We may still have a week left in 2013, but for all intents and purposes, Wall Street’s investment banking departments have shut down for the year, leaving their denizens pondering the size of their bonus checks, packing for their winter getaways or simply rearranging the deal trophies on their desks.
This year, there are a lot of those Lucite tchotchkes, especially over at Goldman Sachs (NYSE: GS). According to preliminary data released by Dealogic Ltd., Goldman captured the single largest share of revenue from underwriting new stock deals in 2013, walking away with $1.5 billion in fees worldwide. JPMorgan Chase (NYSE: JPM) was nipping at its heels, however, wrapping up the year with $1.47 billion in equity underwriting fees and dominating the landscape for debt transactions.
When it comes to overall investment banking revenue, Goldman had to take a back seat to both J.P. Morgan and Bank of America Merrill Lynch (NYSE: BAC), with 6.8 percent of the $72.6 billion up for grabs in 2013, compared to 8.6 percent and 7.5 percent for the two top performers.
What do all these dollar numbers mean?
Basically, that the deal environment is at its most robust level since 2007. True, overall investment banking isn’t as lucrative as it was back then, when investment banks could celebrate generating $87.6 billion in revenue. But the industry is also leaner and has consolidated considerably in the wake of the financial crisis, meaning that for the top-tier banks, the rewards are still impressive.
That’s especially true in the stock underwriting business, where underwriters brought an impressive 4,879 transactions to market, generating $815.8 billion, a 23 percent jump. Revenue from those deals soared 29 percent, to $17.6 billion, of which nearly 60 percent came from North American transactions. Initial public offerings made up about a third of that revenue, having soared 44 percent over 2012 levels.
The data seems to signal that when it comes to traditional investment banking operations in the equity arena, Wall Street finally has shrugged off the post-crisis malaise.
In particular, it has been a blockbuster year for private equity firms, which were able to profit from the stock market’s big rally to unload stakes in Hilton Worldwide (NYSE: HLT), SeaWorld Entertainment (NYSE: SEAS) and Pinnacle Foods (NYSE: PF), to name only a few. Indeed, Dealogic calculates that the $166.5 billion raised worldwide from these “sponsor-backed” equity underwriting activities was the highest ever recorded and generated a record 20 percent of all equity underwriting.
True, not all of these deals shot out of the gates and some, like the much-watched IPO of cosmetics company Coty (NYSE: COTY), continue to languish beneath their offering price. But backers like the Carlyle Group, TPG and Blackstone are just happy to finally be able to get some of these businesses out of their portfolios (at least in part) and into the hands of public investors, generating some real cash returns for their own limited partners.
The bond market paints a slightly gloomier picture. Yes, revenues hit a record of $21.3 billion this year, but volumes dipped 8 percent over last year, with issuance totaling $6 trillion, down from $6.56 trillion in 2012. The most alluring spot in this universe, not surprisingly, was the high-yield bond market, where underwriting activity hit a record of $476.5 billion, thanks in large part to corporate eagerness to lock in debt at historically low rates while they’re still available. That eagerness was met by a similar urge on the part of investors to seek out any securities offering even the slightest bit of additional yield in a market environment where that remains exceptionally scarce.
That contrast – a blockbuster performance in equity underwriting, coupled with a ho-hum year for fixed income as a whole – seems likely to be reflected in compensation levels when bonus time rolls around. But if anyone at Goldman or JPMorgan Chase is expecting that their bonus payouts will be as lavish as they were pre-crisis, they may want to reset their expectations. The truth is that many banks are setting aside a smaller portion of revenues for employees.
That gets to the heart of a new truth about the way Wall Street works, one that is likely to make shareholders slightly happier and even appease some critics. Faced with the need to juggle the interests of various constituencies, this year, the banks are handing the short straw to their employees.
Yes, revenues are up and so, too, are profits. But bank CEOs are opting to boost dividends and steer a smaller portion of their cash to employees than has traditionally been the case. At Goldman Sachs, the estimated portion of revenue to be paid out as compensation is now at its lowest level since the bank first went public; meanwhile, Goldman has boosted its dividend payout significantly in the last two years.
The likely result of this new approach is that Wall Street firms will reward their most valuable employees as lavishly as ever – and skimp on bonuses to those who aren’t seen as rainmakers. The first group’s services are invaluable; top executives still in cost-cutting mode may cry only crocodile tears if others take umbrage and head for the doors.
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