely flying. It's a general rule for any young person entering the bank. And if you're at HSBC or if you're at BNP, you go to lending, you go to debt capital markets, et cetera.

Final question on that just before we move on to some of these IPO details then. Is there much transfer between people going from DCM to ECM and vice versa?

Yeah, there's definitely, there's a lot of transfer between ECM and leveraged finance and corporate lending because the fundamentals, it's all about credit. It's, and it's all about the creditworthiness of that particular company. So the metrics you look at, the ways of analyzing companies are pretty similar whether you're on public debt, private debt, leveraged finance, moving from debt capital markets to equity capital markets and to M&A and vice versa. Yeah, it happens. And you'll often be on a pitch with a combination of the M&A team that's presenting the potential acquisition opportunity. And then you get the equity capital markets teams to talk about how they would finance it. And then the debt capital markets teams to say, hey, you could get a bond away that would support this acquisition. So there's quite a lot of cross-pollination between the three. And therefore, you know, you do get movement between those three different teams.

That already made me think in my mind's eye, because you know, you and I have a little competitive spirit, and if you are teaching banking and I'm teaching markets, Or if you are pitching raising funds via the equity capital markets, I'm doing it through debt. It must be quite an interesting dynamic when that's playing out.

Yeah. And it's actually difficult because there is to a large extent a right answer in terms of the way that your capital structure, the combination, the mix of debt and equity is put together. And that will probably get decided within a, you know, in one of the meeting rooms within a bank. And maybe the final decision maker might be the M&A director that's potentially running the deal and go, no, no, no, it makes more sense to be more heavily weighted on the debt capital markets pitch. So we're going to put that as item number 2 in the presentation and put the equity capital markets down to item number 3, because do they need to really raise money in the public markets for this? Probably not. So yeah, it's a really interesting dynamic. And as we've said before, there's quite a lot of egos out there as well.

All right. And then percentage-wise, then just give us some context. How is the IPO market performing?

Yeah. So yeah, moving on to IPOs, we've spoken a lot about IPOs in the last 4 weeks and obviously my big buy Reddit's up 70% since it IPO'd. So I'll be cashing that in. Changed my job from long-term stable investor to day trader, I think. But yeah, no, so from an equity capital markets and IPO perspective, it's been 40 IPOs in the US so far this year, which is 18% more than last year. There's been some big IPOs, a number of which we have spoken about, and it's kind of, it's up. I was just looking at the stats here. It's up 361% in Europe. That's $7.3 billion. That must be related to some of the companies we were talking about a couple of weeks ago. Douglas, our favorite company, and Galderma. Galderma's responsible for, you know, a third of that, if not half of that on its own. So that's an extraordinary increase. And quite representative of the fact that there were just zero IPO activity at all in Europe last year. I still couldn't find, by the way, I still couldn't find a Q1 London Stock Exchange IPO. I don't know if I was just looking in the wrong places. I don't know if, have you reported on any?

Well, I like the way that when you look at these kind of, there's lots of different data vendors that you can use to look at investment banking scorecards to kind of slice and dice all these statistics up in real time. And, uh, yeah, I know we've left Europe, but you would have thought there would have been a London item on the list, but London doesn't even exist anymore in, in the UI of that website that we use. So, uh, probably says it all, really.

Yeah, it's bad. And I, and as I said, I just don't think I've seen an IPO of any, any significance, if, if any significance, if, if any IPO in, in London over the last quarter, which isn't, which isn't great. But maybe we'll Shein, who knows. Um, so just a couple of stats, and I think this is really important to zoom out and think about the equity capital markets team that runs the IPO process within a bank. And often we almost use equity capital markets and IPOs as almost interchangeable. But if you're looking again at the stats from Q1 and you're looking at the top 10 equity capital markets banks, Got Morgan Stanley in first place, JP Morgan in second, Goldman Sachs in third, and their split of fees across different equity capital markets products is quite interesting. So follow-on, which means things like rights issues. So when a company's already public and it wants to do another equity raise within the public markets, that was 61% of Morgan Stanley's fee income on the equity capital market side. That compares with only 28% on the IPO side, with 10% convertible bonds debt to equity. And it's the same every single one of these top 10 companies, over 50% of its fee revenue is follow-on. So again, we love talking about IPOs because they're fun and they're interesting. Where the money's at is follow-ons, is rights issues, is additional funding through the public markets. And it makes sense, right? You only IPO once, but you need to raise money multiple times if you're doing expansion.

