M&A advisory activity to pick up – Goldman Sachs CEO

Goldman Sachs Group Inc. Chairman and CEO David Solomon struck an optimistic chord on M&A during the company's third-quarter earnings call.

After consecutive quarters of rising advisory backlog, Solomon said he expects a continued resurgence of investment banking activity, including both M&A and equity issuance. Investment banking fees rose 20% year over year to $1.87 billion during the quarter, and advisory net revenues rose 5% year over year to $875 million, according to an earnings release.

"We are seeing increased client demand for committed acquisition financing, which we expect to continue on the back of increasing M&A activity," CFO Denis Coleman said.

Despite tailwinds in the M&A space, investment banking is still not operating at 10-year averages, Solomon said. Goldman Sachs' target return on equity (ROE) is 15%, and the company is on its way to achieving that goal, he said. Its current ROE sits at 12% for the first nine months of 2024 and 10.4% for the third quarter, according to the earnings release.

Solomon said Goldman Sachs needs to deliver on its foundation of global banking and markets to reach its target ROE. Year-to-date M&A volumes are 13% below 10-year averages, and equity issuance volumes are 27% below 10-year averages, he said.

However, Solomon noted that current volumes are an improvement from those of 2023, which were 25% and 35% below 10-year averages for the first nine months of the year, respectively.

"There's no reason why we're not going to get back to 10-year averages," Solomon said. "But you can look at the performance of banking and markets and that's one building block of the foundation."

Private equity sponsors are likely adding trillions of dollars in dry powder to the M&A environment in order to facilitate acquisitions, said Wells Fargo analyst Mike Mayo who asked Solomon whether that could create a "super cycle" that would make 10-year averages less relevant.

Solomon said he expects 10-year averages to increase, since they are correlated to market capital growth and economic growth.

"Sponsors have been slower to turn on than I would have expected, but they will turn on," Solomon said. "I do think that sponsor activity will continue to accelerate over the next six, 12, 24 months."