United States / Coronavirus Insights
2020 Investment Banking Landscape

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by Nick Masters, Senior Analyst
Mar 20 2020

The 2020 Investment Banking and Securities Dealing industry (IBISWorld report 52311) landscape has been drastically altered by the economic effects of the COVID-19 (coronavirus) pandemic. The industry is expected to experience a sharp decline in initial public offering (IPO) advisory fees due to depressed capital markets. However, the industry’s expertise in assisting struggling companies through restructuring and risk management advisory will likely serve to sustain the industry’s prospects in the coming months.

IPO activity

The economic effects of the coronavirus outbreak are expected to bring initial public offerings (IPO) to a halt in 2020. This is attributable to several factors including a spike in investor uncertainty, declining stock market values and, to a lesser extent, physically necessary social distancing measures.

The coronavirus pandemic has pummeled investor sentiment in the past few weeks, as made evident by the S&P 500’s 26.0% year-to-date decline (as of the time of this writing). With low market values, companies are less likely to undertake an IPO due to the lower amount of capital they stand to raise in a depressed market.

From an operations perspective, the issuing of securities is a complicated financial and legal undertaking involving several parties, including regulators. Thus, in-person meetings are critical to the underwriting process, and the practical limits of teleconferencing will likely hinder the effectiveness of security issuing for the duration of the coronavirus pandemic.

Overall, stymied IPO activity is expected to lower investment banking revenues in 2020 as revenue from equity underwriting accounts for an estimated 7.5% of industry revenue.

 

 

Mergers and acquisitions

On the other end of the advisory spectrum, fees from mergers and acquisitions (M&A) and related activities are estimated to account for 14.0% of industry revenue in 2020. The economic fallout caused by the coronavirus pandemic is expected to have mixed effects on M&A activity though the end of the year. In the near-term, volatile capital markets will hinder deal activity. Nonetheless, when the dust settles, M&A activity will likely pick up given lower valuations, and thus, market opportunities.

From a buyer’s perspective, acquisition targets have become more attractive in light of a substantial decline in capital market values. This holds true for private companies as well given their benchmarking to comparable public companies.

However, with the increasing risk of recession, prospective acquirers are also likely to shelve growth-through-acquisition strategies for more-defensive measures given a greater likelihood of weaker balance sheets. Due to these circumstances, the investment banking industry may experience an uptick in advisory fees related to restructurings and risk management.

Overall, an expected uptick in M&A and restructuring activity will likely sustain investment banking industry revenue over the coming year despite lower IPO activity.

 

 

Edits by Sean Egan