John Kolz
Welcome to the US Equity Capital Markets Roundtable from RBC. Our goal with this roundtable is to try to offer some timely thoughts and insights to both corporate clients and investing clients from our capital markets professionals.
John Kolz
I'm your host John Kolz, head of US Equity Capital Markets here at RBC. In this episode, I'm joined by Mike Ventura, Head Of Industrials, ECM and Joe Pissarro, Head Of Our US Syndicate desk. Mike spends his time talking to issuers into the marketplace, corporate clients private equity venture cap plus two are looking to raise money in the markets while Joe is focused on execution, taking that product and executing it out into the marketplace with investors. Hopefully in the next 15 minutes or so, you'll hear from both as we try to demystify what's going on in the capital markets in 2023. And what to expect as we finish out the year and head into 2024.
John Kolz
The question that Joe Mike and I get asked more than any other is, when are we going to see the broad reopening of the equity capital markets in particular for IPOs. As we sit here in late August, looking towards September and the fall, as expected, it's been a very wacky year. IPO volumes are actually up 140% This year following issuance is up 43% This year, converts are up 140%. But all those numbers are off an extremely depressed base. This continues to be a tale of two cities. The NASDAQ is up 27% But there's been virtually no tech IPOs. S&P is up 14% But it feels much worse. And earnings season is basically over at this point with 80% of the S&P 500 having beat earnings, but the reaction has been muted. Deal volumes have been decent, but performance thus far has been fair at best. So what do we think? What will the fall hold? What will early 2024 Hold? And importantly, what do we think the catalysts are both from the perspective of issuing clients and from investors what are they looking for to gauge success or not in this marketplace?
Mike Ventura
Yeah, what we're talking most with our clients about John is really the old adage of the separation is in the preparation. So as you mentioned, big question on when markets will reopen, I think healthy debate around whether or not they already have we saw a massive run in issuance. If you think of your year over year comparison stats that you rattled off in the preamble, most of that deal volume came in a very well defined window in May and June ahead of corporate blackouts. And so it feels like there is a lot of momentum in the market. Real time, low volatility as measured by the VIX, again, high degree of pattern recognition with deals getting done and pricing and performing pretty well. You know, I think the broad market performance data, again, has investors feeling let's say pretty good about the market backdrop, so I suspect that we'll see the knock on effect of the very strong follow on market backdrop, and the beginning green shoots of an IPO market reopening there's a couple of high profile deals that had gotten done those somewhat singular in their own narratives. A good handful of transactions that are expected to launch post Labor Day and the market is putting a lot of their eggs in that basket with respect to expectations that those high profile IPOs that are slated to launch post Labor Day up price and perform? Well, I think that will be sort of the final, the final breadcrumb on what is it now a decently long trail of them to indicate that the market really is fully reopened. And so for our clients back to your direct question for our clients, what are we advising, we're advising to be prepared to hit that window if you're an IPO candidate, a private company, who potentially shelved plans in 22, and 23, given the market backdrop, get ready to go down that path, again, in terms of updating financials, and getting documents ready, if you're a follow on candidate who let perfect be the enemy of pretty darn good in May and June, it's begin having those conversations with your board and key stakeholders, again, because I think being nimble in this market environment that's been again, quite window driven, is is going to prevail and win the day.
John Kolz
In Joe, we probably have spent an inordinate amount of time focusing on these handful of high profile IPOs that are expected in the fall, our investors focus the same way. Are they putting that much pressure on those deals to do well, and to trade? Well to sort of be that catalyst for the reopening of the IPO markets?
Joe Passaro
Yes, they certainly are. And I would say it really falls into two buckets. One, just from an overall performance perspective, there is a lot of focus, but given the size of some of these IPOs. I think that will allow for some alpha generative opportunities for the buy side at large. But also the things that are potentially talked about and launching in the post Labor Day timeframe, actually are going to look a lot more like what is the broader construct of the current IPO pipeline? Cava Oddity Kodiak and Fidelliz some of the names that have gotten out are somewhat one of the ones that they don't have a pure play pier that is indicative of all of the hype and pipeline that we had talked about and referenced in the 2020 and 2021 timeframe. So, you know, we talked about can they get out and price well, and trade well, but I also think it'll be so very important to who shows up? Because we've never really had a demand issue. It's going to be what is the narrative for Mike's clients for the next set of tech IPOs? That it's not just a question of them getting done at a price, I think we have a high degree of confidence that that will happen. It's, do the large mutual funds, do we set these companies up not just for near term success in trading day one, but set them up for success as public companies with really strong shareholder bases on a go forward?
