We are living in quite strange times. The financial markets appear to be facing even stranger times with current stock market prices seemingly disconnected from the surrounding economic upheaval. As I write this blog, the financial markets are near peak valuations while the private equity industry sits on a record amount of dry powder. Yet, many of the industries investors traditionally favor might be facing potential waves of bankruptcies due to the prolonged disruption following the COVID-19 pandemic.

After being the storm of the last recession, capital markets firms this time have more or less the opportunity to just ride the crisis out. However, to do so would be to miss out on the opportunity of this decade.

The looming credit crisis following the global pandemic could play out in a myriad of ways, so I won’t waste precious space describing all the potential scenarios. What I’d like to highlight instead is the opportunity the credit crisis presents for capital market firms to do well while doing good. Allow me to explain.

Filling a finance gap for small- and medium-sized businesses

The crisis gives capital markets firms an opportunity to do well because it creates a burgeoning need for of-the-moment, innovative solutions that can be scaled easily. Mushrooming credit problems present capital markets firms with a chance to grow revenue and reach small- and medium-sized businesses. Those businesses’ financing needs have historically been met by commercial banks, but COVID-19 has changed that pattern, causing a gap.

Capital markets firms have a potential growth opportunity there. They could meet the funding needs of these companies by creating new securities and financing structures appropriate to the times. Firms that create vehicles to fund smaller companies could also have the advantage of distributing these products further and meeting the needs of their asset management clients. The chance to do good comes because if smaller businesses can take advantage of such new structures to fund themselves until growth resumes, they’ll likely be able to rebound.

Let’s talk quickly about what this could look like. For example, securities firms could aggregate revenue pools from small businesses, grouping them by industry or geography. Equity investors could then purchase shares of pooled small businesses bundles into publicly traded, exchange-traded funds.

In addition to new offerings—the “what”—the capital markets industry also has an opportunity re-think much of the “how” at a broader level:

Core technology and analytics transformation

Tech and analytics transformation is key to successfully navigating a post-COVID future. Data insights are the bellwether for industry and economic headwinds, from analyzing when the airline industry may rebound to predicting new consumer buying patterns shaped by habits created during the pandemic. Capital markets firms could learn in that respect from other institutions who have successfully shifted to the cloud, improving their data management and security while lowering costs. This could also help with a greater uptake of artificial intelligence to improve user experiences while reducing costs, such as through addressing internal reconciliation and client onboarding.

Simplify, strengthen, and scale

The path to innovation at scale could vary for each capital markets firm. Some may grow capabilities in-house, while others might acquire fintech companies because they augment or jumpstart new capabilities at a far lower cost than building from within.

In addition to potentially adding new capabilities, firms should also look at where they might want to be doing less or doing things much more efficiently. This might include analyzing and evaluating the longer-term need for office space or taking a fresh look at “where” activities might be delivered. Also outsourcing might be an option—for example, 45% of firms are considering outsourcing their data management in the next two years, according to a recent Northern Trust survey.[1]

Regardless of the path they take, capital markets companies should take a hard look at the business lines that form their core—the ones they excel in—while jettisoning those that are ancillary. Such a strategic assessment could include re-examining the growth potential and expectations for specific geographies or entire lines of business. Performing those types of examinations is not only good business practice but could also give firms good input while they are thinking through how to transform their operating model.

Simplifying, strengthening and scaling their most valuable capabilities could be key to bolstering capital market companies’ own health so they can help other businesses and their clients through this crisis.

An opportunity to take bold steps

The good news is, right now—even during a global recession—capital markets firms have some cushion to improve their operating models so they can better help others through this crisis. The opportunity to take bold steps is a luxury some industries just don’t have. Those that do have an obligation to keep a forward focus, planning for a time outside of this uncertainty. Whether it’s using digital for greenfield growth or trimming costs in existing growth areas, capital markets firms should look to the health of their own operating models as they move to innovate for their clients during the looming credit crisis.

Doing well and doing good are not mutually exclusive. Increasingly, investors reward firms that do both. Capital markets firms that recognize this have an edge in volatile times.

For more insights, download: Can capital markets help with the global pandemic?

 

[1] https://www.northerntrust.com/united-states/pr/2020/survey-asset-mangers-most-concerned-about-managing

Kimberly Richards

Managing Director – Banking and Capital Markets Strategy

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