So surely you put your crack squad on the IPO because if you can win the IPO, yes, proportionally it's 28% for Morgan Stanley, but that leads to the follow-on. The more IPOs you execute, surely the more revenue you get latter down the domino effect.

Yeah. And I'm very biased towards startups, but I use the startup analogy, you know, to go from zero to one as a nascent company to get a product or company off the ground, that is extraordinarily difficult. And then to run that company is hard, but it's not as hard in my mind anyway. And it's a little bit like this with IPOs. It is very hard to convince a market that a company is worth going public at a certain price to put together all the materials to do the sales pitch, et cetera. Once that company's public, doing the follow-ons, yes, there's some convincing. Yes, there's some meetings to be had, but you're already a known entity. So it's more of a kind of, uh, more transactional maybe than the IPO process is. So yeah, definitely put your crack squad on the IPOs.

And from a career, bringing it back to career visibility then, so would I be right in saying you'd have an investment bank with its banking division which would then have within it equity capital markets, which would then have within it teams that would sit in follow-ons, convertibles, or IPOs. And so you can kind of go down that way, or would those latter points again cross-pollinate?

They would say, I, I would probably say on the, and it, and it, it varies by different bank, but on the equity capital market side, you'd be split by region. Okay. And then if you were to split again, it might well be sector. You should, as an equity capital markets banker, be able to do all three of those things. There might be a separate convertibles team because it's got that debt and equity piece in there. But yeah, you should be relatively good at doing both IPOs and follow-ons.

Okay, cool. Makes sense. So let's move on then. Let's talk a little bit about PE, private equity.

Yeah, this is super interesting and I'm referencing the Bain Global Private Equity Report 2024 quite a lot in this piece and we'll put it on the show notes, so we'll put it on LinkedIn. It's a really instructive report of an asset class that's just super interesting. And the reason why it's interesting, I mean, 2023 was a bad year for private equity in terms of deal values and exit values. So deal value fell by 37%. The amount of private equity company exits i.e., I as a private equity fund own a company and I need to sell it in order to realize the upside. That fell by 44%. However, lots of big funds came to market. So fundraising was basically flat. So you've got a decrease in deal value, you've got a decrease in the number of exits, but you've got assets under management going up consistently year on year. What does this mean? This means that there is so much dry powder out there. So dry powder mean— meaning uninvested money sitting within a fund. And it also means that there are so many companies that need to be sold. In fact, this report says that nearly half of all global buyout companies have been held by the fund for at least 4 years. Remember a private equity fund cycle, you tend to accept that your money is locked up for 5 to 7 years, but beyond that, you start really agitating to get your money back. And you as a private equity firm want to hold a company no longer if you possibly can than 5 years. So you've basically got, I think we reported it last week, you've got $3 trillion, 28,000 companies. That are waiting to be sold effectively when the timing is right. And this is kind of why I'm saying this is going to be a bumper M&A bonanza because in order to return funds to investors, to limited partners within these private equity funds, they need to realize liquidity. They really need to realize exit events and they're going to have to do so relatively quickly. So again, just as we see a little bit more stability, just as we see a little bit more certainty over interest rates, the leveraged loan market starting to open a little bit, I think you are going to see hundreds and hundreds of private equity exits. Remember, private equity firm can either exit through IPO, it can exit to a corporate, You know, we spoke about that, about that earlier on in the pod, or it can exit to another private equity firm. And if you think about it, private equity, what has it got? It's got loads of dry powder. And on the other side, there's trillions of dollars worth of companies needing to be sold. I would expect logically that this is going to be a bumper 2024 for private equity to private equity deals. So a company needing to sell because they've realized the value within that 5-year holding period. And then another private equity firm with loads of dry powder needing to buy because they're sitting on money that needs to be used, buying off another private equity firm and saying, look, we can extract more value. We can take, you know, we can pump a little bit more debt into this company and it gets kind of passed the parcel around private equity firms. As these dynamics continue.

I love that. It's just like, how can we make money out of money? It's brilliant.

