Industry volatility is expected to subside, but regulation may hinder revenue growth.
New York, NY (PRWEB) February 19, 2014
Despite hedging revenue to a certain degree by providing an array of financial services, the performance of the Merchant Banking Services industry has been damaged by falling underwriting activity and subdued trade over the five years to 2014. Merchant banks share a number of characteristics with investment banks and private equity firms, and often invest alongside their clients as a means to endorse potential investments. More specifically, merchant banks provide foreign corporate investment, trade financing and international transaction facilitation services, along with bridge and mezzanine financing. While large bank-holding companies, including Goldman Sachs, have merchant banking segments or subsidiaries, the majority of industry operators are relatively small in size, with the average enterprise employing approximately a dozen individuals. Impaired capital markets and falling asset valuations have particularly damaged these small merchant banks in recent years; consequently, industry revenue is expected to fall at an annualized rate from 2009 to 2014.
Merchant banks typically provide bridge and mezzanine financing services to companies that are too large for venture capital firms but too small for large initial public offerings. Therefore, while drops in total equity underwriting activity do not directly damage industry revenue, they do indirectly harm revenue through reduced demand for bridge financing. According to the latest available data from the Securities Industry and Financial Markets Association and IBISWorld estimates, domestic equity underwriting is anticipated to fall significantly in 2014, and industry revenue is expected to drop in the same year. Yet, demand for industry mezzanine financing has increased in recent years, largely due to low bank and hedge fund capital provision.
The Merchant Banking Services industry has a relatively low level of concentration, with the four largest operators generating small proportion of revenue. Over the five years to 2019, general improvements in private equity supply and demand for alternative assets are anticipated to benefit merchant banks; consequently, industry revenue is forecast to increase at an annualized rate of over the period. However, according to IBISWorld Industry Analyst Stephen Hoopes, “mounting regulation in the financial services sector concerning conflicts of interest is anticipated to hinder revenue growth and damage profit margins.” Similarly, “declining fees among hedge funds and private equity firms are indicative of broader drops in charged fees and have the potential to damage margins for merchant banks,” says Hoopes.
For more information, visit IBISWorld’s Merchant Banking Services in the US industry report page.
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IBISWorld industry Report Key Topics
The Merchant Banking Services industry primarily makes private equity investments with firm or investor capital into the securities of private or public companies. It also provides a wide range of ancillary bridge, mezzanine, real estate and distressed financing as well as international trade financing and foreign direct investment services in varying degrees. This industry is a segment of the Investment Banking and Securities Dealing industry (IBISWorld report 52311).
Key External Drivers
Industry Life Cycle
Products & Markets
Products & Services
Globalization & Trade
Market Share Concentration
Key Success Factors
Cost Structure Benchmarks
Barriers to Entry
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