The Pipeline: M&A and IPO Insights | S.3 Ep. 3 - M&A Outlook Brightens as Financial Sponsors Prepare to Ramp Up Activity

In this episode of The Pipeline podcast, Devin Ryan, an equity research analyst with Citizens JMP, provided insights into the current state and future prospects of mergers and acquisitions. Following a record-breaking year in 2021, the M&A landscape faced significant challenges in 2022 and 2023. However, Ryan expressed optimism that 2023 may represent a low point and activity is getting closer to more normal levels. A key factor in the recovery is the role of private equity firms and whether they start deploying more dry powder. 

More S&P Global Market Intelligence Content:  

• Webinar: M&A in Focus: Dealmaking Amid High Volatility 
• Price tags on biggest M&A deals grow larger in 2025
• Balance sheet, M&A and capital raising strategies for a volatile environment 
• Navigating M&A Trends During Market Volatility

Credits:

• Host: Joe Mantone
• Guest: Devin Ryan
• Published With Assistance From: Sophie Carr, Patrick Moroney, Alison Perico and Feranmi Adeoshun

Joe Mantone   00:00:00

Welcome to another episode of the Pipeline, an S&P Global Market Intelligence podcast that dives deep into the world of M&A and IPOs. I'm your host, Joe Mantone. And today, I will speak with Devin Ryan, equity research analyst with Citizens. Devin and I, we've spoken over the years a number of times, mostly about M&A trends as investment banks is a big area of coverage for Devin. But Devin, why don't you start with giving us a little bit about your background and your coverage area?

Devin Ryan   00:00:34

Sure. Thanks, Joe. Great to be on again. Yes. So my coverage is really 20 years in financial services and started covering investment banks back in the early 2000s, worked as an associate for a couple of years on the large banks and the large investment banks. And pretty early in my career, kind of pre-financial crisis, I noticed that there are some interesting companies Raymond James and Stifel and some middle market investment banks who really didn't have much coverage at all at that time. And they were similar companies, but just much less developed. And so I raised my hand and said I'd love to cover these companies. And very soon after companies like Lazard and Evercore and Greenhill came public in other smaller investment banks like Thomas Weisel and KBW and JMP as well. And so those all kind of went into my coverage universe. And so I built out kind of a nice coverage in the mid-2000s of investment banks, some of which were since acquired, but some of which I'm still covering today. I left Sandler O'Neill in 2013 and came to JMP and at JMP kind of broadened out my coverage to a much wider group of investment banks and brokers and asset managers and really covered the full spectrum of financial services. And as I've kind of continued to cover companies at JMP, have broadened out even further and now span kind of digital assets and I head up our fintech research. And I've worn a number of hats here, but I always go back to my roots in investment banks and wealth managers and enjoyed covering that space because there's a simple story, but you really have to kind of understand the nuance from company to company and the philosophies of how these companies grow because it's a great business, investment banking, M&A advice, equity capital markets, non-commoditized financial services, but at the same time, they're people-driven businesses in a lot of cases. And so you have to understand the people behind them. I covered the space a long time and looking forward to the conversation here.

Joe Mantone   00:02:26

Yes. That's great. That was really smart you to sort of get ahead of that run before those advisory-focused firms all went public. And I can certainly attest to that there was not much in the way of equity research coverage there because as a journalist, trying to find analysts to speak about the investment banks, it wasn't always easy, but I've always appreciated the time that you spent and your research is always a must read for me. So kind of getting into it a little bit here. The outlook for M&A was pretty positive coming into the year, and then it became much more uncertain after the April 2 tariff announcement that created a lot of market volatility. What would you say is the current outlook for M&A?

