Investment banking volumes were up in October, with equity capital markets (ECM) and mergers and acquisitions (M&A) leading the way, gaining 26% and 76% respectively this month. Debt capital market volumes fell 11%, but they are still up for the quarter after a strong September, according to UBS analysts Daniele Brupbacher and John-Paul Crutchley.
Investment banking: EMC gains driven by IPOs
ECM gains were driven by IPOs, which were up 213%, and “year-to-date total ECM volumes are 21% higher than in the same period last year and we see upside risks from here based on the ECM pipeline,” write Brupbacher and Crutchley. Even though completed M&A volumes are up, announced M&A volumes are down 31% from last month. M&A have been depressed for some time, and many analysts expect the rate to really pick up as market conditions improve.
“The M&A backlog continued to improve in a steady pace in October but fees are still under pressure,” they write. “The ECM pipeline shows an extreme spike in volumes and a strong jump in revenues at the moment. We remain cautious with extrapolating from the current data or taking the surge in volumes for granted, as the picture might change quickly, but the trends are certainly promising.”
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DCM volumes fall
Investment-grade DCM volumes fell 20% and high yield fell 34%, and year to date DCM volumes are lower than they were this time last year. “We do not expect a major improvement for the rest of the year, as high yield issues have become less attractive,” write Brupbacher and Crutchley.
This move away from DCM shouldn’t be surprising as the cost of debt starts to increase, while IPOs become more attractive with rebounding equities markets. Companies that may have avoided stock offerings in the last few years for fear they wouldn’t get a decent price have more options available to them now. Other debt investment strategies have also been taking a backseat – hedge funds have made a killing recently with every strategy turning a profit except for distressed debt.
“Equities still in the sweet spot,” write Brupbacher and Crutchley. “Sentiment remains healthy but volatility is falling. We see potential for positive knock-on effects from the strong ECM activity.”