Citigroup Preparing for a Dealmaking Upswing

The second half of next year could see an increase in M&A and leveraged finance deals as market makers move closer together in their earnings expectations, and pent-up deals come to fruition.

Macro-economic uncertainty, triggered by the Ukraine war, inflation, and supply chain disruptions, have left many European and US deals up in the air, Citigroup’s head of mergers & acquisitions for German-speaking countries in Europe, Holger Knittel, said at a media roundtable Wednesday.

Although the slowdown in deal flow is expected to continue over the next few quarters, it could pick up next year if the situation stabilizes. Citigroup’s co-head of equity capital markets for EMEA, Valery Barrier, said that.

Initial public offerings (IPOs), which dropped by 70 percent in EMEA so far this year compared to last year, could even surge in the second half of 2023 with pent-up deals potentially materializing, he said.

At the same time, the trend for companies to delay or hold off from going public is likely to remain as the investor base for minority private placements of equity investments has become more structured with more defined processes, Barrier said.

Compared to 2021, which was one the best for equity markets, companies’ earnings expectations for next year have already come down, because investors are grappling with not knowing how inflation, the macro-outlook as well as energy prices will affect companies’ business models, Knittel said, adding that there is still scope for further earnings estimate downgrades.

In this uncertain climate there is a gap between what the sell-side says companies are worth and what the buy-side is willing to pay, halting dealmakers in their tracks. Exacerbating the situation within leveraged finance is the limited number of buyers able to finance such deals, resulting in the absence of a fully functioning leveraged finance market.

The sheer velocity at which this year’s investment environment has changed, is partly responsible for this deficiency within leveraged finance, according to Barrier. Some companies have seen their stock prices plummet 50 percent since the beginning of the year, he said while drawing attention to the rate at which central banks are pushing ahead with interest rate increases.

Citigroup seems to be preparing for when markets have more clarity by bolstering its investment banking leadership with recent new hires Patrick Frowein from Deutsche Bank and Jens Welter from Credit Suisse.