Devin Ryan   00:03:13

Sure. Yes, I think you described it well. We came into the year, and this is after kind of if you go backwards a little bit, you had really an aberrationally good year in 2021, where you had coming off of COVID and kind of liquidity in the system and kind of record valuations and really perfect market conditions at the time. And so that led to by far, a record in M&A activity. And then soon thereafter, in late 2021, early 2022, you had kind of the Fed pivot and shift in interest rate outlook. And at the same time, you had the geopolitical issues that were starting to brew and equity valuations fell nearly 25% in early 2022. And as a result of that, that really changed the momentum completely from kind of that aberrationally positive environment to kind of being on the other side of the coin in 2022. And so if you look at activity, 2022 was a big down year for 2021. And then 2023 was another down year from 2022. And that actually follows kind of the normal cycle pattern. Normally, you have a peak and that takes 1 to 2 years to trough. -- so '21 to '23, '23 being the trough. And then the view is it normally takes 1 to 2 years from there to get back to a baseline or a more normal level of activity. And our view was 2023 was probably the trough. 2024 is going to be something better, which it was. announced M&A activity was up 14%. And then the view coming into this year was there was a lot of momentum where 2025 should be a year that's much more normal. And so what that means is just by quantifying it, you need to see an increase of about 25% from the 2024 level of M&A announcements just to get to kind of a historical trend line or what we would characterize as normal. So to your point, I think there was an expectation that coming into 2025, the setup was pretty constructive. You had the change in administration to, I think, views of kind of less regulation and markets were kind of approaching, if not at all-time highs. And so really good momentum. And then the market tone abruptly shifted as we got early into the year where it became clear that there was a lot of uncertainty that was coming out of, I think, this administration. And it was not just tariffs, but you look sector by sector, health care valuations were really struggling in health care equity capital markets is really 1 or 2 top capital markets sectors. It was down like 50% in the first couple of months. So you're seeing some dislocations more broadly in the market. And then as we started to approach liberation Day, M&A really came to a screeching halt. And I think that's where kind of the latest update we got from companies was right on the other side of that, where there was really kind of extreme uncertainty. I think the enthusiasm that everyone had coming into the year shifted to, I would say, not necessarily fear, but just a view that this wasn't going to be the year that we maybe initially thought. And as things have progressed, the market conditions have actually gotten quite a bit better. Capital markets are reopening, the IPO window is reopening and the M&A markets are getting back to, I wouldn't say maybe quite as enthusiastic as where we were to start the year, but something that is getting to much more normal. And just to give you a couple of stats, Joe, the announcements, we look at announcements, April was a very soft month. But then May was right on top of -- if you annualize the May number of like $360 billion of global announcements, that's $4 trillion of deal value annualized. that's like a normal year, normalized right on the trend line. And then June has been very good. So announced M&A volume when you zoom out, is actually up 20% in 2025. So it doesn't really feel like it because there's been so much uncertainty in the macro backdrop, but we are improving and happy to talk about why I think that is. But I think there's a little bit of a cadence to the cycle, and there's also some tension that's been building, particularly in financial sponsors where they need to do things because you have kind of a record duration of private equity portfolios right now. So there's a lot of pressure to return capital to LPs.

Joe Mantone   00:07:28

Yes, I agree with you. I was looking at some of the numbers, and it does seem like it's kind of been a sneaky, decent year for M&A because March wasn't even that bad of a month. March was pretty decent.

Devin Ryan   00:07:39

Yes. That's right. Some of that -- there were some big chunky deals. So we want to see breadth, not just big deals that drive it. But -- but to the fact that M&A is up 20% even with a soft April and then actually sponsors are up 33% year-over-year in terms of deal announcements. So sponsors are coming back. I would say they're still far from what I would argue is normal, and happy to quantify that a little bit. But sponsors are starting to come back as well. I think for some of the reasons that we just mentioned, there's a lot of tension for them to return capital. And they've really been out of the market for the last 3 years. They're in the business of transacting, and they've got record dry powder. And generally, when they have dry powder over time, they're going to try to put that dry powder to work.

Joe Mantone   00:08:26

Yes, that would be great if you can dive into the financial sponsors a bit there because I know that they were a big part to the M&A boom that we saw in 2021. And as you just mentioned, they were on the sidelines for a while and just to get them really back going again, it seems like a key piece to the M&A picture.

