What's driving growth for founders today?​

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John Richert: Hi. You're listening to What's The Deal? our investment banking series here on J.P. Morgan's Making Sense podcast. I'm your host, John Richert, Head of J.P. Morgan's Mid-Cap Investment Banking team. Today, I'm delighted to be joined by John Simmons, J.P. Morgan's Head of Commercial Banking. And Melissa Smith, Co-Head of Innovation Economy and Head of Industries for Commercial Banking. John and Melissa, welcome to the podcast.

John Simmons: John, thanks so much for having us here today. We really appreciate the partnership and the opportunity to join the podcast.

Melissa Smith: Thanks, John. We're delighted to be here.

John Richert: Throughout this podcast, you'll notice that we have a couple of Johns on it, so you maybe hearing us use our full names just to make it a little bit less confusing for our listeners. Today we're going to dive in to the vital role that founders and business leaders play in our economy, and how J.P. Morgan is supporting them through their life cycle. But before we get to that, John, Melissa, why don't you both tell us a little bit about your history at the firm and background?

John Simmons: So, I've been at J.P. Morgan, it's hard for me to believe, 32 years next month. I've led the commercial banking business and the middle market, predecessor to it, for the last decade. Prior to that, I spent 20 years in the investment bank where I led financial institutions, investment banking business for a number of years. And prior to that, did telecom, media and technology, equity capital markets and debt capital markets.

Melissa Smith: You have several J.P. Morgan veterans here today. I've been at the firm for 25 years, so my whole career. I have been in this role leading the industry's business within the commercial bank for the last seven years. Have had the opportunity to do a couple of roles in the commercial bank and spent the first 16 years of my career in the investment bank on the debt capital market side.

John Richert: I'm tremendously excited to do this because the partnership between the investment bank and commercial bank is one of the key things, I think, that we have at J.P. Morgan that differentiates us from our competitors. And today, we'll dig a little bit deeper into that and some of the secret sauce that I think we have here. So, John, let's level set with you. Tell us a little bit about the client landscape within the commercial bank and specifically the demographic of companies and industries we serve, and how their needs differ from large corporations.

John Simmons: I'm delighted to. Let me first, John, try to set a little bit of context. We define commercial banking as businesses generally between 20 million and 2 billion of top line revenue. And within that definition, there's roughly 140,000-150,000 mid-sized businesses in America. This segment of the economy represents roughly a third of US GDP, and in many ways, is the backbone of the US economy. Our commercial banking business is nearly a $12 billion top line business with a presence in more than 150 cities, and clients in all 50 states. Today we serve 32,000 corporate clients, and also serve 36,000 commercial real estate property owners within our commercial real estate business. And we've enjoyed very strong growth within this business particularly over the last five years where we have doubled our client base, as well as doubling our overall client-facing bankers and treasury management officers. Something we're quite excited about and proud of. Melissa has been leading our specialized industries business in the commercial bank for the last seven years. And that has been a major engine for our growth. And I'll let her describe a little bit about our industries go-to-market strategy. On the industries side, we've continued to increase our sector specialization amongst our bankers over the past several years. And as John Simmons just noted, that's been a major driver of growth for our business. Today, we have 15 different industries in the commercial bank, including our innovation economy business, healthcare services, beverage, food and ag, government, our not-for-profit healthcare business, to name just a few of those industries. And we believe that having dedicated bankers for each of those industries with specific expertise allows us to do a number of things. First and foremost, I think, it allows us to better assess and provide credit to these companies to design bespoke treasury products and solutions to meet their specific needs, which again, are very specific to their industries. And to partner with our industry experts in the investment bank.

John Richert: Thanks for that clarification and I agree with that. The industry specialization, I think, has been a great way for the IB to partner with you guys across a couple of that areas that are of incredible growth for us including tech and healthcare. And just makes it easier when interfacing with our clients. John, in your role today, how are you supporting founders of small and mid-sized companies, both private and public? And as these companies navigate key inflection points, like planning for an IPO, can you talk about how the commercial bank partners with the investment banks to deliver a cohesive world-class offering to our clients?

