The Pipeline: M&A and IPO Insights | S.4 Ep. 1 - IPO Window Widening; The Importance of Equity Research

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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 Mark Lehmann, Vice Chair of Citizens Commercial Bank. Mark moved to Citizens in 2021 when the firm purchased JMP Group. The acquisition helped Citizens bolster its equities and research offerings. At JMP, Mark was President of JMP Securities. Earlier in his career, Mark was Global Director of Institutional Sales and Global Director of Equity Research at Bank of America Securities. He was also an institutional salesperson at the firm, Montgomery Securities. So Mark, thank you for joining us here today.

Mark Lehmann   00:00:56

Great to be here. Thanks for the time.

Joe Mantone   00:00:58

Of course. Mark, given your history, I certainly want to hear about your views on equity research. I also want to get your take on the IPO market and discuss the M&A outlook report that Citizens recently published. But before we get into all of that, I want to learn a little bit more about you. I'm always curious about people's backgrounds and how they got into the business. I noticed that you had an undergrad degree in accounting from the University of Illinois, and you earned a doctor of law degree from NYU. So I'm basically wondering 2 things. Was your plan always to get into financial services? And what was it like to go from the cornfields of Urbana Champagne to the constant car counting of New York City?

Mark Lehmann   00:01:43

Let's see. Was it always a plan? I'm not quite sure, but I probably couldn't find more diverse offerings than, like you said, East Central Illinois and New York City. But there are reasons for both. I was born in New York, but raised in Chicago and definitely had ties to both, and I satisfied both those ties with my choices. Illinois was an easy choice at the beginning, a, because it was local and b, because I paid for school, it was 1/4 of the price than anything else. And c, it had the best accounting program in the world, and it still does. So that was really the reason for that. I actually -- despite people probably thinking this is crazy, I actually like studying accounting, and I really like things that had an answer. And as you can guess, those things you learn in accounting have answers. Frankly, the reason I went to law school was I didn't know what I wanted to do. I spend a couple of summers in accounting, and I knew that wasn't it. And I also realized I probably need to exercise a different part of my brain I wasn't a particularly good writer. I wasn't a particularly good, I wouldn't say thinker, but putting my thoughts together, I thought law school would answer that. And I distinctly went to law school to not practice law. But -- and I really enjoyed my 3 years at NYU Law school. But with a mountain of debt and a few -- very few job offers in financial services, I chose the law route. And 2 months after starting, I said this is not going to be my future. And I spent the next 2, 2.5 years really thinking long and hard what I wanted to do. I had a very fortunate -- my brother was in the business and introduced me to some people. And basically having never been in San Francisco, I got introduced to somebody who went to my almamghter, the University of Illinois and hired me to be his trainee, his Sherpa on the institutional desk at Montgomery. I moved to San Francisco, New Year's Day 1992, right as San Francisco was coming out of a recession and I learned one of my first lessons, which is it's great to be hired at the bottom and then at the top. Getting hired when things are making new highs may seem like the most alluring thing, it rarely is just like when you get hired when things are not so great, it may seem like a disastrous time and it probably is, but it probably forbodes something much better. And I was very fortunate to have that.

Joe Mantone   00:04:02

Interesting. It certainly led in great cities, New York, San Francisco and Chicago. But the law background, though, has it helped you with problem solving with clients or anything like that?

Mark Lehmann   00:04:13

The rigors of law school, the rigors of analysis, I think, are something that is required in a lot of professions, this being no different. I think having a combination of an accounting degree and a law degree reading a prospectus, you get a much different view of when you have those disciplines. It also makes you a really good listener. And I think there's a lot of good talkers on Wall Street. My wife would probably claim I'm one of them. But being a good listener is really a skill and choosing your words carefully is something that I really learned along the way. And I think the discipline you get from law applied to what I do is something I benefit from every day.

Joe Mantone   00:04:50

Interesting. I'm certainly glad you got into financial services because you may or may not recall, but I spoke with a number of individuals from JMP when I was a young reporter who was just starting to cover the investment banking business about 15 or almost 20 years ago, but you were one of those -- you were among those who really helped me understand the industry. So I just wanted to thank you for that.

Mark Lehmann   00:05:15

Listen, I've always had to be a resource. I will tell you the more seasoned you get in business, I think the more you want to talk to young or younger folks who and tell them about lessons you've learned. -- your research has always been good. I think it's -- we want to play as much a part of that. And I think if it dawned an age for you, and I'm here today because of that's thrilling.

