Banks Acquiring Restructuring-focused Advisory Firms

With fees on the decline due to reduced M&A deal volume, investment banks, consultancies and financial sponsors are acquiring boutique advisory firms specializing in corporate restructuring and distressed dealmaking. Following J.S. Held’s acquisition of Phoenix Management and Mizuho America buying Greenhill in 2023, will this trend continue in 2024?

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Transcript 

Julie-Anna (00:05): Hello and welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket and SS&C Intralinks. I'm Julie-Anna Needham. I'm a business journalist who's been covering M&A for a decade. In this episode, we're finding out about how investment banks are preparing for an increase in distressed deals by buying up smaller advisory firms with expertise in restructurings. To find out more about this, I'm joined by Marlene Star, who is the U.S. editor for sector coverage for Mergermarket. Hi Marlene. Thanks very much for joining me today.

Marlene (00:45): Thank you for having me.

Julie-Anna (00:46): So can you kick off by telling us when you first became aware of this increase in the number of advisory firms with experience and distress situations being acquired?

Marlene (00:57): I guess the evidence was anecdotal at first. I kept hearing about deals being announced in the space, and then I would follow up with some of the executives and they talked about why this seemed to be happening. And then as is usually the case when we start to detect a trend, I went to our team of analysts to see if this was a trend, and lo and behold it was.

Julie-Anna (01:23): And so what did the analysis team find?

Marlene (01:27): The analysis team found that there's good reason for advisory firms to be looking for new sources of income because North America's investment banks have seen a painful decline in revenue because of the prolonged slump in dealmaking. We found that during the first nine months of 2023 fees for M&A advisory work in North America fell 25 percent year on year to USD 11.5 billion. So that's a pretty hefty drop.

Julie-Anna (02:01): And so can you spell out why there's an expectation that there are going to be more distressed situations on the horizon?

Marlene (02:09): You have to look back a few years for some context. The levels of distressed dealmaking really surged in 2020 after the COVID-19 pandemic took hold, and then we saw a pretty strong recovery. The number of distressed deals fell sharply in 2021 and 2022 because that was when the market started to really climb again. And interest rates were very, very low. But here we are this year and distressed deals are back on the rise again. And there are many reasons for that. As you pointed to the rising interest rates have caused the financial markets to really tighten up, and this has made it really hard for companies to raise new capital or for existing companies to refinance their debt. And then there's concern about the economy slowing. And also in the U.S. at least, there is uncertainty around the presidential election, which is actually having a ripple effect around the world as well. And the data bears it out as well. The merger market analysts came up with figures on the number of transactions involving North American targets that are either distressed, being liquidated or in administration in the year to date through November 7th. That figure almost doubled versus the total in 2022.

Julie-Anna (03:32): So that's a really significant increase.

Marlene (03:34): Big time.

Julie-Anna (03:35): And when we are looking at the target companies, those advisory firms with expertise and restructurings, can you talk through what kind of companies, what size those are, please?

Marlene (03:46): They seem to be mainly boutiques with like 20 to 40 people. I think for the most part they have expertise. The targets have expertise in distress situations, restructurings workouts, if you will. And the acquiring companies actually are a pretty broad range of companies. They tend to be obviously strategic players like investment banks, but also other financial companies, consulting firms, and many, many financial sponsors as well.

Julie-Anna (04:16): And can you give us some examples of specific deals, please?

Marlene (04:21): Sure. There were quite a few. If we go back to 2019, Conway McKenzie was acquired by Riveron. And then if you go to 2021, Accordion acquired Mackinac in May of that year. And in July of 2021, Hilco acquired Getzler Henrich. And then more recently, Kelso last month, their portfolio company, which is a global consulting firm called J.S. Held, acquired Phoenix Management Services. Effie International is another company that told Mergermarket that it could look at either establishing its own restructuring practice or acquiring a debt-focused fund as it transforms itself into more of a middle market-focused investment bank. So there have been a whole slew of examples we've come across.

Julie-Anna (05:22): And is it seen as a good source of revenue for investment banks who might be seeing other types of revenue drop off?

Marlene (05:30): Absolutely. M&A volume for the first six months fell 32 percent compared with the same period last year according to our data. And the number of deals dropped 18 percent. So with overall M&A volume down so sharply investment banks are looking to distress deals and restructurings as a way to augment their revenue.

Julie-Anna (05:52): Thank you. And just for some context, can you talk through whether this is a pattern that's happened before when there has been pressure in the financial markets?

Marlene (06:01): Yes, it has been somewhat of a pattern Mergermarket has found over the years that advisory M&A activity has tended to rise during periods of great market turbulence or economic uncertainty. A few cases in point, the internet bubble bursting between 2000 and 2003, of course, the global financial crisis in 2008 and 2009. And then as I mentioned before, after the onset of the COVID-19 pandemic. So far this year, we've seen 15 deals through November 7th. And so it looks like 2023 is shaping up to be another strong year. We saw 18 deals in 2021 and 19 in 2022. So we're definitely following that trend.

Julie-Anna (06:50): And why are acquirers interested in buying instead of building the capability in-house?

Marlene (06:56): With any kind of M&A? It's always a decision between buying and building as you've pointed out, but I think it comes down to whether the firm feels it has the expertise in-house and also how fast it'll take to get ready to really go to market and start tackling these deals. There was a recent study that I came across from an executive search firm called Eastward Partners, which pointed to an acute shortage of talent in the distressed M&A market. Basically, a lot of very senior people are getting ready to leave the field and there aren't nearly enough new people entering the field. And that means it's going to be really competitive to attract people with this kind of skillset. So M&A is a much quicker way to hit the ground running and be able to do these distressed deals while they're happening as opposed to trying to grow it in-house.

Julie-Anna (07:54): And it sounds like it might be a really good area for people going into the industry to get into.

Marlene (08:01): Absolutely. I think that this is definitely something we're going to see more of.

Julie-Anna (08:05): Great. Marlene, nice to chat to you. Thanks very much. That was Marlene Starr, who is the U.S. editor for sector coverage. Thanks for listening to Dealcast, presented by Mergermarket and SS&C Intralinks. Please rate review and follow the podcast. You'll find us on Apple Podcasts, Spotify, or look out for your Mergermarket news alert. For more information, have a look at our show notes. Join us again next week.