Absolutely. And there's some really interesting dynamics here as well. You know, so we've spoken, I think we've spoken briefly about net asset value financing. It's, you know, securitizations and things like continuation funds. So continuation funds are where the likes of Apollo will set up a fund to basically buy the companies from their other funds in order for their other funds to return money to their limited partners and for the new fund to raise money on the back of some really, really good companies that are coming to it. So yes, money making money making money, I think has been the kind of watchword for private equity over the last 20 or 30 years, but they're extremely good at it. And there's some, there's interesting things like the secondary market, for private equity opening up, which again is going to give a whole new flavor to the industry.

That Jenga tower is looking pretty solid for the time being, so it's all right. I won't pull any of the blocks at the base out anytime soon.

Yeah. And it's really interesting because as an asset class, private equity just has been so, it's just performed so well over the last 20 years. It's just a case of Is this entrenched? Is the fact that you have to lock up your capital for 5 years, is that the downside that is offset by the upside of you've got a long-term, a more long-term approach with a more focused management team with access to more leveraged finance products relative to the public markets? Maybe it is structurally a more remunerative, more lucrative asset class, but maybe it's not, maybe it's cyclical and maybe we're about to hit a decade-long private equity trough.

So is it, would it be right in thinking then that there's quite clear parallels between the state of play there and the state of play in venture capital?

Yeah, it's, yeah. So venture capital's the last one we're going to talk about. And obviously venture capital is a subsection of private equity. Remember when we talk about private equity, we usually talk about buyout firms that are buyout funds that are buying the entire company and putting a bit of debt in there and trying to improve it and turn it around. Venture capital, still private equity. It's still private capital. And yeah, the dynamics are relatively similar. I was just looking at some of the stats here. So venture capital is sitting on 69% more dry powder, more investible money than the 5-year historic average. So it's got money to deploy. And 2023 was such a shocking year. That it's almost like we're all pent up. All this money is pent up. The money hasn't gone. And this is why 2024, '25, I don't want to be overly bullish, but you can see the way that stock markets are going on any hint of good news. You know, there's just so much money out there to be deployed in the event of good news. And VC, very, very similar dynamics. And you've also got the excitement of artificial intelligence and AGI. Massive, massive fundraisers for very, very, very small companies. We've reported this earlier on this year with Mistral and Cohere. There's some big, yeah, some big deals being done and a lot of money waiting in the wings. Is it a good time to go out and raise money as a startup? I would say probably yes. This time last year I would've said no. And the reason why I say yes is I think that venture capital investors got a little bit burnt by all of the easy money and SoftBank and everything of about 3 or 4 years ago. And in 2022, '23, got their act together and said, look, we're not just going to fund anything. We need to fund fundamentally strong founders and fundamentally well-positioned businesses with interesting technology and interesting economics. We will fund you because we've got all of this dry powder. So it's going to force you as a founder to really think about a robust business plan and a robust business model. But the money is there if you get it right. So I think it's a really, it's a really interesting environment. Okay.

Well, look, I actually think that that's a good, a good note to finish on. And what I'm going to do is say two things to conclude. For one, we've obviously talked about some different areas here. So if you're a student, I'd be quite keen via the poll, if you're listening on Spotify to hear which one of these areas sounds the most interesting to you from what we've discussed. So we've got M&A, equity capital markets, so let's say IPOs, but also some of the other activities that Stephen discussed, PE, and we'll splice that off and have, um, we'll have VC, but I'll also put in there debt capital markets as well.

Definitely put in some debt.

Yeah, let's have, let's have all, what, 5, and let us know. I'd be really interested to know. And then secondly, If you do find this conversation useful or any of the other previous episodes, please do share it with a friend because, you know, we've bumped into a few people over the last couple of days and they've said it really helped them when it came to securing their spring weeks because that's a lot of the activity we're having with students at Banks at the moment. And so if it helped them, you know, don't keep it to yourself, spread the love, let other people listen as well because we're here to help. And to make some of this stuff interesting. And hopefully we, we hit the mark. And if you're a business owner, because I do know that business owners and people who work in a variety of different professions who are, who are grown up like me and Stephen, um, they listen for, for different reasons, whether interest in finance or because they are running a business, they want to know what's going on in the economy and what's happening in the business world. So yeah, spread the love. I'd be much appreciated by Stephen and I. But Stephen, as always, uh, great Great insights, and thank you very much.

Thanks so much, Ant.