Devin Ryan   00:08:43

Yes. The key thing is sponsors have been raising capital at a mid-teens CAGR for the last 15 to 20 years. So there's this incredible growth in the sponsor community. And I think that's -- you see Wall Street kind of assembling around that, right? People are trying to cover private credit and find ways to do more with them. People are definitely getting a lot closer to the private equity teams and then finding other advisory services they can provide for these companies, continuation vehicles are a huge trend right now, and that's one outlet for an ability to -- when you have long duration of portfolios and you can't return the capital through normal M&A or an equity offering, continuation fund is one way. There's a lot of secondaries activity that's happening where advisory firms are helping limited partners exit positions to be able to free up capital. And so there's a lot of business happening in those parts of the market right now for the investment banks that I cover. But -- when you zoom out and you think about the relationships, and I always like to look at kind of long-term data because there's definitely a cadence to this, as I mentioned, the secular growth, but there is a cycle. And sponsor capital growing at mid-teens CAGR, as I mentioned, financial sponsor, particularly private equity dry powder sitting at a record for the last couple of years. Clearly, there's going to be a relationship of financial sponsor M&A to the amount of dry powder they have. And over the last 20 years, the announced M&A volumes for sponsors have been about 80% of dry powder. And that's the average over 20 years. For the last few years, 35% to 40% -- so what that tells you is that sponsors are transacting substantially less than the dry powder that they have available to them. And part of that's because they haven't been returning capital, right? But at some point, that is going to come back into balance. And the point would be that sponsors could literally double or more their level of M&A volume and just be getting back to historical averages, let alone something that you would say is really elevated or frothy. So it just gives you that perspective that sponsors have been out of the market. They want to come back. Part of the market valuations coming back into greater balance. I think interest rates stabilizing. I think there's enthusiasm rates may come down, and that could be a catalyst. But just rates stabilizing is important where sponsors can do the math around what they're buying and have some confidence that they're not going to get surprised by a much higher interest rate when they're going to close a transaction. So I think the stability in rates has actually been healthy. A little bit lower rates would probably help, but I don't think we necessarily need to see that for sponsors to move forward here as long as financing is available and valuations continue to move in a positive direction as they have been since the April 9, 10 area, you've seen a pretty big market recovery and a lot of stocks are kind of back around all-time highs, which is helpful then when you're thinking about trying to exit and start an auction process or start a sale process that the public comps are back to something that is more reasonable.

Joe Mantone   00:11:55

That's a really interesting stat on the financial sponsors. Would you say 80% of their dry powder is what they historically have spent, but now you said that was around 30%, right? I get that right.

Devin Ryan   00:12:04

35% to 40% in the last few years. It's been bouncing around there. So just, again, they've got a lot of room to get back to something more normal. So as you can imagine, if you're an investment bank and you're heavily weighted towards sponsors, it's probably even though longer term, we know that's a great place to be because sponsors are becoming much bigger players just in the markets, in capital markets, in private credit, in asset-backed financing and so many other facets of finance. So that's a big theme. But if you've been connected to them in the past couple of years, it's not really been a great place, an adviser or just an investment bank more broadly.

Joe Mantone   00:12:46

Okay. Great. I know you mentioned that tariffs aren't the only sort of policy initiative that's impacting the deal markets, but tariffs were a major theme during the earnings calls in April. Are you expecting tariffs to be a theme again on these upcoming earnings calls that we'll be hearing?

