By Anish Ailawadi, Global Head of IB and Advisory, Acuity Knowledge Partners
Investment banks and advisory firms have weathered the tough market conditions created by the prolonged and lingering impacts of inflation, high interest rates and geopolitical instabilities. Equipped with the insights gained from experiencing significant downturns, such as the 2008 recession and the COVID-19 pandemic, investment banks are no strangers to these market scenarios.
While most economies are walking a thin line between achieving continued disinflation and maintaining financial stability, further increases in inflation and interest rates could negatively influence M&A (mergers and acquisitions) activities and valuations. Despite such concerns, investment banks are well positioned to manage protracted fragile macroeconomic conditions. They have strategically expanded their service offerings in anticipation of the restructuring and debt-advisory opportunities that will surface.
Despite the strong fears of a global recession that marked the beginning of 2023 and presented unique hurdles for investment banks, current forecasts for soft landings in developed economies by the end of 2023 are kindling hope for banks gearing up for a busy 2024. Overall, 2023 is projected to be a “net-positive” year for investment banks, fuelled by deal-making opportunities from growth sectors, especially TMT (technology, media, and telecom) and healthcare. A gradual valuation reset and the introduction of new assets to the market, including those from distressed situations, will also supplement deal pipelines.
Acuity Knowledge Partners conducted a global online survey involving more than 75 seasoned senior executives of various-sized investment banks and advisory firms. Fifty-eight percent of respondents stated they anticipated only a slight decrease in business opportunities, and more than 70 percent believed that their firms’ revenues would either increase marginally or stay flat in 2023.
Several catalysts are paving the way for a market rebound, and the record-level dry powder of circa US$1.3 trillion in private-equity firms is expected to be the prime factor. Companies are aggressively working toward building resilient supply-chain models, ensuring they are better equipped for future situations akin to the COVID-19 pandemic. To achieve this, companies have invested in optimizing their business models and acquiring robust technologies. Banks and lenders have substantial cash piles and are now eyeing the deal pipeline to pitch debt packages and fund selective M&A situations.
We expect some high-value deals involving prudent investors, who are less inclined toward “quick” transactions in this hard-to-predict climate. TMT and healthcare have consistently dominated the deal-making landscape and are expected to continue generating sizable deal opportunities and revenues for investment banks and advisory firms. In the technology space, advancements in AI/ML (artificial intelligence/machine learning), virtualization and the interactive media space will ensure abundant opportunities for investment banks in the medium and long terms. There has also been a notable increase in deals related to cleantech (clean technology), fintech (financial technology), medtech (medical technology) and healthcare analytics.
In conjunction with the economic and business landscapes, it is pivotal for investment banks to maintain steady flows of the right investment opportunities. There has been considerable emphasis on sophisticated deal origination and business-development activities. The current focus areas for investment banks and advisory firms can be found on page 16 of the Investment Banking 2023 survey.
Re-evaluating business operations becomes crucial during downturns. Investment banks and advisory firms are adopting differential strategies, such as:
- Consolidation to outstrip competition and achieve scale-driven efficiencies focused on increasing the top line and lowering operating expenses. Investment banks’ M&As have already gained traction globally, with some noteworthy deals in the space including:
- In July 2023, US-based investment bank Houlihan Lokey announced its acquisition of independent advisory firm 7 Mile Advisors to bolster its IT (information technology)-services coverage capabilities and expand its geographical footprint;
- In June 2023, the Anglo-South African firm Investec Bank doubled its stake in Paris-based boutique Capitalmind Group as it bids to expand its European M&A practice;
- Swiss banking giant UBS completed its acquisition of long-time rival Credit Suisse in June 2023;
- In May 2023, Japan’s Mizuho Financial Group (MHFG) announced its acquisition of premier US M&A advisory firm Greenhill to accelerate its investment-banking growth strategy;
- In April 2023, Deutsche Bank entered into a deal to purchase the City of London-based broking and advisory firm Numis Corporation to accelerate deeper engagement with the corporate client segment in the United Kingdom.
- Automation investments are sustainable and ways to improve efficiency and productivity rapidly. Aiming to bring cross-functional teams together, investment banks are adopting modern operating models by leveraging new technologies instead of launching piecemeal solutions. Our survey also confirmed that more than 80 percent of investment banks and advisory firms have implemented or plan to implement new productivity-enhancement and automation tools.
- Specialized knowledge partners that extend support throughout the various phases of the deal lifecycle generate substantial efficiencies. Offshoring has been inherent in the working models of investment banks. Lately, relationships with offshoring partners have evolved into strategic integrations. Knowledge partners are quickly evolving, with transformed value propositions of providing operational flexibility, high-value and high-quality services, and technology efficacy to investment banks and advisory firms. Direct and immediate cost advantages are no longer the main benefits of offshoring.
The pandemic transformed the working models of investment banks and financial-advisory firms. Shifts toward remote working, myriad financial regulations and market democratization triggered firms to explore options to decongest and achieve fast-paced growth. Introducing robust frameworks for evolving structural profitability and maximizing ROIs (returns on investment) through better overall efficiency will undoubtedly pave the way for faster times to market and lower cost burdens.
- Productivity levers to fuel growth are embedded in getting the “tech” and “touch” components right. At every stage of the deal’s lifecycle, the digital journeys for its stakeholders are still “pie in the sky”. However, the trends of developing in-house collaboration platforms, entering into digital partnerships with vendors possessing relevant technologies and leveraging AI platforms for augmented client experiences are picking up fast.
- Workforce undercurrents are critical aspects to be addressed by senior decision-makers. Recently, many firms have resorted to downsizing their teams as a desperate measure to secure profitability, jeopardizing their brand reputations. More than 70 percent of respondents in our survey acknowledged that offshoring is a strategic way out. A gateway to a readily deployable pool of qualified professionals providing support around the clock from across the globe can immensely empower an investment bank. The notional boundaries between in-house and offshore teams have blurred, particularly post-pandemic.
- Establishing a sophisticated operating model, closely interwoven with a skilled workforce, can lead to sustainable business profitability. The financial-services industry is far from underrating the importance of a skilled workforce, even during the automation race, in providing the right direction for all ideations toward achieving better efficiencies.
Investment banks and advisory firms worldwide can no longer compete while depending on traditional working formats. Being on the path of becoming holistically digitized and enthusiastic about deploying various platforms at each stage of a deal’s lifecycle, investment banks have embraced an exploratory approach and are experimenting with various offshoring products and services along with the gamut of recent technology offerings.
Currently, the investment-banking sector is progressing cautiously in combining technology with proprietary-knowledge pools, while data-privacy risk is no longer a topic to evade. Ironically, technological advancements are far from swamping the most valuable investment-banking skills, which require creative, strategic and relationship-oriented expertise. The multitude and magnitude of transformations that the investment-banking sector is traversing bring ample scope for innovations and integrations across all business divisions. Recognizing the need for significant change and embracing it in time will differentiate the game-changers.