Copy. Next up, very pleased to have Morgan Stanley from the company, Dan Simkowitz, Co-President. He is directly responsible for the Institutional Securities Group, but serves on the Operating Management Committee and can really talk about the firm as good as anyone. Before we begin, I will be remiss because Leslie will yell at me.
This discussion may include forward-looking statements which reflect Morgan Stanley Management's current estimates and subject to risk and uncertainties that could cause actual results to differ materially. Morgan Stanley does not undertake to update the forward-looking statements.
This discussion, which is copyrighted by Morgan Stanley, may not be duplicated or reproduced without their consent, is not an offer to buy any security. Did that good. Maybe we could start, big picture on the current environment. You have been very focused on building the business for the long haul and solving for higher highs and higher lows.
Investors are debating where we are across a number of important cycles, capital markets, sponsor activity, AI-related investments, broader economic growth. Just how are you calibrating where you are today and how is that shaping the way you position the firm?
First of all, thank you. It is a great conference. It is a great time to have the conference and you and Venkat and all the rest. We are really great partners with you. I certainly felt, going into and out of the second quarter, there was a pretty big debate around peak earnings, I think especially around the more capital markets-oriented companies.
We feel strongly that there are a number of big thematics around the market, which I will touch on, which all lead us to believe that 2026, as an example, is not peak earnings at Morgan Stanley.
Last four quarters were almost $80 billion in revenue. I think that puts us at least in our TAM, what we do, the largest financial advice firm in the world, and across all of our client segments, we see TAM growth and market share growth in every single one.
In that context, we are not at peak, but I think, let me talk a little bit about thematics. I would say the first one is not really a thematic. It is something I am passionate about. I have talked to you about it in the past. I ran strategy, I ran EM, and then I ran capital markets before this.
When we look around the world of financial services, we still think the number one growth opportunity in financial services at scale from here is Morgan Stanley Wealth Management. So even though they are number one, the path forward from here is pretty extraordinary, and I think that is driven by at the client level. If we start at the client value level, we think we are the best in the world at delivering value to the client.
At the same time, we've gone from 2.5 million households to over 20 million households. Via the workplace, we are the client acquisition powerhouse that no one has. We not only have the best value once we get the client, our ability has really been transformed. That 2.5 million was 2019, transformed so that we can go grab the clients, and we can service them, both digitally, all the way to the advisor and everything in between.
We still feel, with the help of technology, with the help of the brand, with the help of the investment bank and all that goes with it, I'm sure we'll talk a little bit about SpaceX and a few of these things, that we're still in the early innings of monetizing that growth, that move from 2.5 to 20, but also the events of the summer and some of the IPO activity.
We're definitely not focused on 20. We're focused on much higher in terms of relationships in that context. What I would say is to win takes immense focus. The entire leadership team, and my day job is running ISG, and I guess Andy and I, we have night jobs running strategy, but every day the leadership team is focused on winning big in Wealth Management.
That's a comment on our own strategic positioning and where we are in the innings of monetization. I think the second one, I'm sure we'll get in more detail and others will talk about it in other sessions today. We're still of a view that we're relatively early in the M&A capital markets cycle.
In 2022, 2023, even parts of 2024, you had activity in M&A and IPOs way off the GDP curve. You have a lot of pent-up demand. Pent-up demand at the corporate level, pent-up demand at the private equity level.
I'll go into some more detail, I'm sure, in a second. You've got confidence at the boardroom, and you've got private equity, with a monetization backlog that's big and a dry powder that's big.
In a market context, and we certainly are from a risk perspective and an advice perspective, we're super focused on macro, super focused on $100 oil, 5% tenure, $40 billion of debt, a war. At the reality of getting deals done, credit is in really good shape. Spreads are tight. Equities are close to highs. We are way off that GDP curve.
There is a little bit of call to action around the regulatory environment, which around M&A, that could change. We think we're early to mid-innings on M&A and IPOs, and I think what's hopefully really evident, but I hope it's even more evident by the time I'm done in 34 minutes and five seconds, is that that M&A and IPO cycle cascades down through all of Morgan Stanley.
And I think the third one that I think is big and topical is, and we'll talk, I think, more about it, is AI. We still think we're in relatively early to mid-innings around the AI financing element, which is really just a bridging of the timetable until, in essence, the build is build ahead of all of the revenue, but not the revenue path.