Devin Ryan   00:13:04

I think it will be a topic of conversation, but we just wrapped up a big tour of seeing all the investment banks in New York. I do it every year. It was early June. But generally, the tone from that tour going and seeing CEOs and business leaders was that you had this year building as we described, where there's a lot of enthusiasm coming into the year, but the year started slower than people were hoping just because there was a little bit of an uncertainty in the air, and we knew that tariffs were brewing, and we didn't really know exactly what that would look like. And that uncertainty kind of progresses as the first couple of months went on and then hit an Apex post Liberation Day in the first days of April until we got to that period of the pause. Once we got to the pause, equity valuations have kind of been a V in valuations where you've seen a pretty material snapback. And again, we don't have full clarity around where the tariffs are going to land or more broadly now there's other geopolitical tensions and other things that we're watching closely. But the tone is substantially better than it was at the end of April into early mid-May. The view is that we're not -- we haven't maybe completed the V-shape recovery. And I think that's the big question. Are we plateauing at something that's, I'd say, pretty reasonable level of activity? Or are we still reaccelerating? And even though we've lost 1 or 2 months of the year, if you zoom out, this is actually still going to be a pretty good, not necessarily a revenue year, but the level of M&A announcements will have been pretty healthy, setting up for what could be a really good 2026. And I think a lot of the sentiment that we're hearing right now is, yes, 2025, you lost a couple of months, but the view of the 2027 window really hasn't changed at all. But again, these reasons for why deals need to happen and the tension that's in the market of sponsors need to return capital and corporations need to move on with their strategic plans and you've got an abundance of financing capital available and as long as valuations are at reasonable levels that people want to move forward. And M&A is going to be a key way that companies can try to drive value for their organizations. And it's something that we're still really bullish on, and I think that we're hearing that sentiment. So I think the earnings calls are going to be more constructive, not necessarily again, like on near-term earnings, but on the tone of backlogs are effectively at a record, and now you're starting to see some conversion of the backlog, whereas at the end of April and early May, we didn't really know what it was going to look like because it was so fresh off of the tariff kind of acute stress that was happening in early to mid-April.

Joe Mantone   00:15:55

Yes. I know there's a school of thought that tariffs can lead to more M&A as companies look to execute deals in different geographies and they try to avoid the higher cost of doing business and avoid some tariffs. I think it was Lazardo talked about that. Have we seen any evidence of those types of transactions where companies are trying to do a deal in a different geography to position themselves to avoid some of those higher cost tariffs?

Devin Ryan   00:16:20

I don't think so yet. I think it's been pretty fresh. But what I would say is M&A can happen in any environment. So there's -- you can have a recession and there's still going to be some level of M&A. That's not a good M&A market. You want a market where valuations are, I think, moving in a positive direction. companies and sponsors feel confident in their business outlooks and have confidence moving forward on transactions. And then generally, that's going to be in a healthy economy as well. So there's conditions for M&A in kind of any type of environment. You can have M&A happen in good market, bad market, but that's not healthy M&A market. Healthy M&A market is, as I described, 2021 was kind of the aberration where it was like perfect, where there's no market volatility. People were incredibly bullish on the outlook, and we were up into the right. But we don't need that. We just need some stability and people feel confident. And then also the other conditions of their dry powder in the system, it is good to have some catalyst of timing, right? Companies feeling like we haven't done something in a little while. So we need to move forward on our plan versus if you're just coming off of an uncertain moment, you might feel like you've got some time to wait it out. After you've already waited it out, which that's where we are right now because M&A has been really quiet for 3 years, -- now you got to move forward, right? You can't just sit on your hands and hope that at some point, 5 years from now, we're in a less volatile environment. I think companies and sponsors are generally equipped for volatility at this point. There's been so much volatility through COVID and just people are used to volatility in the markets operating within that.

Joe Mantone   00:18:05

Yes. We've had a lot over the last few years. Aside from tariffs, how are investment banking executives sort of viewing the regulatory environment and its impact on M&A?

Devin Ryan   00:18:16

Yes. I think it's not one answer. Every sector is different. I mentioned health care has been -- I think there's been a lot of uncertainty around this administration and health care has kind of been in the crosshairs. And so as a result of that, capital raising has been challenged, valuations have been challenged. I think I mentioned equity capital markets volume for health care is down 50% year-over-year. On the other hand, certain verticals are kind of gearing up. So financial services, I think the tone is much better. And financial services equity capital markets revenue that we track is tracking up over 50% year-to-date. So that's a sector that's doing really well in this current kind of uncertain backdrop because they're less affected and then financial services, particularly depositories, could get some relief, and that seems -- that's the direction we're going here. But just more broadly, consumer finance, insurance has been very active. So I think it's sector by sector. You look at some sectors like technology, one of the challenges that technology has is that, that's a sector where there was a lot of really high valuation transactions back in 2020 and 2021. So the sponsor community, their ability to turn over some of those investments is going to probably take some time. They need those businesses to grow into the valuations that they paid 5, 6 years ago. it's really sector-by-sector influence from a regulatory perspective, but also a valuation perspective as well is obviously very important.

