Over the past five years, the time it takes to close an M&A deal has increased by more than 30%, according to data from Ideals VDR.

But are early stage investment funds also experiencing the same slow pace when getting deals done? The Financial Times reports that VC funds have more than $300bn in dry powder as investors take a more cautious approach, in large part due to a lack of exit opportunities caused by “an inhospitable IPO market and regulators constraining M&A.”

To find out how this cautious approach is impacting deal times, we spoke to Oliver Finch, who has almost two decades experience in early stage investing, most recently as Founder of early-stage advisory firm Longmont.

Q: What’s the current state of venture capital and early stage investments?

A: The overall landscape continues to normalize after the frenetic activity of the past few years. Many good businesses are still being funded, with attractive round sizes and structures. Clearly there are lots of headline-grabbing deals and bright spots, but the overall landscape appears one of more scrutiny and reversion to longer-term means.

The past few years of “over-funding” have probably meant it takes 6 – 12 months longer for some deficient technology or distribution models to face reality.

There are certainly some great technologies and companies with slightly compromised business models which will struggle, and it will take some difficult conversations and decisions to continue to recalibrate and recapitalize. These businesses might either need to reconfigure to break even with lower growth expectations, explore ways to exit, or package the business differently.

Q: How is this impacting new investments and fundraising activity?

A: Management teams and investors are having to face a tougher reality in some cases. Especially in more nascent markets, bold decisions are needed to determine whether shifts or slowdowns are temporary, or if they necessitate a more fundamental change in direction, business size, or approach – or indeed if they need to wait for the situation to develop.

It takes a huge amount of leadership maturity and discipline for companies that have been overfunded to say, “The tail is wagging the dog here. There isn’t the right-sized market or the broader liquidity for us to effectively deploy what we’ve raised. We can’t yet define a coherent strategy in this new environment.” 

There are some fantastic opportunities amidst these challenges for those in the mid-market, lower mid-market, or corporate development sectors.

It’s also become more challenging for many investors to raise new funds. Some large funds like Atomico and Balderton have raised substantial amounts, but this success is not universal. Many smaller and less differentiated funds have struggled. We are hitting some bumps in the road, and it’s difficult to imagine that it doesn’t filter down into company and portfolio-level interactions and advice.

I believe there are some fantastic opportunities amidst these challenges for those in the mid-market, lower mid-market, or corporate development sectors. For companies with the right framework and environment there should be valuable strategic assets at a lower cost, either as standalone businesses or through M&A.

These deals might look similar to restructuring M&As. They would be very fast, small, complex and likely a bit fiddly. But for focussed teams who know what they’re doing, they could be really interesting opportunities with significant asymmetric financial and strategic return. 

The other way we’ve seen this theme emerge is via companies that have grown well, been very generously funded, but not met the most outsized expectations. These are now positioned to undertake reverse mergers, acquiring legacy assets and books of business from incumbent firms and applying their novel technology and perhaps more innovative culture to them.

Q: To what extent is the focus on AI influencing investments and due diligence? 

A: From an investment perspective, AI has become a significant focus. The handful of fast-tracked “mega-deals” to solve big tech’s existential crisis probably distracts from the more thoughtful approach at most funds.

There is certainly pressure on large corporations to address how AI might disrupt their business, how competitors might use it, and how they can gain a competitive edge.

Generally investors are looking for better linkages to the underlying business problems, even if the technology’s full potential will unfold over months or years rather than immediately.

There is definitely an expectation around technical areas based on a class of techniques that might be now considered outdated or static. We are now back to a healthier market with claims and ambitions better understood in context of the mix of talent, research and technical execution.

At the larger end of the spectrum, there is certainly pressure on large corporations to address how AI might disrupt their business, how competitors might use it, and how they can gain a competitive edge in both narrow ways, and at scale.

Q: Data from the past year shows that M&A deal durations have remained fairly static, decreasing by 5% since last year. Does that reflect your recent experiences?

A: That’s an interesting observation. There does seem to be a slight release in pressure this year compared to the previous one. Last year, there was a more cautious approach, which could be seen as a “risk-off” reaction, manifesting as pauses or deeper dives into certain risk factors not always correlated to core deal rationale and risk. This year seems more normalized within a three to five-year context, which aligns with what I’ve observed.

Working in the syndicated deal space, I’ve also noticed that people are more willing to say no and pass on deals early. Previously, there was a tendency to keep options open longer, with lead investors needing to qualify others out. This mix of factors contributed to a general pressure cooker on more limited deal-doing capacity, which paradoxically might have created a bit of momentum overall.

Q: Do new regulations in areas such as ESG slow down deals, or do they quickly get integrated into standard processes?

A: I think it’s more of the latter. When GDPR was introduced, there was significant concern and urgency to comply, but the actual impact was less dramatic than anticipated. In the early phases of new regulation, more risk-tolerant firms might just say, “We’ll deal with it if it becomes an issue,” whereas the more prudent might over-index initially. 