And there is a lot of equity, and there's a lot of credit finance, and we're in the middle of that with really high share. But I think, again, that, and Ted answered it on the earnings call, we still think we're also early in middle innings.
And you've seen just enormous announcements, NVIDIA, Broadcom, Google, and then the model players out there in that perspective. So I think in those three thematics that are pretty important, I would say, early to middle. And none of them feel really late. And in that context, we don't think we're at peak.
Okay. A lot in there that I want to try to unpack. Just maybe first, can we dive a little deeper into the investment banking landscape? You talked about M&A and IPO activity, and just maybe just talk about investment banking pipelines, what you're hearing from strategic and sponsor clients.
Yeah. And I'm going to use some anecdotes to try to make it feel-
Please
a little alive here. But at the macro sort of statistics level, very robust pipelines. They are very robust across product. They are driven by the dynamics I mentioned. Credit is in pretty good shape. GDP growth, 6.7% nominal GDP growth in the U.S. in the quarter. Real matters, but if you are a corporate, you have got to keep up with nominal.
Equity near highs. All of those combine to make the product set at very strong investment banking. We were talking about this a few minutes ago. In that construct, we remain very constructive around the investment banking environment, and it cannot all get done this quarter. It cannot all get done in the fourth quarter. This is an 18- 24 month cycle.
B is especially, well, A, you go public, and then most companies, if they are private equity owned or if they are venture owned, there is a cascade of secondaries or block trades or trading lock-up releases that continue.
Those are all revenue events for us. But I would say most discreetly is M&A, which is if your competitor does an M&A deal, then you are going to react. We saw it at Morgan Stanley when we were doing M&A.
Others would react to us, we would react to them, but extend that through the entirety of the economy. When someone does something strategic, it causes every boardroom in the ecosystem of that sector to think about strategic activity, and then it happens.
Also when you buy something, the board often will challenge you to, "Well, what should you get rid of?" You have got a carry-on around M&A, and that activity in the context of there being a period where we are way off the trend line, where again, as we have talked about, 18, 24 months, it may even be longer.
At some way, I had to cut off the lens as an example. Let me give you a little anecdote also on private equity, because it is not easy around these monetizations. You can have ups and downs.
We announced, I think it was last week, Consolidated Precision Products. This is a company that Warburg Pincus bought in 2011 for under $1 billion. They sold it last week to GE Aerospace for $12.5 billion. They moved it from fund to fund. They did seven acquisitions.
They recapped it with Berkshire Partners. In the midst of COVID, at this price, unthinkable. By the way, GE Aerospace is up 6x in the last five years. Again, the job of execution there. They had confidence. These guys were real operators on the asset. They had patience. 15 years of patience, and then the trade finally comes together at that moment.
When I was running capital markets to a degree, I thought, oh, PE is all around the buy and the sell. Clearly, if there is 15 years in the middle, there is a lot more than the buy and the sell. We have got this incredible mid-cap U.S. PE business inside of MSIM, run by a gentleman named Aaron Sack. They taught me. They showed me what happens in between. They buy companies from entrepreneurs and families.
It is pretty remarkable what some of these companies can do, but it is not a straight path. In fact, it is not a straight path. We are seeing that actually in MSIM. On another fund, we have an infrastructure fund, which has a really strong track record. They have got two European assets.
The fund has accrued a lot of unrealized carry. But those assets are not doing as well. So you have a couple of hundred million dollars of unrealized carry reversal, which is about a nickel of EPS, because it is just not straightforward. So PE monetization. I come back to my macro comment.
If credit is pretty good and equity prices are there, and corporate confidence is pretty high, and there is a lot of dry powder in PE, it may take a couple of years here to clear some of the backlog, but it is there.
By our count, there are 1,500 private equity companies worth more than $1 billion in the U.S. The PE partner does not get paid until they or most of the fund gets monetized. So there will be incentives over time.
There will be, maybe not as extreme, the Warburg examples in that context. We are up to Leslie is going to kill me because now we are up to over 100 private equity sell-side mandates in our pipeline, so that is at a record level. So this stuff will come, it just takes time, and you are going to have ups and downs, like I mentioned.
