Midsize companies are big business for Wall Street’s megabanks

Dining chain Cava uses JPMorgan for everyday financial services. (Getty Images)
Dining chain Cava uses JPMorgan for everyday financial services. (Getty Images)

Summary

With fewer large deals, banks including JPMorgan are earning more fees from smaller outfits.

America’s biggest bank has a thing for midsize companies.

Known for financing and advising megamergers, JPMorgan Chase is spending more of its resources on doing deals for companies valued at $2 billion or less.

The goal is to leverage the relationships it has with the roughly 30,000 U.S. businesses—names such as fast-casual restaurant chain Cava Group and virtual driving-range operator Topgolf—that get their checking accounts, lines of credit and payment processing from JPMorgan’s commercial bank.

JPMorgan wants to provide them with investment-banking products and services when they need a loan, decide to go public or are acquired by a private-equity firm.

Big banks are moving deeper into territory normally reserved for smaller lenders. Many companies shifted their deposits to bigger banks during last year’s banking crisis, and some regional banks have scaled back lending as they adjust to the impact of higher interest rates. 

Meanwhile, big banks are going head-to-head with specialized boutiques, recognizing that advising on smaller deals helps them win repeat business from companies as they grow.

There is another benefit for big banks: Midsize companies are a favorite target of private-equity firms. Buyouts for such businesses have remained relatively robust despite an overall decline in private-equity deals in recent years. Smaller buyouts are less affected by rising interest rates than bigger deals because they tend to rely less on debt.

Middle-market deals made up a record 74% of private-equity buyouts by count in 2023, outpacing the previous high of nearly 72% set in 2019, according to PitchBook. While the total value of such buyouts declined along with the broader market, it fell less than large-cap deals. Fundraising for middle-market buyouts, meanwhile, had its second-best year after 2019, according to PitchBook.

At JPMorgan, global M&A revenue was down 12% in 2023, while revenue for a unit focused on middle-market M&A was up 48%.

Other big banks have similar initiatives. Bank of America, which also has a large commercial bank, has doubled the number of its middle-market investment bankers in two years to 200.“Locally based investment banking teams help us better serve our middle-market clients across the country," said Mike Joo, head of North America corporate and investment banking at Bank of America.

The ability to convert commercial-banking clients into investment-banking clients isn’t a given. Goldman Sachs, which doesn’t have a commercial bank, has been No. 1 in fees from U.S. deals $2 billion and under, including the company’s debt, since 2017, according to Dealogic. JPMorgan has consistently come in second over that period.

JPMorgan’s Mid-Cap Investment Banking unit, which was started in 2012, has nearly 115 bankers and is expected to reach 150 within the next year. They are stationed in cities including Nashville, Phoenix and Dallas, and are exclusively focused on doing deals for middle-market companies. The bankers are homegrown in their respective regions, many of them poached from smaller investment banks such as William Blair, Harris Williams and Robert W. Baird.

In 2021, JPMorgan also dedicated $10 billion of its balance sheet to providing direct loans to these midsize businesses, a figure that has already grown. That gives it a shot at keeping clients in house when they might have otherwise tapped regional banks or private-credit firms for financing.

The Mid-Cap unit generated 13% of North America investment-banking revenue in 2023, doing deals such as Cava’s initial public offering, up from 5% in 2019.

It is targeting about $1 billion in revenue this year, according to John Richert, its Atlanta-based head. The middle market was also a focus of JPMorgan’s newly combined commercial and investment banking division during the bank’s investor day last month.

“We think we are serving the backbone of the U.S. economy," Richert said.

When J&J Worldwide Services Chief Executive Steve Kelley was tasked by the widow of its founder to sell the company, he assumed the defense contractor—with less than $40 million in annual earnings before interest, taxes, depreciation and amortization—would be too small for JPMorgan’s investment bank.

Yet JPMorgan, motivated to get involved because of its commercial bank’s multidecade relationship with J&J Worldwide Services and the likelihood of future deals, ended up winning the mandate.

JPMorgan advised the company on its sale to private-equity firm Arlington Capital Partners in 2020 and represented it again when CBRE Group bought it for more than $800 million earlier this year. In total, JPMorgan reaped about $25 million in investment-banking fees from J&J Worldwide Services over a three-year period, according to people familiar with the matter.

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