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Market dynamics shaping tech investment banking

Chris Grose: The last 18 months have been quite difficult. Global M&A volumes are down 65%, and U.S. equity issuance is down a staggering 75%. And there's really been just four tech IPOs in ‘22 and ‘23 year to date versus 112 IPOs at the peak in ‘21. Now, in the spirit of finding bright spots in every dark cloud, we have started to see some successful IPOs in other sectors.

What are we looking to set up? The broader tech reopening? First is a recalibration of peer multiples. What is the Fed's policy going to be as it relates to interest rates in light of the inflationary environment? What will corporates and investors ultimately do and think as it relates to their ‘24 and ‘25 growth outlook? And once they have a better sense of that, we think stability will return to the broader markets.

The future today, in my opinion, is as bright as it's ever been. TMC is going to continue to be the engine for the US economy and drive the innovation in the way that we live, the way that we work and the way that we function as a society. Now on the M&A side, companies remain cautious given the macro uncertainty. What's the one loan bright spot? It's been sponsor activity. We've seen a good amount of tech privates and we expect to see more.

And the debt markets have just been, frankly, more resilient than the equity markets. And we expect a relatively healthy financing backdrop to support M&A going forward, whether that's in the traditional leveraged loan market or in the more alternative financers like direct lenders. And last but certainly not least, has been activism. Some notable trends that we're going to be watching very closely going forward include companies facing a sunset of their super voting shares, as well as the New universal proxy card rules, which are likely to result, in our opinion, and more proxy fights.

The A.I. landscape is evolving at an unprecedented pace, and this is not just happening in the private markets. We're seeing it in the public markets as well. And then when we look at the velocity of AI, several market studies anticipate that a few native A.I. companies will scale to a billion and a half dollars of air in the next 18 months. So in our view, every single company is going to be impacted by AI.

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Trends to watch in payments in 2023

Tien-Tsin Huang: We still see the same two big themes in payments playing out. Number one, software is taking over payments. And the second one is that everyone wants to bank their users. 

Most of the companies are really good at doing just one or the other, meaning just serving consumers, or just serving merchants. But for those handful of companies that have building relationships with both, if they can connect the ecosystems, there's a host of opportunities for them to provide value-added services to have higher retention, to have better LTV. 

And as a result, you should see better growth. We're starting to see e-commerce growth pick up, credit debit spend has been a lot more predictable. The challenge is that there are some signs of the consumer getting a little bit weaker. And so that's a macro issue. But there is history to draw parallels against that. And the further we move away from the pandemic, I feel more confident that the predictability of growth will be easier in '23 versus the last two years. 

A niche opportunity we're watching and payments is in vertical-specific software, companies that go very deep in a vertical, and dominate it with an operating system, and trying to own that market. We're starting to see in restaurant, in retail, education, names cropping up and delivering outsized growth. So we like that market. 

Another one I'd say is the B2B space. B2B is still underpenetrated. It's three times larger than the consumer-to-business space and with better software, better platforms, and better bank distribution. We feel good about the outlook for payments. We know there's a lot of concern over the macro, and the consumer, and how healthy businesses are, et cetera. But the secular outlook for payments is undeniable. 

There's a lot of investment and innovation both on the consumer and the merchant side. We're going to see better experiences both on the digital and face-to-face world. So we think the payment names can overcome some of the macro and get back to being viewed as defensive growth. 

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