Maybe shifting gears to markets. Second quarter equity results were exceptional. A big debate in terms of investors I talk to, whether it is cyclical, structural, particularly what is going on in Asia.
Maybe just talk about the durability of the markets while it broadly, and just maybe what opportunities you see, and then also just where are you investing and where do you see wallet share opportunities across equities and FICC?
Yeah. Again, our focus certainly on the investment side around, and we will talk, I am sure at some point around capital, is just to be disciplined and steady investing in the businesses. What I would say, again, on markets, and this one you get challenged even more, but I was getting challenged at a I was going to say a competitor.
At the Morgan Stanley Financials conference in Europe in the spring of 2025, are we at peak markets, as an example. Even today, and I will get to it, we do not think 2026 is peak markets, and I will get into some of the dynamics. What I will say, we certainly do not manage to and invest long-term to a single quarter. Second quarter of this year was pretty exceptional in markets, and I think it is safe to say 3Q is no 2Q.
But if you think about the long-term dynamics, which we think are very much intact, in equities, you still have a lot of equitization still in front of us. Yes, Asia is doing really well, but the Japanese market came from almost nowhere five or six years ago. Korea is back. Taiwan is embedded in the technology trade.
Greater China is motivated around economic growth. International investors want to be a participant to that. India will have its day and not have its day and back to having its day. That is before we get to sort of equitization in some other parts of the market.
There is policy potential in both Mexico and Brazil, where we have high market share and high margin, for equities to get rejuvenated. Middle East war goes away, and we are back on a train in the Middle East around equities.
Again, what we do is we bring the same technology, the same capabilities, the same research quality into all of these markets to everybody in this room. It is a little weird to talk to all of my clients out here in the room.
That is the mantra, and then we can allocate our resources to the highest sort of ROI to the client and the highest ROI to us, and we can do it in cash form, we can do it in derivative form. In the future, we will do it in tokenization form, as an example.
All those are intact, and I will just bring up one sort of Japan round 2 possibility, but we hired the finance minister of Germany to run Germany for us. The German capital market is dramatically smaller than it should be against the economy. That is an optionality around equitization in front of us.
In fixed income, we are big bulls. I think that we have talked about it here before, around credit asset managers. Some of them, the credit side, are represented in this room. Credit asset managers are fueling the economy around the world, whether that is energy transition, whether that is AI, whether that is private equity.
If they are fueling it, they want to work with Morgan Stanley. We help originate those assets, we help finance those assets, we help raise the LP money for those assets. So we think that is a secular trend.
Risk management and fixed income. We went from zero to five on inflation. We have gone from zero to five on rates. We got commodities going all over the place. We got currencies going all over the place.
So our corporate clients, our private equity clients, our private credit clients, they all want to hedge, and we want to do more of that business, and we restructure the bank. I use the word bank in two ways. We now can put that derivative, put that risk management business inside the bank as an element.
What I would say is we have got balance sheet and capital in front of us to go invest in these businesses in ISG, IBD, the markets businesses, wealth management lending. Got well over $400 billion of deposits, but we also have capital capacity. As you would expect, we are going to be steady and disciplined, not do it all in one quarter, but it is in front of us.
When we think about a little bit of TAM in both equities and fixed income and a little bit of share in fixed income equities, along with the cycle element, admittedly, in investment banking, we feel pretty good about the next couple of years in the ISG business.
Again, 3Q is no 2Q, and the volume and the ball is a little down in 3Q, certainly, but long-term, we feel pretty good about these businesses. I think ROE in ISG is really in mid-20s ROE. So we are able to deploy a pretty good returns versus our cost of capital.
Makes sense. Before we move on to wealth management, maybe just one question that comes up a lot with investors, and I know Ted addressed it on the second quarter earnings call, just around CapEx or AI-related CapEx spend. Just how are you thinking through sizing and the risks of the AI financing opportunity? Just how does Morgan Stanley see AI opportunities for the business overall?
Part of it is we step back and watch what we are doing. We step back, and we listen to what our clients are doing around deployment. So we are very fortunate around this ecosystem. We had Sam Altman come to our board in May of 2022, before ChatGPT was released. We are really good strategic partners with Anthropic, xAI, Gemini, and Microsoft. So we get the best of.