John Kolz
Yeah, it gets to that question of the should you versus the can you, right? There's probably an answer to the can you that yes, there is a classic price for everything. But should you really get the investor base that you want? Can you really get the start to your debut in the capital markets that you want? And there's probably a few more data points that we need to answer those questions. But interestingly, in the same vein,
John Kolz
IPOs may not be falling off the shelves right now. But there does seem to be something for everyone in the equity capital markets, between convertibles block trades, private placements, ATMs, equity margin loans, covered calls, etc, etc. There seems to be a solution that can fit every issuing clients needs. And interestingly, for us at RBC, this is precisely how we've built our business, to be big enough to offer everything that a client needs, but to also be creative to be nimble. And to avoid cookie cutter one size fits all approaches. Mike, with that, as a wind up, how do you how do you take that approach to corporate clients and offer them a solution that meets their needs?
Mike Ventura
Yeah, the market sort of solves for the recommendations sometimes on its own, right? I think we're in a period right now, where so many of the historic norms around how to issue when to issue what to issue are getting challenged, which again, sort of makes it a very exciting time to be an ECM practitioner, gone are the days when a CEO or CFO or a board quite frankly, could, you know, respond to us pitching a product, like a convert and say, Well, this is too complicated, it's really not for us, or, Hey, you know, we have this sort of big hurdle rate internally for, you know, getting over, you know, putting a piece of paper like that into our cap structure, not the case anymore. You know, there's a very high degree of understanding across all of the management teams and boards that we deal with about, you know, what a convertible bond might mean to a company's capital structure with respect to interest rate savings right now, just given where the market has moved at, you know, once was a product that was a little further afield for most management teams. Now, it's, you know, sort of a portfolio management tool in terms of how folks think about their debt stack. Similarly, ATMs becoming much more topical, in sectors where folks want ready access to equity capital without the lift of executing a registered transaction; issuing equity at a price that might be slightly lower than your last tranche of equity that you sold two or three years ago, is no longer sort of an anathema to my private equity clients that I talked to, or my corporate clients, all of these sort of traditional norms that are again, you know, really getting challenged, real time in the market, have created a backdrop where folks are just embracing creativity. nimbleness, I think is a word we've probably used a few times over the course of today's discussion, and really just embracing that that market opportunity when they can find an issuing window that's open.
John Kolz
And Joe for you in terms of executing transactions, the menu has broadened dramatically as well.
Joe Passaro
Absolutely, in our investing clients have had to grow with that growing menu. People used to just be able to sit and evaluate trades that were either marketed over a long period of time, we're very vanilla in nature. And I think their learning and understanding of the capital markets has evolved alongside the menu that we've provided to our clients. The overall depth of a convertible market has grown significantly in terms of the traditional investors versus folks who are now willing to allocate capital across the capital structure. We are seeing folks far more willing to take more structured pieces of paper, both on the mutual fund and the hedge fund side. Clearly, the ability and the investment in privates that we saw really blossom, in 2021, will have will continue to evolve over time as we now hopefully return to a more active IPO market and how to folks think about the monetization or build out a positions as these companies bridge the gap from private to public life
Joe Passaro
Our job is to take what we're learning from our investing clients on a daily basis, and really hone and continue to keep a finger on that pulse to provide our issuing clients with best execution advice. And that execution advice continues to be more dynamic than any time I've seen in my career in my overall ECM career. Whether it be our sponsor, clients, utilizing corporate equity derivative, hedging strategies, or more tactical, intraday, trading and block strategies versus being beholden to the traditional registered deal. The simple uptick that we've seen in unregistered blocks and the monetization style in which those access the market investors are being really forced to stay on their toes and stay in front of their investment banking counterparties to make sure that they and their reverse inquiry is timely and fresh, given how quick the market is moving and the pace at which the sponsors are going to look to monetize across all different timeframes.
