Accounting boss predicts death of mega-corporate deal as cost of debt soars
The drought in high-level corporate dealings could be even longer than that following the start of the pandemic, the British PwC boss has predicted.
Kevin Ellis, UK chairman of the Big Four accountancy and consultancy firms, said the quiet final quarter of 2022 is likely to extend into the second half of this year.
Ellis, speaking at the World Economic Forum in Davos, told the Mail that the “upper level of transactions” was slowing amid a “tough” debt market – after soaring inflation pushed central banks to sharply increase the cost of borrowing.
Slowing down: PWC Chairman Kevin Ellis says a hiatus in major deals that began in the last quarter of 2022 is expected to extend into the second half of this year
“You won’t see the big mega deals that you’ve seen in the past for a little while because the debt market isn’t able to fund them,” Ellis said.
The comments come days after a group of Wall Street banks estimated the cost of a trading slump as their investment banking revenues fell by more than half, prompting JP Morgan to reduce the bonuses of its investment bankers by up to 30%.
Ellis, however, was optimistic about prospects further down the corporate food chain, as well as restructuring when struggling companies run into trouble, all of which earn PwC lucrative advisory fees.
“There will always be deals,” he said. “The size and scale will be different. If you go back to March 2020, we saw a vacuum in the deals, but it came back with a vengeance in September because there is still a lot of money in the hands of private equity, sovereign wealth and corporations, and so they won’t want to miss the rise.
“So while there may be a bit of a vacuum in the deal market now at the higher levels, there is still activity in the mid-range and it will quickly come back like post-Covid.
“We are still seeing a lot of business activity and our business activity continues to grow.”
Ellis said there would also be “a lot of activity in the restructuring market.” He added: “That will change again.
“What we saw the last time we had this downturn with 2020 and Covid, the downturn lasted a much shorter period than expected.
“I think the first signs of positivity as we saw in the transaction-led recovery in September 2020 will likely repeat in the second half of this year.”
He said the crisis started in the last quarter of last year. If his prediction is correct, it would mean the major deal “vacuum” could outlast the six-month freeze between March and September 2020.
Lagarde rate hike alert
Rate hike: Christine Lagarde, President of the European Central Bank
The European Central Bank is pushing back on bets that it will slow the pace of its interest rate hikes given the recent declines in inflation.
Investors lowered their expectations of higher borrowing costs, bolstered by data showing lower euro zone and global inflation and related talk of more modest increases from the US Federal Reserve.
But the bank’s president, Christine Lagarde, said investors were underestimating her determination to bring inflation in the 20-nation eurozone back to her target of 2%. It is currently 9.2%.
Insisting that the bank was determined to “stay the course”, Lagarde told an audience in Davos: “I would invite [financial markets] review their positions. I think they would be well advised to do so.
The comments suggest that the ECB is bracing for further rate hikes. By contrast, Bank of England Governor Andrew Bailey said “a turning point has been turned” in the UK after inflation fell for the second month in a row – despite being high at 10.5%.
He also hinted that interest rates could peak at 4.5%, after rising from 0.1% to 3.5% since December 2021.
The Bank is expected to raise rates to 4% on February 2 – on the same day the ECB is expected to cut from 2% to 2.5%.