John Simmons: First, we love working with founders. They are a very special breed and extraordinary business leaders. In fact, we recently just wrapped our ninth annual Founders Forum that we held in New York City. It's an event that founders have come to really appreciate. We had nearly 200 together in a range of terrific speakers. We're already hard at work on planning the tenth anniversary, which will happen next year. In fact, at our new 270 Park headquarters, so we're excited about that. But let me give our listeners a little bit of context for that. We were very fortunate to partner with John Richert and his mid-cap investment banking team, and we've been able to be the number one investment bank to commercial banking companies for the past decade. And John's team has helped fuel that growth. And John, again, congrats on ten year anniversary of that team. That mid-cap investment banking team led by John has a team of more than a 150 bankers that's working hand-in-glove with our commercial bankers all across the country to help business owners and founders think about ownership transition, which is an increasingly relevant topic for them, whether it's partial sale, bringing in a private equity partner, IPO, or even a full exit. Historically, we used to think about 60% plus or minus of middle market companies would ultimately pass that business down, and 40% would ultimately look to monetize that either partially or in full. And over the last decade, we've seen that 60-40 ratio flip the other direction, with 60% now thinking about exit alternatives, either on a partial or full basis. Over the last three or four years, we in partnership with John's mid-cap investment banking team had helped advise more than a 150 commercial bank clients and we've helped take more than 50 commercial bank clients public. We certainly expect that post-Election and a Fed that is expected to begin easing this Fall, you're going to see elevated activity for sure as we look to 2025.

John Richert: And thank you for the partnership. It's easy to put on paper that two businesses should work together. That dedicated resources and time and effort and strategy and deliberate action that it takes to make it be successful works because both sides understand the value that it brings our clients. Melissa, so that turns to a question for you. You support high growth companies across stages and industries. More recently, those navigating significant market changes within the innovation economy. What makes those founders and companies unique?

Melissa Smith: Sure. And it is definitely a very unique ecosystem in our minds. First, I would just mention the way we think about our innovation economy business or how we define it. It's really several industries that comprise that business. Those include technology and we have various sub-sectors under tech: life sciences, health tech and climate tech. Again, sort of, comprising the entire innovation economy business. We also have a startup banking team that is solely focused on serving pre-seed and seed stage companies. And again, we find these companies specifically so unique, given their high growth nature, and the fact that many of them, if not all of them, are VC-backed. And given the pace at which these companies are scaling, they really need a banking partner that cannot only provide what everyone would think about as traditional banking services, but also can assist with anything else that the clients need along their growth journey. And again, those needs and solutions change rather rapidly given how quickly they are scaling. Our objective is to bring the full breadth of J.P. Morgan's resources to meet the companies evolving needs, whether that be payments and liquidity solutions to various financing alternatives. And ultimately, to strategic advisory and access to the capital markets, which we do in conjunction with your team, John Richert. And because many of these companies are so early stage, they often have very limited finance staffs. In fact, for a startup they have no finance staff at all. So, we really want our bankers to be an extension of the company's team and really service their trusted advisor.

John Richert: Another interesting thing that I found out about you in doing the research of the podcast today is not only are you an amazing leader at the firm building out this business, but a burgeoning author apparently. This year you co-authored J.P. Morgan's Innovation Economy Mid-Year Outlook. And one of the things that jumped out to me was the quote that said, "Despite US venture capital dry powder remaining near an all-time high of 300 billion, fundraising has become increasingly challenging." How are we advising founders as they navigate the current fundraising environment given everything that's going on economically and politically and to the Election cycle here this Fall?

Melissa Smith: Sure. So, a few things I would point to because it's all very interconnected in the fundraising environment. So, I think for VC funds in particular, the environment continues to be quite challenged. And it's been particularly difficult for emerging managers as LPs look to allocate capital to more established players overall. Having serve a slightly more risk-averse tone right now. I think for companies and founders we are starting to see a little bit of an uptick in venture investment, which I think is really a result of greater confidence overall given a slightly more constructive backdrop in the equity market, after a wave of more successful IPOs earlier this year. And we've also clearly seen a bit of a rebound from the extreme volatility we saw in early August in the equity markets. It's a little too early to say in my mind whether 2024 will surpass 2023 in terms of overall venture activity, but again, we're starting to see some positive signs. We are seeing larger deal sizes, particularly in certain sectors like AI, which continues to be very popular as you would imagine. But deal counts are still quite low. But with the Fed expected to cut rates in September and the expectation at least of a soft landing in the US, we do think 2024 is on track to be a decent year in the IPO market, sort of projecting a $30 billion plus year, based on obviously public filings that are out there, which is significantly higher than what we saw in 2023. And we do expect volumes to increase in 2025. So, we really need to see that full return to normalcy if you will in the IPO market in order to really see a significant uptick and rebound in venture investing overall.

