We have a number of friends who are investment bankers. Over the years, we have lunch with them a few times a year. We catch up on industry gossip, tiptoe around sensitive subjects covered by our respective NDAs, and just generally talk shop. Lately, we noticed that it has been almost a year since we have done this with most of them. Invites postponed, emails unanswered. Assuming this is not personal (maybe a big assumption), we think we know what is going on here – bankers are really busy.
The problem with this theory is that they seem to have nothing to show for it. There have been no major M&A announcements and almost no IPOs in a very long time. The one banker we did manage to connect with a few months back claimed this was the busiest he has been in a decade, but also the longest he had gone without announcing a deal. The capital markets are log-jammed and the limits on our social calendar is just one symptom of that.
We have been writing about this for a while, like this piece back in 2023, which earns mixed marks for our predictive abilities. The stock market is up a lot since then, but the deeper problems remain.
We view all of this through the lens of start-ups and the venture markets. Companies are staying private longer. Successful late-stage private companies (which are not start-ups, but not public either) can tap into private capital markets for their funding needs. Those capital sources are not pressing them for an exit, so the companies do not go public and have little motivation to sell. This is part of a broader trend in global capital markets where private funding – for bonds as well as equity – has risen to prominence.
For their part, venture investors are in no hurry to make their portfolio companies seek an IPO. Once that happens, they will in turn feel pressure from their Limited Partners (LPs) to return capital. Part of the problem with that is it risks forcing them to mark to market their portfolios which still suffer from the hang over of exuberantly priced deals in 2022. As a result, none of the major funds have returned meaningful capital to their LPs in a shockingly long time.
On top of that, there has been immense regulatory uncertainty. For the past two years, the tech industry got the clear signal from Washington that large M&A deals would not go through. This seems likely to change with the new administration, and in part explains the level of tech industry support for it. For semis companies, add a final dose of geopolitical uncertainty, no one knows if the PRC will give anti-trust clearance to any US semis deals.
The only glimmer of hope in this bleak outlook is the fact that our banker friends are all so busy. Companies want to do deals. Some companies are now long overdue for some form of corporate action. The appetite for deals is out there.
That being said, we have no idea what will spark the dynamite needed to unblock all those logs. Interest rates have come down a bit, but apparently not enough to move the needle much. (That too may change soon.) At some point, we have to assume that the major LPs will start to clamor for their returns – whatever they may be. The whole situation feels untenable, but it can probably stay that way for some time.