John Kolz
And speaking of things that are either the same as before or different than before, Joe, one of the things, an observation is the vast majority of deals have been wall crossed into an overnight whether that's wall crossed into a blood trade or whether that's wall crossed into an overnight market a transaction? Is the traditional market a deal for a couple of days in the market. Is it over? Is this the new normal now that everything is in the name of de risking? Or how do you how do you think about that?
Joe Passaro
It's a great question. And I would say we're definitely in a place where it's far more situational. But 23 has provided a far more conducive market backdrop than what we experienced the role of 22. Year to date, we've only seen two daily moves greater than 2% in the S&P 500. And then counter that within 2022, we had already seen 30 days where we had had moves of 2% or greater, that's about 20% of all trading days year to date. So 22 was something where you had to do things by the cover of wall cross, just given the overall market volatility. 23 has provided a far more calm market backdrop, a couple that with a VIX that's averaged about 30% lower than what we had seen in ‘22. And I think, you know, now people are in a position and are issuing clients are in a position where we can actually now debate and weigh out the pros and cons of marketed versus wall cross. And I think that was best exemplified in early June when we saw GE Healthcare, Mobileye and Corbridge all out for market and follow ons raising between 1.2 and $2.2 billion. So there was a clear decision tree there, where they could have probably achieved a block trade or an overnight in the context of 500 to $750 million. But chose, hey, let me go out there for my first time, follow on go out and market for a day or two, and actually achieve both breadth in terms of the shareholders that I reach, as well as you know, probably maximize for size, given the sheer size of the overhangs that each one of those three situations faced.
Mike Ventura
It's really completing that that puzzle of shareholder depth, John, that you touched on in your earlier question, you know, IPO was the start of it. For as long as probably the three of us had been in this business, you know, your first follow on was always sort of the marketed deal. And that from a banking perspective and coverage perspective was sort of the last shot at that widely syndicated construct in terms of you no follow on execution and marketing. Those folks that Joe mentioned, really went back to the old playbook. But I do think that's where the rumors of the marketed follow ons demise are probably somewhat exaggerated to borrow that old phrase, right? It's, there will always be a need those situational, right to really round out a shareholder base that that won't necessarily, you know, completely go away. The market backdrop sort of ripe for revisiting that execution approach, and I do think, you know, as M&A volumes pick up, just given where asset values are even, you know, with the market moving in the way that that it has, from a performance perspective, you'll start to see folks, you know, sort of reengage with that execution approach again.
John Kolz
The market feels okay, maybe better than okay, maybe feels good, but a little delicate, I think is what we've all talked about a little bit. We could probably all make the case for the IPO market roaring back in September and into the fall, we could also probably make the case for why that doesn't happen. I'm going to ask each of us to give your own personal prognostication look into the crystal ball as to how you see the fall, rolling out and maybe Mike for you, given that you spend your time in industrials And in that side of the world. I know there's no one size fits all answer here. Maybe I'll go first as you're thinking about that, but I, I, I see a world where there is an impetus for owners. That's private equity and VCs To return capital to start to get the ball rolling at a in a market environment that is receptive and doesn't have to be perfect. So I do think we're going to see a steady increase in volume, but with a mentality of nobody really wanting to necessarily be first, no one really wanting to put a target on themselves to be the bellwether, the harbinger of what the rest of the calendar has to look like. But I think that results in a steady drumbeat of activity throughout the rest of ‘23 with really the probably the top of the bell curve of activity into early and mid ‘24. But I think that's predicated on investors wanting to return some capital investors and look, primary capital. Investors want to buy companies that are raising primary and are investing for growth that whether that's funding M&A, whether it's funding CAPEX, whether that's funding expansion in their business more broadly, I think we will see more primary capital transactions as well.
Mike Ventura
I think the fall is going to be exceptionally busy from a follow on perspective. I think the private equity community is going to rush to the exits to try to get one more mark in before year end. Simultaneous with that I think you will see, let's call it these four to five very high profile IPOs. That the media you know, over the weekend, really. I think the chatter on their imminent launch has reached a crescendo. I think you'll see those deals, launch and price well and perform well. I think that the next set of IPO candidates are not yet ready to launch immediately on the heels of those transactions, which means that Q1 of 24 is going to be very busy. I think what will be different about 24 You'll want to be closer to the beginning of the line, if not first versus sort of in the middle innings or middle to later innings of the lineup in terms of in terms of execution timing. Again, think there will be a lot of secondary paper hitting the market all the way up until your end suspect there will be a little bit of fatigue that comes along with that And so I think that when we come in, you know, Jan three, whatever it is this year, I suspect the folks will want to be folks being issuers, particularly on the IPO front will want to be off to the races and near the front of that line, as folks think about deploying new capital in the in the new year.
