International Finance
Ideas Magazine May-June 2019

Investment banking set to sustain the high growth rates of the recent past

Taking a contrarian view, one can see four factors driving investment banking growth momentum in 2019

Investment bankers world over have reasons to be pretty pleased with how business has turned out to be in the recent past. The question facing investment managers who manage billion dollar plus deals is the following: Can investment banking, which is central to the cross border financial flows across the world, sustain the momentum it inherited into what is left of 2019?

There is an outside possibility that the mergers and acquisitions activity at the global level will shrink as the slowdown in the global economy gathers pace.  The latest to raise the spectre of gloom is the estimate from OECD which in its interim assessment recently pared global economic growth forecast for 2019 to 3.3% citing shrinking economic activity levels in Europe and China. The recent US payroll data, the rising interest rates and a strong dollar hint that the two-pronged growth theory might no longer be relevant: that the US economy will expand without hiccups while the rest of the world hits the slower lane of economic growth. The confusion over whether Britain will have a soft or hard landing once it ejects from the European Union confounds the thinking.

Against such a backdrop, it is only natural to expect that the investment banking segment at a global scale may hit a rough patch. But being an investment banker for decades, I have real reasons to make a pitch for a contrarian viewthat the investment banking business will continue to grow at a faster clip and there is no need to read too much into the sagging global growth leading or the resulting volatility in equity markets.

To put it in the simplest possible terms, I anticipate strong cross-border financial flows to support the heightening activities at the micro enterprise level, despite increasing and newer risks to global growth. Going forward, the most important factor to drive the new wave of cross-border financial flows will be the appetite for increasing market share to power growth as volatility in the markets has capped the room for organic growth. This is not to say that there are no bumps ahead, but to put it simply, positives outweigh the negatives. You can predict increasing investment banking activity based on four factors.

Clients raise the bar for investment bankers

Mahesh Singhi
Mahesh Singhi
Founder and Managing Director
Singhi Advisors

Increasing client awareness calls for higher diligence by investment banks in their business activities. While scaling up business still remains the dominant theme, there is an ever-increasing emphasis on portfolio clarification.  This is because firms are starting to take a clear call on businesses that they see as their core. They are also more than willing to put their non-core assets on the block, if necessary, to raise capital and sharpen focus on the core business. Moreover, since volatility and uncertainty became the new normal for the market, the needle has moved toward more accountability in transactions with a core focus on returns on investments and capital employed, respectively.

Liquidity is now abundant

In spite of the fact that major central banks are tightening their balance sheets and sending lending rates soaring in major economies, there is still plenty of liquidity available in the market for business with good AA or AAA rating. It is true that while hardening interest rates will make capital costlier, the system is still awash with funds and the lenders are pricing capital more realistically and accurately. The more the private funds available with private equity, sovereign wealth funds, family offices, and others are at their historically high levels, together they may set a new floor for the market from a value perspective.

Technology to the rescue

The market for capital, especially the IPO market, which has been remaining lacklustre for a while, is set to see elevated activity levels because more and more technology firms in key verticals are poised to hit the market in full force to raise growth capital. This is expected to rekindle investors’ interest in the primary equity and debt markets. Once the mood in the market lifts, brick and mortar firms too will join the rush to raise funds from the market lifting the spirits of investors.

India becomes a major player

In India, the looming political uncertainty with the nation shifting to the poll mode and the liquidity strain that still haunts the financial sector, weigh on domestic growth. However, benign price levels and softening lending rates still put India on a high visibility growth map. A leading global brokerage house has just added muscle to the India growth story by saying that funds could shift to emerging markets in coming days from developed markets and included India among its most preferred emerging market economies.  The traction will also come from the on-going resolution processes as the seminal bankruptcy (IBC) code comes into force as well as from the planned divestments by the government. Moreover, companies in India that are aiming either to disrupt the market or consolidate the market are mainly driving the M&A wave in India. Together, these factors will put India high on the global investment bankers’ radar.

According to a recent report, the value of the announced merger and acquisition (M&A) transactions, involving Indian companies, has more than doubled in 2018 to reach $129.4 billion, the highest since 2007. In addition, according to EY’s Private Equity Monthly Deal Tracker – February 2019, investments worth $2.6 billion across 61 deals and exits worth $472 million across 10 deals were recorded in India.

To come to the question posed in the beginning: Can the investment banking business sustain the high visible growth it has clocked in the past few years? The answer is a resounding yes provided the bankers keep playing by the new rules of the play book that place value in each deal high on priority.

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