They are helping us to deploy right now in some size, a size dramatically higher than we would have anticipated a year ago. The ROI on that is pretty extraordinary. So when we think about it, I will break it into groups. In research, broadly defined, that could be the research team that helps support you to come with an initiation or a recommendation.
That is the research in investment banking, that is the research in investment management, that is the research that sits at the desktop of every sort of front-line, client-driven person. The productivity that we are getting out of that is pretty extraordinary. In research alone, number of companies covered, rankings from the buy side, rankings as an example, all going up, but the sort of cost for that not going up, in the same context.
Financial advisors, too. We have gone from 2.5 million to 20 million. We are now at $8-plus trillion of wealth management, and the advisor count is not growing anywhere near those levels, so we are getting ROI off that. We started out on an AI path in wealth management productivity in late 2022 off of that board session. So we are getting good ROI there.
At the research level, we are getting ROI, and we are putting capital to work, and we will get ROI longer term in cyber. We are getting it in customer service. Going from 2.5 million households- 20 million households, we are going to be a physical customer service monster, and AI already has allowed us to get that really efficient in the ability to deliver customer service back to that instance.
Then, we have got a lot of processing at Morgan Stanley, and some of it bleeds into research. Operations, accounting, legal, software development, all of that is going to create a system which we are already seeing, which is the revenue per employee at Morgan Stanley. The ROI is pretty dramatic.
When you take that, and you then take some of what we are seeing, what we are hearing from some of our clients in the asset management business, what we are hearing from some of our corporate clients, there is an immense demand build. We are big TAM believers on the AI just from our own bottoms-up research, and it has got to get built out.
That CapEx is still early, and it is pretty clear that the credit markets are going to innovate around that. We have been at the center of that. We have got really high market share. The equity markets will support it.
Google or Alphabet and SpaceX raised circa over $150 billion of equity. I think the entirety of the equity spend in AI infrastructure will clearly, by the cycle is over, get to well over $1 trillion of equity, not just credit, as an example.
We are very fortunate because we got lucky. I sat in the same spot in our conference in March. I interviewed Jensen, and I presented him a tombstone from the original deal. Again, NVIDIA, $47 million IPO for Morgan Stanley. Mind boggling in that context. We are big believers that compute equals intelligence, and then intelligence can drive both revenue and expense base in that respect.
We are in the boardroom with every chip layer, NVIDIA, Broadcom, Google, AMD, et cetera, all the hyperscalers, all the LLMs, a whole number of the neoclouds that are being generated. But they are all reacting to demand from enterprises and consumers around the world.
That is the other thing that is incredible, is that the tools that we are using at Morgan Stanley to drive that ROI, some of those same tools can be used in emerging market countries where they do not even have landline telephones. It is in the hand of that. That is very powerful. You are going to have a lot of safety and governance and competition and open source, but all of that is going to require compute, and we are in the middle of that ecosystem, which is pretty cool.
Interesting. Maybe turning to wealth management. Last year on this stage, you called Morgan Stanley Wealth Management the number one growth opportunity in all of financial services.
I did it today, too.
You did. Workplace has gotten a lot of attention, given stock plan represented just over half of record 2Q NNA, and that there's still a pretty big pipeline of large IPOs to come. Maybe just talk to how Workplace fits into the wealth management growth engine, what you've learned over the past several years in retaining and deepening those relationships.
Yeah. Again, just to put the context and numbers, $60 trillion U.S. wealth management TAM, which we think is going to $100 trillion. This is a really big market. If you do that math, we're low double-digit market share, yet we think we've got the best acquisition engine. We think we got the best service.
We got the ability to deliver all of that from digital to advisor, so we do think there's a big market share place. Workplace is an incredible powerhouse in that context. I guess I'm going to use SpaceX a little bit as an example. We talked about it a bit on the call, and Jed and Andy have talked about it since. To a degree, the old model is the value that we could provide to a corporate.
It could be an IPO, which I am going to focus on more, but it also could be existing corporates in their balance sheet, in their M&A views, their capital markets views. Now we are a talent advisor, and especially in the growth ecosystem, talent is critical.
We have been engaged, as an example, with SpaceX for several years around how to design the stock plan for their employees, how to educate those employees around financial education, how to get them advice, how to get them, over time, liquidity in various forms, both pre-IPO, right before the IPO, after the IPO.