John Kolz
Joe, you've recently spent time on your own personal investor roadshow. What are the key takeaways you're hearing from investors? What are they telling you and what are they telling us to report back to corporate clients?
Joe Passaro
I think we've seen 60% of all ECM activity in ’23 come in the form of 100% secondary offerings. And we've already surpassed what we saw in 2022, both in number of deals in notional. So when you think about the private equity monetization schedule, we have a lot of catching up to do, there are still a ton of stock that is held between private equity, venture capital and corporate cross holdings. So we'd expect this trend to continue, particularly if you're looking at on the block front, given the competitive dynamics ongoing amongst us in our peers, we've seen the average to last trade collapsed by almost 200 basis points from about 5% and ‘22, to just under 3%, in ‘23. So the fact that there is a conducive market backdrop where the sellers can exit these positions with relative ease in terms of the friction that they're facing, I would only expect that to continue into the back half of 23 and early ‘24
Joe Passaro
We've seen investor sentiment among all of our largest mutual fund and hedge fund clients improve markedly so far and ‘23. Albeit off a very low bar in 2022. But as markets have stabilized and investors have a better sense of the forward interest rate and inflationary environment, their willingness to step for They're outside the risk curve and deploy capital back into the equity markets is much in a much healthier place than it was what we saw last year. Clearly IPOs remain at the far end of that, where I think the first place where they're willing to deploy capital has been in the follow on market, where they're able to re underwrite a lot of their positions that maybe are marked down 20 3040 plus percent from where they may have invested in the 2021 timeframe. But overall, I would say we are returning to a place where investors now can think about making investments over a longer duration. Because people felt in the 2022 timeframe, it definitely felt like investors were in a much shorter term, trading oriented market, where now it does feel like we're returning to a place where investors can make longer term bets and bet on cyclical winners over the next three to five years.
John Kolz
Joe, we often hear that the end of the fiscal year for mutual funds has an impact on their investing decisions. Is that real? Or is that ECM lor?
Joe Passaro
It's interesting, and it definitely comes up in conversation. And it may be more ECM lore than it actually is, in terms of invest the way investors think about investing, I would say there is a small camp who try and protect their gains into year end. And clearly, as we turn the calendar page, maybe their willingness to step a little bit further outside the risk curve may improve slightly. But overall, if you think about the core client base that we're going to be allocating the large percentages of our clients deals to those are folks who are making much longer term bets. So I don't know that there's any place in the calendar year where something changes so drastically that we would advise a client to not issue equity in the October or November timeframe. In reality, the folks who are going to be targeting from an investing perspective, are clearly far more oriented to longer term holding periods.
Joe Passaro
While we're not out of the woods yet, and there are still a few looming issues out there, in terms of potential for the US going into recession, or the fears around the broader China economy. We clearly see that we're in a place where inflows are coming back to the equity product. And investors will usually look forward to ECM as the most efficient and effective way of deploying capital into the equity markets.
John Kolz
In its simplest form, we spend a lot of time thinking about the supply side and the demand side of the equation. Joe, what you just hit on was that with more dollars into the capital markets, there's more demand, the corporate side, the issuing side has been one that's more lack of supply to meet that demand so differently. We don't have a demand problem. We have a supply problem at this point in our assessment we need we need more potential issuers out there to meet that ever growing cash hoard sitting on the sidelines.
John Kolz
Well, thanks for that. whatever lies ahead in the equity capital markets, who knows, but we will be back.
John Kolz
Thanks to everyone for joining us for the RBC Equity Capital Markets Roundtable. We look forward to having you join us for the next episode, where we will evaluate our predictions and then tackle the latest issues in the ever changing ECM landscape. If you have any questions, in the meantime, please feel free to reach out to myself to Joe or Mike or any member of the RBC Equity Capital Markets Team. Thank you.