Morgan Stanley issued a note Thursday signaling that the long-awaited return of mergers and acquisitions may not lift all boats equally. The bank told clients that while large corporate deals are picking up, a slower-than-expected recovery in private-equity-backed transactions is creating a split in the advisory landscape.
That divide is already showing up in second-quarter expectations. Morgan Stanley cut its Q2 earnings per share forecast for Houlihan Lokey by 17% to $1.73 and lowered its price target to $187 from $193. It also trimmed longer-term estimates for Lazard. Meanwhile, the bank named Evercore and Moelis & Company as its preferred advisory firms heading into earnings season, arguing they are better positioned to capture fees from large-cap strategic mandates.
Strategic vs. Sponsor Deals: Two Different Engines
The distinction between strategic M&A and sponsor-backed deals is central to understanding this note. Strategic mergers involve one corporation buying another to expand its business, often in large, one-off transactions that generate substantial fees for the advisers that land the mandate. Sponsor-backed deals, by contrast, are driven by private equity firms buying and selling companies. They tend to be more frequent and predictable, providing a steadier stream of revenue for advisory firms that specialize in that market.
Morgan Stanley’s message is that the current M&A recovery is tilted toward the strategic end. That benefits firms like Evercore and Moelis, which have strong relationships with large corporations and a track record of advising on blockbuster deals. But it leaves firms like Houlihan Lokey and Lazard, which have significant exposure to sponsor deal flow, facing thinner pipelines and more uneven quarters.
This dynamic is playing out against a broader backdrop of rising equity markets. The S&P 500 has hit new highs this year, and a strong Q2 earnings season is testing whether those lofty valuations are justified. For advisory firms, a buoyant stock market can encourage corporate buyers to use their shares as currency for acquisitions, potentially fueling more strategic deals.
What It Means for Investors
For everyday investors, this note is a reminder that not all M&A plays are created equal. A headline about rising deal activity can mask wide differences in how individual firms perform. When a handful of large strategic closings can swing a quarter for one adviser, while another struggles with a slow sponsor pipeline, earnings season can produce sharp contrasts.
Morgan Stanley’s revised forecast for Houlihan Lokey puts a spotlight on fee mix. The bank now expects Houlihan Lokey to earn $1.73 per share in Q2, down from its earlier estimate. That figure becomes a benchmark: if the firm beats it, investors may see it as a sign that sponsor deal flow is picking up; if it misses, it could confirm that the recovery is still uneven.
Evercore, meanwhile, gets an additional boost from its exposure to equity capital markets. When companies raise money by issuing new shares, Evercore often advises on those transactions, providing another revenue stream that can cushion any weakness in M&A advisory fees.
This kind of divergence is typical when markets are in transition. As the JPMorgan launches new team to target mid-market M&A deals, it shows that even the biggest banks are repositioning to capture different parts of the deal spectrum. For investors, the key is to understand which firms are best aligned with the type of deal activity that is actually happening, not just the overall trend.
Looking Ahead to Earnings Season
With Q2 earnings season underway, the advisory boutiques will soon report their results. Morgan Stanley’s note sets the stage for a period where beats and misses may be more pronounced than usual. For firms like Evercore and Moelis, a single large mandate closing can make the difference between meeting expectations and exceeding them. For Houlihan Lokey and Lazard, the focus will be on whether sponsor deal flow is finally starting to recover.
Investors should watch not just the headline revenue numbers, but also the composition of deal pipelines. A firm that reports strong earnings but reveals a thin forward pipeline may be less attractive than one that misses slightly but shows a growing backlog of mandates. In this environment, the quality of earnings matters as much as the quantity.
Morgan Stanley’s call is a bet that the M&A cycle is shifting toward the strategic end of the market. Whether that bet pays off will become clearer as the earnings reports roll in.