With areas like supply chain circularity and sustainability, early phases looked like a checkbox exercise for many firms. But as these aspects become central to competitive strategy, due diligence in these areas becomes more significant.

This over-preparation often becomes a learning process, allowing deal teams to get faster and more targeted over time, and for firms to either increase deal capability and speed in that area, and be more selective about how and where they invest their time and resources.

With areas like supply chain circularity and sustainability, early phases looked like a checkbox exercise for many firms. But as these aspects become central to competitive strategy, due diligence in these areas becomes more significant. We’ve seen dedicated funds, like Circularity Capital, focusing on companies that reuse or optimize existing resources – on the plausible and increasingly strong evidence base that these firms will be more valuable and more competitive in the next 10-20 years than those that don’t. 

This reflects a shift from basic compliance to a more strategic and competitive approach, which might contribute to a slower or more complex deal process as firms and investors develop a deeper understanding of ESG and how it might generate superior long-term returns in specific circumstances.

Q: Sabine Schilg, VP of Customer Success at Ideals, said the cost of money is the main factor slowing deals down. Do you agree?

A: It’s definitely a significant factor, but changes in the cost of money also affect the nature of markets. For instance, it might lead to certain businesses disappearing or changes in market competition. Firms with strong balance sheets might find opportunities to acquire weaker or more questionable assets at a lower cost, which could offer synergistic value.

Cultural legacies and historical experiences with M&A can also influence how firms approach new deals. For example, after a painful M&A experience, some companies may avoid large deals for many years. M&A laggards appear anecdotally to spring to life just as major M&A trends begin to wane. There could also be markets or segments where firms might choose to go on the offensive, taking advantage of lower costs to acquire assets that align well with their strategic goals.

When the weighted average cost of capital for Fortune 500 companies exceeds around 9-10%, the dynamics of M&A can change significantly. Companies might shift their focus from paying a high price for growth to valuing cost-saving M&A far more. This often means that while the volume of deals might remain similar, the nature of those deals changes. Companies might be more willing to pay a premium for cost-saving synergies rather than growth, and undertake different work to diligence their hypothesis.

Even in broadly challenging financial environments, technology remains so attractive. Great technology delivers cost savings and growth with less overall expenditure.

Methodology

The figures referenced in this article are based on anonymized data collected from Ideals Virtual Data Room customers on the sell and buy sides of M&A deals. We calculated the deal duration as the time between the first non-admin invited and the closure of the room. We also measured the number of hours spent working on documents within the room. 

Since a record-breaking rise in 2022, salaries and bonuses in UK investment banking have remained stubbornly static, moving up (and even down) by only a couple of percentage points. 

However, this doesn’t mean individuals aren’t able to negotiate on a case-by-case basis. There is still a war for talent and institutions are willing to fight to secure the best candidates. 

Let’s take a look at the latest figures representing the state of salaries in the UK’s investment banking sector, how they compare to Europe and the rest of the world, and the trends that look set to shape remuneration strategies in the second half of 2024.

UK bonuses could do better

Interestingly, while efinancial careers reports the below UK bonuses as being the highest outside of the US, Selby Jennings’ survey tells a different story. 

Below, bonuses trended at 50%-65% of fixed salary (10% lower than overall European expectations reported by Selby Jennings) and nearly 110% for Managing Directors. 

Whether bonuses are higher or lower than expectations seems very much to depend on who you ask.

UK banking pay and bonus changes

Europe banking pay and bonus levels, 2024

Investment banking salaries remain flat

After strong growth in 2022, salaries in investment banking have reportedly hit a more stagnant patch. Research from Morgan McKinley suggests that 70% of hiring managers in banking and financial services feel their salary offers have remained flat. 

A little over a fifth (22%) also stated that they had no budget to hire new talent in 2024. This has seen a rise in professionals considering accepting contract roles which tend to offer better pay and more flexibility.

Here are some selected data points from the research – check out the full research for more information.

Salaries at investment banking and brokerage houses (converted from USD in July 2024 at current exchange rates)

Pay is important but non-financial benefits are increasingly a consideration

Most in banking would agree they are well compensated compared to society as a whole, however within the industry the discrepancies in pay levels do rankle. According to Robert Hall’s 2024 Salary Guide, the lack of competitive pay when comparing like-for-like roles across companies is employees’ top concern, while poor work/life balance only ranks fourth.

However in the efinancial careers research, one London-based Vice President admitted that he was well paid, but also that working fewer hours was more attractive than gaining more pay. The Morgan McKinley research supports this, with flexible working being a number one priority for employees, followed by their bonus. 

While some institutions are seeing a slowdown or even hiring freeze, it’s not stopping others from poaching away talent. Offering career support and meaningful work are as important as remuneration to stop employees jumping ship.