Joe Mantone   00:05:38

I appreciate you saying that. One of my early lessons in covering the industry was that equity research could sometimes be viewed as a cost center. Some firms provide check-the-box research coverage and didn't always see it as a differentiator. But even as a novice reporter, it was clear to me that JMP took a different approach to equity research. the firm always put out nuanced reports, and I know that's continued under the Citizens banner. But I was just curious, what was the reasoning or what's the reasoning and rationale behind the commitment to equity research?

Mark Lehmann   00:06:16

It's a good question. I think research when I started on the street was really something that was wildly valuable. It was very early in the information age. deep quality research had a huge role in decision-making and education as well as it was a huge resource for everybody. That changed a lot with the dawning of the Internet age and many of the research analysts or at least several confused what their jobs were at the time, and that also was not great. Citizens was started basically when they got in the research business, they saw that JMP had a huge presence in that space, and we had deep domain expertise, and that was valuable, especially in the sectors that we covered, we decided to go narrow and deep as opposed to wildly broad and narrow. And so we're very happy about that. We don't cover every sector of the S&P, but we really concentrate on verticals that are growth oriented. We want to have best-in-class research. We want to help our clients with insights. At JMP, we wrote the first report on the dawning of the cloud age. That was 15-plus years ago. I remember we had a little light switch on the cover of the research report. And whether that's in AI or some of the things we do with life sciences, we want to be really deep expertise. So we really become sector experts. We're talking to new companies. We're talking to people in the companies and reporters like you. And I think that is accepted now as a resource where years ago, I think it was a question whether it can still be a resource. It's something we really pride ourselves on here, and Citizens has really doubled down on that effort, which makes me really happy.

Joe Mantone   00:07:59

And the change in equity research, I'm guessing you're referring to the global settlement and the separation between equity research and banking.

Mark Lehmann   00:08:08

I am. And like I said, that was an era that was really -- it just -- fortunately, we were not a part of that in my former company or Citizens was, but it really was not a time that I think the Street should be proud of themselves. I think it was a time when some people, very few people lost their way and made it tougher for a whole industry. I guess it's a little trite to say one app can spoil the bunch, but the quality and quantity of good research has never been questioned, and that's what we're doing here at Citizens.

Joe Mantone   00:08:37

And so obviously, now it's very separated equity research and investment banking. But is it possible now still for equity research to help win equity underwriting assignments?

Mark Lehmann   00:08:47

We're really careful, right? We do not want our research analysts and bankers to be colluting. We really want our research to speak for themselves. We want our knowledge base and our access to people who know something or 2 as well as having a big part of a bank that really wants to be helpful all along the way. When people ask me what I do for a living and they really don't understand Wall Street, I say, very simply, I try to help little companies become big companies. And that's what I think about with our research. We're trying to help new found companies or younger companies with our expertise given the expertise that they have. But we're very careful to make sure that we're really doing our own independent research and our analysts are very separate and distinct from the banking world. And that's really important to me. And one edict I have always here is compliance always wins. And that's something that we will never cross.

Joe Mantone   00:09:40

But speaking about helping smaller companies grow, I know in recent years, the IPO market has been pretty subdued. We did see some pickup in 2025 off a low base. So what are your thoughts on the outlook for the IPO market as you sit here in 2026?

Mark Lehmann   00:09:57

I'm optimistic. We saw much better '25 than '24 or '23. The year is starting better than it started in '25. We -- I talk to institutional investors every day. Their appetite for IPOs is greater than it was a year ago or a couple of years ago. I also think when people think IPO, they think tech IPOs and just tech IPOs, and I don't think that's the case. I think it's a much more broad market than we've had before. That's healthy. If you've looked at the early stats on the stock market this year, the broader market, the -- what we like to call the equally weighted market is doing better than the S&P, right? If you just bought the S&P, the 7 or 8 biggest stocks are a large percentage of that, and you wanted to own those stocks in the last 5 years. At some point, we need the market to expand beyond Meta and Google and Apple and all the names. And that's happening. And that's a direct byproduct of some of the IPOs that are coming out. So our pipeline is growing. We have a few deals on the road now. There'll be more coming. And the private -- the people who own those private companies are much more willing to go public now. They want to monetize their companies. And I think you're going to see '26 be a good year.

Joe Mantone   00:11:09

So why do you think investors have more appetite? Is it because we've seen more of a broader market pickup?

Mark Lehmann   00:11:16

I think it's a combination of things. One is one of the things I just said, which is I think there's only just so much room that NVIDIA and Apple can be in their portfolios. They're great, don't get me wrong. But I think if the market is going to be healthy, it's got to expand itself. And that's what we're seeing in some of the companies that are in our backlog. I also think, like I said, the private owners of these companies, the big private equity funds and some of the other venture funds that own these companies are looking for liquidity because there hasn't been a lot of that in the last few years. We've heard that a lot. It's happening now. I think rates have come down and up. I think time has come -- has become a friend, and I think you're going to see that in '26.