John Richert: Melissa, one point that you raised, and I kind of found interesting, is given the Election cycle that we have this Fall, and the seat that you have in talking to venture capitalists, how are they thinking about the Election either side of the aisle at this point? And what can be the impact to fundraising and venture capital investing over the next four years?

Melissa Smith: That's a great question, John, thanks for asking. I think it's still a little bit too early to tell. There have been some notable names in the venture community that have voiced their support for candidates on both sides of the political spectrum. One of the most important things in terms of how things are going to play out in the venture market is just overall the direction of interest rates, so less obviously about political outcomes, and more just the macro economic environment. I think as I just mentioned, obviously, the expectation of the Fed easing is going to be helpful, but I think importantly, just the fact that there's now a lot more consensus of where rates are headed in the coming months. Whereas you look at where we started, the year, there was still a lot of uncertainty as to where we were on the inflation cycle. And if the Fed was actually going to be continuing to raise rates or in a position to lower rates anytime this year. So, I think that at least a consensus view is helpful, again, in creating a more constructive backdrop overall.

John Richert: Yeah. And whoknew a childhood fable in Goldilocks would have such economic ramifications? John, we have seen a huge lift in our mid-cap sponsor business. And I had the opportunity to meet with John Burns, Head of our Mid-Cap Sponsor business last month. Can you share with us your perspective on the institutionalization of the middle markets sponsor ownership? And how it has increased at a 10% CAGR over the past decade and showing no signs of abating?

John Simmons: And John Burns, Head of our Mid-cap Financial Sponsors group and team are doing an amazing job. I'll give you a little bit of context for what we've been building. We're trying to build a comprehensive suite of services to serve middle market private equity because we do view this like an ecosystem. You start with there's more than a thousand middle market private equity firms that we are serving in the commercial bank. And there's $3 trillion of dry powder within the private equity universe. Much of that's laser-focused on middle market. In fact, there's a trillion eight of middle market private equity, and within that trillion eight, there's a half trillion dollars of dry powder. We've seen ownership of middle market companies by private equity increase at a 10% CAGR to more than 13,000 companies over the past decade plus. And so, as a result, we're trying to build an ecosystem that serves every piece of that. John Burns has 50 bankers that are serving that client universe and he's hand-in-glove, John, with your mid-cap investment banking team. We're trying to make sure we have a scaled direct lending offering. We're trying to deliver world-class payments and commercial banking capabilities to the sponsor's portfolio companies. And importantly, we're trying to invest in data, in technology, to make sure that we can bring ever more high quality ideas to sponsors because that's the thing they often value the most.

John Richert: And I would say I think that ties in nicely with what Melissa's business has been and he industry specialization on her teams. Clearly, these financial sponsors are looking for that expertise, not just in broad tech, but specifically in, let's say, software or tech services or fintech or healthcare services and life sciences. I think the partnership between my team, Melissa's team, Burns', and your team, again, is part of what sets us apart from our competitors at this point. And that leads to, Melissa, on your side of it as well, as John has built out the private equity with John Burns. Again, apparently, one has to be a John to work here. Related to that build-out on the middle market PE side, can you talk to us about the build-out that you've done on the innovation economy ecosystem for VC firms?

Melissa Smith: Sure. Absolutely. And I think like John talked about the ecosystem for private equity, a very similar thing exists on the innovation economy side amongst the venture ecosystem. And I would argue it's even more interconnected. And when we think about that very tight-knit community, think about one VC firm that obviously would have multiple partners. And that firm invests in hundreds of portfolio companies, depending on the size of the firm. And each of those portfolio companies has one or two or three founders and that company employs thousands depending on obviously the size of the company, but employs thousands of employees overall. So, there is, again, sort of this interconnected flywheel amongst all of those parties, particularly when you consider that many founders will start multiple businesses and be repeat founders. And so, it's important in our minds that we are serving that entire ecosystem. We talked a little bit previously about really how we deliver J.P. Morgan to the portfolio companies in terms of the company specific needs, but we are very focused and continue to do the same for the VC firms and the VC partners themselves. So, from a firm perspective, we offer fund banking, capital call lines, liquidity management for the venture capital firms as a whole. And for the VC partners, obviously, we're very focused on making sure that we are best serving their private banking needs. So, I think thinking about it as one relationship, one wholistic ecosystem is sort of the secret to success and just important from a relationship perspective that we are being able to provide a wholistic offering to the entire ecosystem.