Mixed fortunes for bonuses

There looks set to be more scope for investment banks to offer better financial incentives in the future after legislation change. When the UK Government lifted its cap on bankers’ bonuses in 2023, leading investment firms JPMorgan and Goldman Sachs both announced in H1 2024 that they would remove their caps on London-based bonuses.

This means the companies’ top performers now have the potential to earn bonuses up to 10 times their base salary, compared to two times their fixed pay previously. However, Goldman also announced that fixed pay rates would have to drop to accommodate the changing remuneration structure.

Elsewhere, the news is less positive for lower-performing employees. Barclays announced in February of this year that it planned to cut bonuses to zero for a number of investment bankers, following a slowdown in dealmaking. 

While the overall bonus pool is said to be smaller as a result, there was a suggestion that high-performing bankers could still see bonus increases of as much as 10%. 

Barclays does look set, however, to join a number of UK banks in lifting bonus caps now or in the near future, including Lloyds, NatWest, HSBC and Standard Chartered.

The move to increasing bonuses and overall take home pay is seen as a necessary salvo in the ‘war for talent’, with London-based firms hoping to offer competitive packages on a par with New York-based counterparts.

According to efinancial careers, the biggest bonus increase was for analysts in Continental Europe. The authors attribute this directly to Brexit, which encouraged US banks to base staff in areas such as Paris or Milan instead of London and increase their remuneration accordingly. 

The future: Balance and certainty

With the possibility that investment banking may return to the era of several-multiplier bonuses, it looks like bankers at all levels could see bumper pay packets in the future. However, with the suggestion that this may impact currently higher levels of fixed pay, some may consider the quid pro quo of less financial certainty difficult to swallow.

By understanding the financial and competitive pressures faced by investment banking institutions, employees have the power to negotiate remuneration packages that suit their circumstances now, and in the future. 

Stay up-to-date on salary news with M&A Community

M&A Community is the best source for information on banking salaries and bonuses around the world. We recently published our own salary data in Brazil and Spain, and will continue to bring you news and analysis from global markets.

In the ever-evolving landscape of venture capital (VC), it is crucial to understand the current trends and dynamics of capital allocations.

Q1 of 2023 saw a general improvement by 37% over Q4 of 2022 in terms of VC investment, rising to $44.1 billion compared to $32.3 billion for Q4 2022. However, Q1 of 2023 has also confirmed:

• The high volatility of the market
• The weaker conditions of the economic environment (until March 2023 there were three major bank failures)
• The existence of macroeconomic patterns following unpredictable paths influenced by global geopolitical changes, like the war in Ukraine.

In the light of this, it is interesting to ask what are the recent shifts in VC investments happening, who are the key players and which factors are influencing their decision-making?

James Heath, Investment Principle at dara5, analyzes the VC scenario, focusing specifically on who, at the moment, has opted for allocating capital to VC and also who has not.

The VC scenario

Drawing upon a comprehensive analysis of over 10,000 limited partner (LP) commitments to VC in Europe and the U.S. from PitchBook Data, this is the current VC scenario.

Decreased commitments in 2023

2023 has witnessed a significant decline in VC commitments, with nearly 70% fewer investments compared to the average of the previous decade. This sharp reduction in allocations has raised concerns and prompted a closer examination of the factors influencing LPs’ decision-making processes.

Pension funds and endowments

Notably, pension funds and endowments, traditionally significant contributors to VC funding, have been allocating less capital in recent times. This trend may be attributed to two key factors:

• First. These institutional investors may have over-allocated their funds in 2021, prompting a more cautious approach in subsequent years
• Second. Underperformance in the public markets has adversely impacted their risk appetite and overall investment strategies.

Rise in family offices and corporations

Conversely, family offices (FOs) and corporations have emerged as increasingly prominent participants in the VC ecosystem. FOs and corporations with sufficient liquidity are capitalizing on the opportunities presented by exceptional vintage years for investments. It is important to note that FOs tend to exhibit a binary approach, either actively investing or refraining from VC allocations altogether.

Fund of funds

Special attention must be paid to the role of fund of funds (FoFs) in the current landscape. FoFs that possess deployable capital are proving to be excellent allocators of funds. However, caution is advised when evaluating FoFs, as some may obscure their inability to deploy capital effectively while simultaneously raising new funds. Thorough due diligence is imperative to ensure a productive partnership.

Acknowledging successful fund closures

In light of the prevailing market conditions, it is essential to recognize the accomplishments of those currently achieving successful fund closures. Despite the wider market activity and reduced commitments, reaching closure on a fund is a noteworthy achievement that merits commendation.

Looking ahead

The VC scenario for 2023 is far from being written in stone. There are at play many factors that will contribute to its definition, such as:

Given all that, it is very likely that VC will maintain a prudent and more selective attitude at least in the immediate future and it is not improbable that the VC investment in general will drop off from the levels seen in 2021 and 2022. This will clearly have a profound impact, for example, on the startups scenario and also on the timing of new deals closing, making it longer.

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