Five big finance questions for 2024

One note to start: In this special edition of DD, we’re looking ahead to some of the biggest themes that will affect dealmaking, private equity, corporate finance and much more in the coming months. We’ll be back to our scheduled programming on Tuesday, January 9. Thanks for reading and happy new year from Arash, JFK and the whole DD crew.

Will capital markets and dealmaking make a comeback? 

Dealmakers need stability to execute transactions, and it was severely lacking over the past year. Rising interest rates and tricky economic conditions mixed with tumultuous financial markets and tense geopolitics cast a deep chill over activity.

Heading into 2024, the market may be thawing. US Federal Reserve chair Jay Powell has signalled that the cycle of rate rises may be over. At the same time, private equity groups and large corporates that have refrained from activity face increasing urgency to strike deals. 

As the market digests new macro and financial conditions, bankers, lawyers and consultants are getting the message to gear up for a more active 2024.

It’s hard to imagine that things could slow down further after the past year, which saw global M&A volumes drop to a 10-year low while initial public offering proceeds fell by about a third year-on-year. 

Yet the extent of that revival remains in question, with elections on both sides of the Atlantic, two wars, and a rocky economic outlook providing enough uncertainty to keep dealmakers on their toes in the new year.

Will boom times return for private equity? 

Last year we asked whether private equity was in the danger zone. Fast-forward 12 months, and the tide has turned for the buyout groups that have spent the past decade basking in cheap money.

PE firms are now left sitting on trillions of unsold investments and their backers are demanding their money back before committing more cash to the asset class. As traditional exit routes from investments — a sale to another company, or a flotation on the stock market — have become more difficult in the new macroeconomic environment, some buyout groups have grown creative.

They’ve increasingly embraced clever new financial engineering techniques such as net asset value financing, aka using the cash flow of its already leveraged assets to borrow more money to fund investor payouts or to alleviate balance sheet pressures at large investments. Take Vista Equity Partners’ recapitalisation of fintech group Finastra, for example. 

The forthcoming year will provide a litmus test for many fast-growing firms such as Thoma Bravo, Clearlake Capital and Insight Partners as they raise new funds. PE giants Blackstone and KKR are also in the process of raising new flagship funds.

Dealmakers are also beginning to envisage greater fundamental change to the industry, akin to the years around the 2008 financial crisis when Blackstone, KKR and Apollo all went public. All three groups saw their shares skyrocket in 2023.

A new crop of IPO candidates in CVC, General Atlantic and L Catterton may test the waters of public markets in 2024, while BlackRock continues to hunt for its “transformative” private capital deal.

Will the trustbusters get busted up? 

Joe Biden’s antitrust team began last year with a goal to crack down on tech giants such as Google, Meta and Amazon and get tough on the private equity giants that had come to control vast swaths of the economy.

The results have been mixed. After some big setbacks, including Amgen’s $28bn takeover of fellow drugmaker Horizon Therapeutics, and Microsoft’s $75bn purchase of game developer Activision Blizzard, competition watchdogs across the globe pulled off wins including scuttling Adobe’s planned $20bn acquisition of smaller rival Figma and forcing Illumina’s divestment of Grail.

Lina Khan was appointed by US president Joe Biden in 2021 with a mandate to revive the FTC to its trustbusting origins © AP

And under chair Lina Khan, the US Federal Trade Commission brought its first lawsuit targeted at serial acquisitions by private equity firms, targeting Welsh, Carson, Anderson & Stowe over its takeovers of anaesthesiology practices. It will be a huge test in the FTC’s crusade against so-called private equity roll-ups.

A suit against Google by Jonathan Kanter, head of the US Department of Justice’s antitrust unit, over its dominance in digital advertising and a challenge to Amazon by Khan and the FTC will serve as further tests for Biden’s progressive regulatory regime.

But the fumble at Microsoft might suggest that antitrust regulators have overstepped their bounds. Pushing for lasting change is a wiser route than chasing blockbuster victories, especially with a fierce presidential election just around the corner.

What now for the ‘golden age’ of private credit? 

It was a boom year for private credit. As markets whipsawed and banks retreated from one of their most lucrative business lines, large private credit investors stepped into the void. 