Joe Mantone   00:11:58

Got you. Makes sense. So with the IPO market improving, does that sort of open up the possibility for companies to pursue a dual track process where they explore an IPO and a possible sale at the same time?

Mark Lehmann   00:12:12

I think that's very possible. I think there's definitely an ample audience on both those counts. I think it's up to Boards to decide what that looks like. I do think that there are going to be -- there always are some of these companies that even go on the road and in the middle of a roadshow, they announced that they're going to get bought. It's not common, but there's that much capital and that much enthusiasm. I think it's going to be a really interesting year on that front.

Joe Mantone   00:12:38

Digging into M&A a bit, mega deals saw an increase in 2025. We saw some large M&A transactions. What were some of the driving factors behind that? And do you think we'll see those big deals again this year?

Mark Lehmann   00:12:53

Listen, 2025 had a lot of good months and it had a lot of months where the stock market was closed, right? We had the tariff issues. We had, obviously, the macro issues. We had the government shutdown, some volatility, some -- I won't exactly call them black swan events because they're happening more so than they used to. But those are factors for companies because they don't know what to do. It's kind of like COVID when it started. I think people got their arms around it, but if you ask people in the first month, they had no idea. Tariffs were like that between the White House with tariffs and some of the other policies, it was a guessing game where they were headed. And when there's guessing games, things get frozen. And we saw that in the end of the year. We saw that when the tariffs were announced in the spring. Obviously, the smaller companies who are being acquired are probably less worried about that. The bigger companies are. So I think there was a little bit of a frozen backdrop for a few months. when we lose some of that, which I think we're going in 2026, especially going into the election, where I expect that the election will be a big factor, but I think it will be a calming factor for the volatility that we experienced last year. You're going to see more M&A, you're going to see more deals in '26. That's my hunch because I think the White House wants to win in the midterms and making a lot of noise and big ed about tariffs and other things isn't going to help.

Joe Mantone   00:14:20

So kind of unpack that a little bit, why do you think the elections will be a coming factor? Just...

Mark Lehmann   00:14:26

I think some of the policies that the White House is offering may not be as popular as the White House thinks they were. We're seeing some of that in the election data. We're seeing that some of the midterm polling. I think for as much as people are excited about $2 gasoline or $2.50 gasoline, their pocket books are being affected at the grocery store, insurance rates are going up. There are some things that are quelling housing affordability and the White House is laser-focused on that. Tariffs did not help that.

Joe Mantone   00:14:54

So it will be more steady-as-you-go policy as opposed to the big policy that could shift and lead to volatility.

Mark Lehmann   00:15:03

That's what I expect.

Joe Mantone   00:15:05

That makes sense. Yes. And the M&A outlook report that Citizens put out talked about some optimism for middle market M&A. Could you talk a little bit about what are some of the drivers for the increase and the optimism there?

Mark Lehmann   00:15:19

Yes. Listen, I think it's a broad poll. Citizens has thousands of clients. We pull them every year. We see how that sentiment is. It's a relatively durable sample of the clientele that we have. It's the highest it's been in 6 years. So that's telling. That's anniversarying COVID. I think one of the points we just made, a better economic backdrop, growth is happening, rates are slightly lower. I think there's going to be less volatility as it relates to that. So that's good for valuation and good for financing expectations. And the people we talk in private equity are even more bullish on that. So the LPs want liquidity and the GPs want to give it to them. Whether we see a clearing price is a different question. But I think all people are looking forward to a better year. All people are banking on a better year. that is as important as anything else. I think they're listening to their LPs, and they want liquidity, too. They want to get to the next fund and they want to get to the next company.

Joe Mantone   00:16:23

Yes. So that kind of hits on something that I wanted to ask you about. Some of the PE exits have been slowed by -- because of the valuations on the entry points in 2020 and 2021. Those valuations were a bit inflated. So do you think the valuations have now reached a point where we can see some more exits?

Mark Lehmann   00:16:44

I think there's some meeting of the minds, another term you learn in Los call about that. I think you're seeing realism, and it's been 5 years. So those 2021 numbers, albeit frothy, are in the rearview mirror. And that's really important because we all know about denialinger and acceptance, and I think we're in the acceptance phase. And I think that's really important because not every company is a winner and not every investment is a winner. It's all about vintages. And if there's a beating of the minds and realistic valuations, that will foster deal making. And I think that means more exit, and I think that means deals we get deals. It's pattern recognition is really important here.

