The M&A market has been nothing short of a roller coaster lately: a slow year in 2020, record-breaking deal volume in 2021, another slowdown in 2022, and now nearly a dead stop in 2023. With all eyes and ears on the current macroeconomic situation, this year is sure to test even the most successful firms, requiring them to go beyond traditional dealmaking practices and look to other industries for answers and inspiration.
Our research shows digitally mature dealmakers with sophisticated use of data and technology transact 3.5x more frequently and generate IRR 8.8 percentage points higher than their peers. And while no one can foresee exactly what 2023 will bring, we're confident leading investment banks will continue to harness the latest tech tools, tactics, and processes to meet new challenges and opportunities head-on.
Here are five technology trends that we believe will impact the way leading investment banks find and close deals in 2023.
With IPO volumes down 45% and proceeds down 61% YOY in 2022, as well as both stocks and bonds suffering significant losses last year, now is not the time to set your firm down a rigid, multi-year path. One tech-inspired tactic that firms can adopt to manage these changing dynamics is Agile. Originally created shortly after the turn of the millennium by a group of software developers, Agile defines a set of guiding principles for working in a rapidly evolving and highly competitive environment.
In contrast to traditionally sequential, rigid, and top-down "waterfall" processes, an Agile approach emphasizes breaking large tasks into smaller chunks, continuous iteration and improvement, and individual accountability paired with team collaboration. Data is also a critical piece of Agile methodology as it allows teams to test and prove or rework certain hypotheses at every step of the project.
Traditional dealmaking processes usually start with a well-connected partner making decisions based on past successes and educated guesses, creating a clear chain of command. Once a plan is set in motion, others in the firm take a waterfall approach to ensure each step of the process is carried out. Analysis and optimization typically take place once the plan has been completed, at which point it's too late to influence the outcome or shift priorities.
In contrast, 2023 will see more banks thrive in today's fast-paced and volatile market by taking an Agile approach to dealmaking. Rather than following top-down directives, these firms will use data to guide their strategies and plans. Every employee will take responsibility for being an expert in their role and using data to consistently evaluate plans, priorities, and progress. Teams will work closely to quickly respond to new opportunities, identify threats early on, and continuously improve performance in real-time.
In-person trade shows have always been among dealmakers' favorite and most effective tactics for finding and connecting with potential targets. It's unsurprising that a recent survey found that the two most popular methods firms use to identify, research, and connect with companies are networking (88%) and conference lists (84%).
We're now seeing in-person events and conferences come back in full force in 2023. However, showing up and wandering expo halls in hopes of running into a high-quality, transaction-ready opportunity simply isn't efficient or reliable in today's highly competitive and increasingly specialized market. Instead, smart firms are using the power of in-person conferences to deepen their relationships with the right companies and generate a long-term deal pipeline.
This means using the latest data and associated technology to pinpoint ideal targets and establish rapport with them prior to attending, which can be done in three key ways:
Want to learn more about these three data-driven strategies? Check out our latest conference guide!
Environmental, social, and governance (ESG) initiatives have been around for a while now, but their popularity has recently skyrocketed, especially in the tech industry. Companies have been changing how they conduct business to be more sustainable in the face of climate change. Employee treatment, well-being, and equality are also top-of-mind for many after events such as the Great Resignation.
To address this desire to do good, some banks have created entire divisions dedicated to ESG. Many others have made strategic investments in ESG for M&A. Beyond the societal good ESG can accomplish, ESG leadership is actually a key justification for higher deal valuations, according to a survey from Bain. And most M&A executives (65%) expect ESG to increase in importance for their companies over the next three years.
This type of "Green Finance" can take many forms, from ESG to impact investing, but the main goal all boils down to this: what are you doing to improve not only the lives of the people you employ but also the larger world around you? How your firm answers that question will be a key differentiator in 2023 and can serve as the foundation for a strategy and reputation that far outlast current market conditions.
In recent months, the tech industry has seen hundreds of thousands of layoffs across thousands of companies, both big and small. And while Wall Street hasn't been hit quite as hard, now is the time to put the tools in place to ensure your firm is able to maintain its current operations with the same or even fewer resources.
Fortunately, technology has evolved to the point where many time-consuming and repetitive tasks can be successfully automated. One of the best ways to take advantage of this functionality is by integrating the tools in your tech stack and enabling them to automatically pass information back and forth between one another.
LFM Capital is one example of a top firm with a fully integrated tech stack. Rather than manually research companies one at a time, LFM's BD team harnesses Sourcescrub's wealth of information on non-transacted companies, intuitive search functionality, and robust filters to surface, understand, and score relevant opportunities.
This information is automatically passed from Sourcescrub to Altvia, LFM's CRM, using Sourcescrub's CRM enrichment functionality. Altvia then sends it to LFM's Sales Automation tool, Outreach.io, which the BD team uses to personalize and send outreach emails at scale. Overall, the firm was able to replace 10 part-time sourcing interns with just 2 full-time employees a 2.5x increase in productivity!
As with automation, AI continues to be an important point in the evolution of the investment banking industry. And each innovation brings more opportunities. ChatGPT has recently served as a fun experiment for many, though its practical uses are not fully determined and its reliability is questionable.
But AI is far more than just ChatGPT. From virtual data rooms, natural language search and chatbots, to blockchain and data processing, AI has nearly unlimited uses. But a recent survey found that just 15% of financial services companies (including investment banks) use AI-powered technology extensively, though nearly 90% plan to increase AI-related investments by 2025.
This year will witness a shift in how investment banks use AI as more firms seek to create competitive advantages. AI can handle many of the industry's more time-consuming and tedious aspects. Deal sourcing platforms use AI to sort and filter through millions of data points, bringing forth more information than would be possible through human power alone. Even things like sales outreach and follow-up can be done for you with AI assistants that still deliver human-like experiences for your customers.
On top of that, you can use AI to process your own data, creating better forecasts and getting better insights about your company and your clients' portfolios. From supporting your other endeavors like ESG to efforts around talent retention, AI is and will continue to be an incredibly powerful tool for the firms who invest their resources into it.
Investment banking is a historical and notoriously traditional industry. But the need to innovate in the face of market disruption and competition, combined with research highlighting the success of digitally mature dealmakers, is leading more investment banks to embrace digital transformation and take a page out of the highly progressive tech industry.
We believe these five trends are just the start of the impact of technology on the investment banking industry in 2023. To learn more about how data and digital transformation are changing how banks find and close deals, read this free guide, Think and Grow Different: Dealmaking Strategies for Investment Banks.