Big buyouts were financed by the likes of Ares Management, Sixth Street, HPS Investment Partners and Blue Owl. These types of firms also became the only option when overleveraged companies needed to refinance their debt, à la Finastra and KKR-backed veterinary hospital operator PetVet.

Their newfound stranglehold on the lending market will be firmly challenged next year as banks hope to re-emerge as a credible option to private equity sponsors. 

There’s already competition under way between the two camps to finance KKR’s investment in healthcare technology business Cotiviti. 

How far banks go to win back a business they have traditionally dominated is unclear and may largely be driven by the Fed’s posture around interest rates. Analysts with Moody’s believe the competition will become quite intense, meaning fewer protections for lenders (read credit investors) and better terms for borrowers.

Banks across Wall Street have been cutting deals with asset managers as they look to take back market share. That’s music to the ears of private equity investors who saw their cost of capital spiral higher last year.

But it could all still go wrong. The Fed’s path will be dependent on inflation and private credit funds will have to navigate a possible slowing economy as well as the cascading effect that has on the loans they’ve hoovered up over the past five years. Credit rating agencies caution that around the corner is an increase in defaults, which they expect will weigh on private credit returns. 

What’s the outlook for employment and pay on Wall Street?

Bankers came into 2023 knowing nothing was really going to measure up to the boom times of two years ago, but it still proved to be a particularly brutal year for Wall Street’s elite.

Lay-offs were the big theme with tens of thousands of job cuts, which are set to continue into 2024. Those who survived were told to brace for lower bonuses as rising interest rates and the previously mentioned dealmaking chill left little to look forward to. 

There’s some hope that 2024 will bring good tidings. The end of the year saw an uptick in listings, including the likes of chip designer Arm and German sandal maker Birkenstock, as well as a gush of oil megadeals, which could be a sign of better things to come. 

Speaking in an interview with the FT, Morgan Stanley’s outgoing chief executive James Gorman struck a more upbeat tone. “The minute the Federal Reserve has concretely signalled that they’ve stopped raising rates, let alone the point at which they first do a rate cut, these markets will take off,” he said.

Though it’s unclear when this “take-off” will happen.

James Gorman © Bloomberg

Regardless of how investment bankers fare, their vaunted status on Wall Street is coming under challenge. The superstar lawyers will continue to displace them.

Partners at elite law firms such as Kirkland & Ellis; Wachtell, Lipton, Rosen & Katz and Paul Weiss, have seen their pay soar and we don’t think that will stop in the near term. And law firms are less regulated and more diversified than the banks. The only question for the superstars is when will the general counsels at their big clients start getting jealous.

DD predictions for this year:

Will David Solomon still be running Goldman Sachs by year-end?

We’re leaning no, but you definitely won’t catch him behind a DJ booth anytime soon.

Will the Carlyle Group still be independent?

The private equity firm faces a big task catching up to rivals in 2024. We’re not sure there’s a buyer out there.

Will Elon Musk default on X’s debt?

Everything is fine, according to Elon, anyway. Expect to hear more about how X is really AI.

Can Jane Fraser stop the bleeding at Citigroup?

Turning around a supertanker is tough. One guaranteed winner: Fraser’s ex-employer McKinsey & Company. 

Will Patrick Drahi solve his cash and corruption crises?

All signs point to trouble ahead.

Will Masa Son do something crazy?

Of course he will.

Is Miami going to replace New York as the centre of US finance?

Ken Griffin seems convinced. We’re not.

Who will be the biggest dealmaker, Saudi Arabia or Abu Dhabi?

Sheikh Tahnoon is giving Saudi Arabia a run for its money.

Will Disney be broken up or acquired?

Bob Iger is under pressure to figure that out, and fast. Deals for sure, break-up we’re not sure.

And finally, some of our favourite features from last year:

Private equity: higher rates start to pummel dealmakers

Project Yeti: How HSBC bought Silicon Valley Bank UK for £1 

How the Swiss ‘trinity’ forced UBS to save Credit Suisse

Centerview: The Wall Street power brokers confronting a rare breach

Kirkland & Ellis: is it party over for the world’s most profitable law firm

Has China become too cosy with private equity?

The downfall of the judge who dominated bankruptcy in America

Carl Icahn admits mistake with bearish bet that cost $9bn

‘Project Springsteen’: how law firm Paul Weiss raided rival Kirkland in London push