KeyCorp CEO Names Real Estate Retrading 'The One Wildcard' For Investment Banking Pipelines
Chris Gorman said deals under $1 billion are down 11% this year while larger ones are up 12%, as rate expectations keep sponsors waiting.
KeyCorp Chairman and CEO Chris Gorman said on the bank's third-quarter earnings call Tuesday that deals under $1 billion are down 11% this year, while deals over $1 billion are up 12%. He named transactional real estate, where "every piece" is being retraded, as "the one wildcard" in an investment banking business whose pipelines he still calls strong.
The numbers underneath the pipeline
Gorman said pipelines are up 5% from the prior quarter and 20% from a year earlier, even after heavy pull-through, meaning deals that moved from backlog to completion. He said he remains comfortable with the bank's guidance for mid-single-digit investment banking fee growth this year.
CFO Clark Khayat, who is also head of technology, said investment banking and debt placement fees were $214 million in the quarter, up 27% from the prior quarter on M&A and syndication activity.
Gorman said the mid-market, where sponsors (private equity firms) are a big part of the business, "is yet to normalize." On the call he described the backlog this way: "it's still depressed," but "I think it'll start to free up."
Why Gorman says deals are waiting
In answer to a Bank of America analyst, Gorman said the debt market dislocations of the past month put things on hold. He said sponsors face an inverse relationship between cash-on-cash return and holding period, and that he expects those deals to start coming out.
On real estate, he told a TD Cowen analyst that cost of capital is such a big part of transactional deals that every one is being retraded. He said he thinks people will transact once they accept a higher-for-longer rate environment.
An RBC Capital Markets analyst asked what has to change for middle-market M&A to pick up. Gorman pointed to bid-ask gaps over value, but also to swings in expectations for future rates. If people expected five cuts and got a hike instead, he said, that "kind of puts people on the sideline."
He added that continuation funds have changed some of the holding-period math, and that a very significant backlog "at some point is going to have to clear."
Loan demand and what comes next
Responding to an Evercore ISI analyst, Gorman said he is not seeing erosion in loan demand except in transactional real estate, where some deals are clearly slowing.
Gorman said management is in its planning process and will have more to say on 2027 at year end. He said he believes the bank is positioned for another year of outsized revenue and earnings growth.
Management will lay out its 2027 targets at year end; until then, Gorman's own test is whether people accept a higher-for-longer rate world and start to transact.