John Richert: It is incredibly comprehensive and wondering did the acquisition earlier this year, First Republic, help solidify that? And were there best practices that we've now taken from First Republic that helped augment your business with the VC world?

Melissa Smith: Sure. So, I think First Republic was certainly much loved amongst founders and was very much known for their exceptional client service. And as we've integrated First Republic into J.P. Morgan, we've really tried to take the best aspects of their service model. And obviously, marry them with kind of the J.P. Morgan solution set. So, if you think about that heritage First Republic, they would have one banker that could help a founder with their personal wealth or mortgage needs. That same banker could also help with that founder's company's needs. And they might even serve the non-profit that founder sat on the Board of to the extent that they were doing some non-profit advisory work. So, given I would say kind of the breadth of J.P. Morgan solutions, we actually think our operating model is going to be slightly different. We think that company and that founder is best served by having experts in private banking or corporate banking or investment banking depending on sort of what the needs are. But at the same time, recognizing that having a service model and we've revamped our service models to reflect this, that can actually sort of bring the same passion for exceptional client service. As well as have one individual that could kind of help navigate whatever that person or that founder or that company needs across the firm is critically important. So, I would say that's really where we are, again, trying to kind of marry the best of First Republic with the best of J.P. Morgan.

John Richert: For a complete winning solution for sure. As we start to approach the end of our time, a question for both of you, John and Melissa. As you look ahead from the back half of the year coming out of Labor Day and the sprint that it is to the end of the year, what's the one piece of advice you would give to our founders?

John Simmons: I think we've learned to expect the unexpected. Every year of the past five, I think, I've had to remind myself that. And what I would say to founders is that we are here at J.P. Morgan Chase to help businesses across every phase of your life cycle. In many ways from startup to ultimate exit and everything in between. And we're there when the unexpected happens. And we want to be a partner.

Melissa Smith: And I would very much echo that advice as we have seen over the past several years. It's incredibly important to choose the right banking partner. When I say that I mean to be thinking in the future about what your company needs, not just today, but what your company will need over time. And really again choosing a partner that you think can help you achieve your overall vision for that founder. As we like to often point out to our clients, it's really impossible to outgrow J.P. Morgan. And as John said, we're really here to support companies through every stage of their life cycle.

John Richert: Yeah. That life cycle effect we've talked about many of the unique capabilities of the firm, but your ability to start from the venture world and move with them as they grow all the way up through the ecosystem inside J.P. Morgan is impressive. And on behalf of my partners in the investment bank, I sincerely appreciate the partnership that you two have done to help build out our businesses together. To recap, today we explored the shifting landscape for business leaders at every stage, discussed the significance of the middle market and innovation economy, and shared insights from J.P. Morgan's Founders Forum on how founders can stay ahead. John and Melissa, thank you so much for joining me today. And thank you to our listeners for tuning in to another episode of What's the Deal? We hope you enjoyed this conversation and be sure to tune into our upcoming episodes. I'm your host, John Richert, and until next time, goodbye.

Voiceover: Thanks for listening to What's The Deal? If you've enjoyed this conversation, we hope you'll review, rate and subscribe to J.P. Morgan's Making Sense to stay on top of the latest industry news and trends. Available on Apple podcast, Spotify, Google podcast, and YouTube. To stay ahead of the curve, sign up for J.P. Morgan's In Context newsletter. Packed full of market views and expert insights delivered straight to you. To subscribe, just visit JPMorgan.com/in-context. This material was prepared by the investment banking group of J.P. Morgan Securities LLC and not the firm's research department. It is for informational purpose only and is not intended as an offer or solicitation for the purchase, sale or tender of any financial instrument.

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