Joe Mantone   00:19:47

Yes, that certainly makes sense. But how about antitrust? I know some investment bank executives over the last few years were talking about how the whole deal approval process had got kind of elongated. Are they any more positive right now on deal approvals and getting those done more quickly?

Devin Ryan   00:20:03

Short answer is yes. I think antitrust, I think there was a big headwind. And then we got into this next administration where people were enthusiastic and then it got tempered a little bit where the sentiment was maybe there actually still going to be some antitrust issues or at least on specific deals. But I think the way I would frame it is we went from pretty big headwind to more of a neutral. I don't think it's a huge tailwind. But then beyond that, I think there's a view of just -- and we haven't really even seen this part yet play out, but this administration really ran on deregulation and a much more kind of open market, particularly in the U.S. And so I think there's some enthusiasm that like that is still coming here, and that's going to be a positive setup for energy and financial services. And so you can kind of go down the list of verticals that may benefit from that. But we haven't seen that in a big way yet, but I think there is some hope that may be coming as well.

Joe Mantone   00:21:01

Okay. Great. And to wrap up, I wanted to switch gears a little bit and ask you about IPOs. It seems like in the second quarter, there's been a pickup in IPO activity. Has this led to you to increase your equity underwriting revenue projections? Or has the increase that we've seen has it been in line with what you were expecting?

Devin Ryan   00:21:22

Yes. Good question, Joe, because I think I gave you the stat on announced M&A coming into the year, just to get back to trend line, we estimated would need to increase like 25% in 2025. Equity capital markets even more depressed in terms of relative to the baseline. So our view was to get to the baseline, you need to increase about 50% based on historical long-term trends. Our view is 2025 should be a much better year for IPOs. There hasn't been IPOs for -- since really 2021. And so now there's a lot of built up supply where companies have been waiting in line for the markets to reopen. And so what you're seeing is demand and supply. So there's supply that's coming. The market is meeting it because the market has like these deals that's come so far. So you've seen really positive reactions. And so what that does is then trigger more of that supply to come. So right now, assuming the deals continue to be high-quality deals and the market can absorb them, I think this could be a very good year for IPOs. And you're seeing the filings come, just the equity capital markets revenues overall thus far have not been there yet because April was a very soft month, as you can imagine. If you normalize the April level of activity, we'd be up about 20% year-over-year because April was so soft. This has not been a great year of equity capital markets. But to your point, the bright spot is IPOs, which are up. So I look at that as kind of a leading indicator of risk appetite. There's a lot of demand for the deals that are coming. And because companies have not been able to get out for the last 3 years or 4 years, really, there's a huge pipeline of companies that I think have interest, whether it's later this year or just building into next year. So it's obviously always going to be market dependent, but I think there's a very good story there. We were baking that in, Joe. So I don't -- I wouldn't say my equity capital markets numbers go up a lot right now. But if we get into another year like 2021, that's not my base case right now, but that would be the scenario where numbers are way too low. We're kind of baking in that we get back to kind of a long-term trend line, which would be up 40% to 50%, pretty healthy growth from 2024.

Joe Mantone   00:23:40

Yes, certainly sounds like. Hopefully, we'll get the the markets, and we'll see some more of those deals come to fruition. Devin, but I think that will do it here. Thank you very much for taking all the time with us today.

Devin Ryan   00:23:52

Yes. Thank you, Joe. Good to be here. And obviously, it should be an interesting earnings season. I think overall, it's going to be a relatively constructive tone even if you don't necessarily see that in results. And from talking to a lot of investors in the group, people are already starting to gear up for what 2026 could look like. So I think we all know that 2025 is a bit of a transition again because of the lost couple of months in the year. But the tone today is absolutely quite a bit better, and there's a lot of pent-up activity that markets willing, markets staying at similar levels as they are now, you're going to probably see that come out over the next couple of months.

Joe Mantone   00:24:30

Great. Thanks a lot, Devin. And that will do it for this episode of the pipeline podcast. Thanks for listening.