We are a partner around value to the leadership of that company in one of their most important assets, which is their talent. What you saw in the quarter is we have got a reason to be there. The reason to be there is twofold.
We are running the stock plan. Again, this is on the back of Solium acquisition, E-Trade acquisition, and Carta partnership. We have a right to be there in that context, but we also have the right to be there because we are the number one advisor firm, so we have advisors on the back half.
You saw that in the M&A discussion in the second quarter. What is really promising is the flow of capital out of the SpaceX complex in this quarter is still really, really strong. That is at the notional dollar amount, but also the flow among the employee base to advisors keeps going up, even in this quarter, so it was not finished at that point.
When we look out around the pipeline, and some of this is around demographics, ex-founders, the demographics in our pipeline over the next 18- 24 months, those opportunities aggregate to be multiples of the SpaceX. This is not a one-time thing.
Again, I think I will make this personal for a second, but for example, my daughter's friend, she is literally a rocket scientist. She is working so hard because having been to Starbase and to Hawthorne and to some of these other companies, the employee base here is running all out. Then they get hit with wealth they could not even imagine a couple of years ago. It is complex.
Not only do they want Morgan Stanley to help them, what we are finding is at a younger age than we would have anticipated, they want an advisor to help them because they are busy running hard because Elon and team, this is really intense work at high stakes, obviously. She is launching rockets into space and all the rest.
This is real value, and if we can be a partner, again, we can be a partner not just at SpaceX and all these IPOs, but we can also be partner at big aerospace and defense companies who have to compete for the talent with some of these companies.
I think that is part of what we are seeing there. The value equation for Morgan Stanley, we were extremely proud to be one of the two lead book runners on the IPO. We are a big equity trading firm.
To be the sole stabilization, really proud. Our relationship around the employee base is back a couple of years and is forward many, many decades with a company like this. Proving that out in the instance of an IPO, which is pretty intense, where decisions need to be made, and it is all becoming real to the employee base, proved the power of workplace, and there is a lot of pipeline behind that in that context.
Maybe we could spend some time on just private markets becoming an increasingly important focus across the industry, whether it is private credit, secondaries, infrastructure, bringing alternative investments to wealth clients. Just how does Morgan Stanley differentiate itself in this area, and where do you see the largest opportunities over the next 3-5 years?
Well, we are really big. If you think about it, we are a half a trillion of private market assets in Morgan Stanley. That is roughly split a half in wealth management and half in asset management. I think in the wealth management side, it makes us maybe one of the largest LPs in the world in the private markets at a quarter of a trillion dollars.
We think the allocations over time, and we are going to be steady and disciplined, will grow. If our assets grow, which I do not want to give guidance, but our assets are going to grow, we are going to become ever more important.
Then in IM, we are at about a quarter trillion dollars. So we are big. Then certainly, we are big in the ISG business. I mentioned my example at the beginning was a Warburg Pincus sell side. I mentioned 100 sells.
The largest IPO in the market for private equity ever happened was a company called Medline. We led that deal as well. So if you think about it across ISG and in wealth and in IM, it is a huge part of our business.
What I would say is integrated firm, which was on, I should have said this earlier, Mandel probably is going to kill me, but SpaceX is the example of integrated firm. But the other element around integrated firm is the private market ecosystem.
So if you think about credit as an example, we are going to help raise the assets for some of this investment-grade credit that everybody is talking about, AI. We are going to help finance it. We are going to help source those assets. I am a believer, like one of the other, probably presenters, Apollo, that there is going to be a lot of gray area.
Some of it's going to trade, so we're going to trade it in that context. We're also going to do the stock plan for those companies, both their portfolio companies as well as their parent companies. We're going to go after the assets and the wealth of the principals.
Private markets in one form or another are quite important to us. It's a secular growth area versus long only, let's say, asset management. I would distinguish on my credit point earlier, private or public, we don't really care. To a degree, we're agnostic both as a business matter but also as an advice matter back to the corporate.
We're just going to go out and find the best cost of capital and the best alpha manager or solutions manager, and provide that solution either to our corporate or private equity client who needs to borrow, or to our wealth management client who wants to invest alongside. We just like the place we are.
We're pretty big, and we do it everywhere. I guess that's one of the differentiating items. We've got it in wealth, we've got it in asset management, we've got it in the fixed income business around financing and innovation on securitizations.