Joe Mantone   00:17:28

Do you think we'll see PE rely less on continuation funds and sales to other PE funds in 2027?

Mark Lehmann   00:17:34

It's gotten a lot of presses in the last quarter or so, rightfully, I think my hunch is some of the bigger LPs have woken up to that reality of what just transpired and probably aren't too happy about it. My hunch is we've probably seen the -- and there's a lot of autonomy on these PE funds ability to do. My hunch is that's probably peaked.

Joe Mantone   00:17:56

The Citizens outlook also talked about AI being a driver to M&A. Can you expand on that and maybe mention some types of deals that are coming to market?

Mark Lehmann   00:18:10

I don't think it's hyperbole to say it's the biggest thing we've seen since the dawning of the Internet age. I don't think that's hyperbolic. It's become an enormous investing must. As I like to tell people, if you got a deck in 2021 when you invested at the top of the market or maybe peak valuation, AI wasn't mentioned in the deck. It wasn't a piece of -- and every deck you get right now, it's the first page.

Joe Mantone   00:18:34

Now it builds the deck.

Mark Lehmann   00:18:36

It is the deck. Exactly. So it is the catalyst right now. So as the biggest technological shift of our -- of all time, it's the most important economic catalyst for deals, and it's also the most important piece of information that is going to be continuing for the near term, medium term and long term. I think there are some people who, like most big cycles, feel like they're missing it, feel like they're late, feel like, what do I do now? I've missed these top 2 or 3 or 4 or 5 companies. And like a lot of things, that's probably slightly true, but it doesn't mean you should give up. So everybody wants exposure. We're hearing it in all of our pitches. We're hearing -- and it's across, right? I always say technology is a horizontal. It's not a vertical. It's a piece of everything. AI is a piece of everything we do. Our digital infrastructure team is very active in like data centers and things like that, that are growing that AI economy. We're seeing big buyers of things in different parts of the technology universe. I think competition is intensifying for those great companies. I'm sitting in San Francisco right now at some people's numbers, 40%, 45% of the AI dollars are being invested in companies that are starting here. I just see more and more of that, and you'll see some companies that are leading with AI going public in 2026. And I think that will be a harbinger for things to come. And it's early and people will make some big money and people will make some big mistakes, but you could easily said that in any era. I quote this all the time in 1999 on the cover of Barrons, I saidAmazon.bom and said, this is overvalued. It's going nowhere. It's they sell books. Obviously, that was pretty interesting at the time and probably pretty frightening for some people and pretty wrong.

Joe Mantone   00:20:27

Yes. Amazon certainly touches everything as you're saying, tech touches everything. But are there any other sectors out there that you can point to that you think will lead to an increase in M&A?

Mark Lehmann   00:20:39

I think you're seeing a lot of capital formation in the service industry. You're seeing a lot in fintech. You're seeing a lot in health tech, digital technology. We've been hearing about automating the health care system in this country since the beginning of time. I will tell you from personal experience, it's not -- we haven't even begun. Trying to get the right hand to talk to the left hand, and maybe we'll be talking about this for another decade. It's happening. What you're able to do with AI and with your phone and with digital is incredible. I see it with some of the things that we see in our -- combining our medical technology with life sciences coverage. It really is the dawning of an age in that, and you're going to see rapid innovation, but it is early. I'm seeing it in so many different areas of life sciences, which we're fortunate to cover a great deal of it. So like I said at the outset, we're going to see a much wider market for IPOs this year. It's not going to -- you're going to say tech or you're not going to just say it's got to be XYZ sector. You're going to see a much broader offering for the buy side. And I think as the market broadens out, the offerings as well offer offerings in the IPO world will also broaden out.

Joe Mantone   00:21:51

That will be certainly exciting to watch. And I think we covered it here today. So I appreciate, Mark, you taking all this time with us.

Mark Lehmann   00:22:00

I appreciate your time. And I think like you said at the outset, we got to know each other maybe 15, 20 years ago. And the fact that we're talking today is really a wonderful thing, and I'm very excited about what we're seeing in the marketplace and what we're building here at Citizens. So I appreciate the time.

Joe Mantone   00:22:15

Great. Thank you. And hopefully, we can keep the conversation going.

Mark Lehmann   00:22:19

That would be great. Thank you

Joe Mantone   00:22:21

Take care. That will do it for this episode of the pipeline podcast. We thank Mark Lehmann of Citizens for joining us, and we thank you for listening.