We've got it in the investment banking business, in M&A and IPOs. There is not many people who can do all of that with the balance that we have. We're quite clear-eyed and a little agnostic and open architecture, and I think that's pretty cool.
Interesting. Maybe shift gears to capital. On the second quarter earnings call, Ted mentioned there was a lot of demand for capital both within and outside the firm. How do you see opportunities for Morgan Stanley to deploy capital across ISG?
Yeah. Again, we're always extremely conscious of the macro I mentioned. Again, whether that's fiscal U.S., that's oil, all the rest, recession risks. I wouldn't use the word conservative, but we're very focused, disciplined, and steady around the capital allocation.
What that has enabled us to do is in an environment where we're in excess demand for our services. In ISG across the board, whether in fix I wish I understood better my romance languages. It's okay.
Across all of our businesses right now, the demand for our content, the demand for our innovation, the demand in particular for our origination in both credit and in equities, the demand for our structuring around either securitization and derivatives, and the demand for the capital and balance sheet that in some cases goes with that, we are in excess demand.
It is a great place to be. Because we are global, and because we are multi-asset, and because we are agnostic, public and private, we get to look around that client set, we get to look around the world, we get to look around the products, and allocate balance sheet and capital incrementally to high ROE.
Because we are in a position of strength, but at the same time being disciplined, we have got a path forward over the next, let us say, 18 or 24 months to steadily, at really high ROEs, continue to deploy. Again, it is in equities in various elements. It is in fixed income in various elements. It is in supporting the M&A finance business.
It is around wealth management lending to some of that liquidity and some of these companies and to some of these employees at really good ROE levels without preventing us from being a really great dividend grower.
So we have also got the capital to do that, and that is first and foremost. To be ready if there are opportunistic opportunities, I would distinguish between the both, to add on capabilities around our core business. We do really love the core business.
Again, if I come back to that beginning, we think we have got TAM growth, we think we have got market share growth, and we like the box right now that we are in. You saw it around private markets. We bought EquityZen. You are seeing it in some of the things that we are doing mostly organically around digital assets.
You are seeing it at the income statement level around adding some investment bankers in the United States. You are seeing it around deployment of AI, and we get a return right away. All of that sort of capital strength that we talk about is allowing us to be really careful, but to deploy in the client businesses around the sort of framework of the business dynamics that we have today.
Interesting. We have got about three minutes remaining. Dan Simkowitz, you gave us a very kind of constructive outlook for the next, call it two years, across all three of your integrated businesses. Now, if there is one or two things when we sit down two years from now that kind of derails this kind of thesis, what do you think it would be?
Again, what we are seeing right now is a little volume lower and a little volatility lower, because I think people are re-underwriting, and as I would think is appropriate, re-underwriting where is that CapEx question around AI? Who are winners and losers? I think there is a little fiscal battle going on, probably around the world.
There is a war assessment that is going on. There is a political assessment going on. I think all of those create some aggregation where you just need to be careful. In that carefulness, could you have elements where something tips over to recession?
Because recession is the real thing that can both drag down activity for an extended period of time, and it probably does not cancel activity, but it could elongate activity not measured in quarters, but measured in years. We are always keeping an eye out there.
But I said this internally, I think I said it externally, our number one focus is complacency, right? We are doing really well, but we do not want to be complacent. We do not want to be complacent on risk, we do not want to be complacent on capital allocation, we do not want to be complacent around our talent.
We are helping SpaceX and others with their talent, we got to also worry about our own talent. We do not want to be complacent around technology and the deployment of that, both the safety of that, cyber, et cetera, but also are we keeping up and we have our eyes open? Are we trying to be aware of what is going on around us? We have to be intense around complacency around our clients, because back to the environment.
The next 18 or 24 months, we think is going to be pretty busy, but busy is not good enough at Morgan Stanley right now. Everybody in the elevators, when I ask them, "How are you doing?" "Oh, I am so busy." "Yeah, but are you productive? Are you going to the right opportunity?" Because in this industry, the next 18 to 24 months, there is going to be a lot of busy, and we are focused on where can we drive out complacency and all the things I mentioned. That is a big focus for us.
Great. On that note, please join me in thanking Dan for his time today. Thank you.