Joe Coletti: Welcome to RBCs equity capital markets roundtable. Our goal with this roundtable is to offer some timely thoughts and insights that are valuable for both our corporate and investing clients. Today you'll hear a conversation between J.T. Deignan, Managing Director and Head of real estate and financial institutions equity capital markets, and Neil Chawhan, managing director insurance investment banking. Today's conversation was recorded at our global financial institutions conference in New York. Now let's dive into the conversation.
Neil Chawhan: So J.T., there's been a fair amount of activity in the capital markets more broadly, wanted to get your thoughts on what you're seeing as it relates to the financial sector and any activity for that you might be saying automatically in in ECM for us.
J.T. Deignan: Well, thankfully, since I cover financial services alongside of real estate, we are seeing a pickup in activity in both sectors. If you go back to really the latter part of last year, Q3 Q4, we started to see some of the sectors come back to life. Insurance in particular, the BDC sector also started to show great performance in the secondary market, which led to more comfort from issuers to contemplate raising IPO capital. So fast forward to, you know, Q4, the back half of Q4, we started to see semblance of insurance companies contemplating moving their timeframe up, when they were actually going to hit that go button and go public. And we saw a number of transactions, three, in the insurance sector, with mixed reviews. But the first one that came out in January of 2023. Now I’m going way back, had a great outcome. And I think if I look at where they're trading today, their performance is close to 135% from where they price their transaction. So had some additional companies come after that. With I would say, pretty good outcomes, both from a pricing perspective and an aftermarket performance perspective, which is critical, right? Because if we're going to have other companies come to the market, they need to be well supported by investors, not just that pricing. But you know, as they continue to grow in the public markets.
BDCs it's been an area around specialty finance, where there's been significant increase in activity, both from an IPO standpoint, and also a follow on standpoint where we're seeing capital being raised for growth and deployment. What's interesting, and we're gonna get into this a bit later, is what types of investors are showing up now, particularly in the BDC marketplace. And that's partly being driven by this dynamic in the direct lending and private capital markets, which has been a point of, you know, major commentary here at the at the conference, and frankly, everywhere on the street. It's a big area of focus for investors, both on the public and private side.
Neil, I just wanted to shift gears a little bit to - I touched on the capital market activity around insurance. And by the way, I think we're gonna see continued runway. We're likely to see, you know, a handful of private assets come to the public market, or with a little bit of a different approach to their to their businesses. But given the success that we've seen thus far with some of the deals that have come to the market, we do suspect as a firm, and I think the street does, both underwriters and investors that you're going to see continued activity there. We just went through earnings season, and, you know, the backdrop remains constructive. So the P&C insurers delivered pretty, broad based updates over their earnings cycle here. premium growth is doing quite well pricing trends are favorable. There's some question around how long the hard market is going to last. Some people think we're in the sixth inning. Some people think we're in a ninth. You talked to a lot of, of corporate clients, curious what you're seeing out there?
Neil Chawham: Look, I think the pricing has backdrop is certainly positive. And it really does vary by line. So not all markets are seeing the same rate momentum as we're seeing in each individual line, depending on the line. So, broadly speaking, I think there's a favorable upward trajectory and rates. And the important question really is, you know, are we getting rate in excess of loss cost trend, because the other factor here is truly inflation and loss costs are going up. And that's part of what's driving the hard market. I think insurance companies are really realizing that they need additional rate in order to be achieve the level of profitability that they need to meet their cost of capital. So certain lines are performing and getting more rate than other lines. But by and large, I think the sentiment is, is very positive. In in PNC, and within P&C, certainly within specialty P&C
J.T. Deignan: A follow up question to that, because we are here to talk about equity capital market activity. So, circling back to that favorable backdrop, what do you think is going to be the key for the next class of insurance platforms that, you know, are considering coming to the public markets and differentiating themselves? For investors? Because, you know, it's it hasn't been, up until recently, where we've seen companies go public, in the insurance sector. And now we're, I won't say, contemplating a wave, but certainly a handful of assets and management teams are considering coming public, but what do you think's going to be the key differentiator for those issuers should they come?
Neil Chawhan: It's a great question. And I think with all businesses, it really does come down to management and ability to execute. So the right management team is, of course, probably one of the first things that investors ought to think about as they consider some of these private names and their desire to go public. Who has a management team that's going to execute in this market. But, you know, from an investor perspective, what I often think about is the strength of the balance sheet, particularly in this market, you know, we've had a few names in the fourth quarter that had adverse development on some reserves. So that really does shake investor confidence. And I think having a having confidence in the balance sheet is important, because that takes the question off the table, and then with that solid balance sheet, the ability to generate a return on equity on that balance sheet. So I do think there's a high correlation between valuations and return on equity. So you know, as you as you can demonstrate a steady, attractive return on equity in excess of your cost of equity. Those companies tend to trade at a premium.
JT, as you mentioned, there have been a number of business development companies raising capital, with private credit and direct lending becoming more and more topical here. How's that impacting the public markets and public BDCs?
J.T. Deignan: I think it's, it's very supportive for a couple of reasons. One, I think, you know, if you go back to the model, and really, when it was created, it was right after the global financial crisis in 2008, when you when he started to see private credit, become more of a prominent, force in global financial markets. And now, you fast forward to today, there's some permanency there, considerable permanency. And some have said, you know, they're competing with the investment banks, right, and providing capital to corporate America. There's no question that happening. But I would also say that, if you talk to some of the larger credit providers and BDCs that are out there, both public and private, they would tell you that they're working in a collaborative way with investment banks. So when I think about BDCs, in the public domain, institutional investors, I think, have a better appreciation for what the BDC, their business development corporation model, brings to the lending world. And you know, not all lenders are created equal. It's a tremendous amount of cost, both on the capital side, and on the human capital side goes into having these premiere, you know, business development, corporations, scale is really, really critical. And if anything we've seen in our conversations with institutional investors, when we bring a company public, and we've had three BDCs, go public in 2024, there's a handful of others that will likely come, one of the first questions they ask about is not just track record, but it's ‘How scalable is your business? And are you going to be able to not only, you know, commit and provide capital to growing companies, but also support larger companies.’
And if you look at some of the, the biggest platforms out there, the Blue Owls, the Blackstone's the Sick Streets, you know, these are folks that are in the areas of the world, they are definitely competing with the banks, but they're also partnering with the banks, some of these smaller platforms, they will be able to get support in the public markets from institutional investors. But it's really these category killers that I think are creating a more institutionally followed segment in the public markets. And that's allowing these smaller entities to come to the to the markets.
What I would say on the on the investor side is, you know, I've done a number of IPOs at my prior shop many, many years ago, and a lot of those IPOs were transactions that didn't have a huge institutional following. You fast forward to today, we have tremendous support from Blue Chip, institutional investors, hedge funds, mutual funds, pension funds, sovereigns are even coming into the sector right now supporting public offering. So that dynamic I think, is going to stick and only get more and more prominent. So I'm looking forward to what the future has to bear for us. But I think, you know, as the marketplace continues to grow, we're gonna see you know, even larger IPOs and bigger platforms come to the market. And we're gonna see continued institutional support, as well as a wealth management partners across the street that love the credit, love the equity upside and these vehicles. So it will be interesting.
Neil Chawhan: J.T., you touched on insurance, specialty finance, are there other sectors that you think will see activity from an IPO perspective?
J.T. Deignan: Yeah, for sure, I think where we're gonna see additional activity is in the alternative asset manager arena. Partly, if you think about what we were talking about prior around private credit, as an asset class, if you will. And you look at these alternative asset managers that have various, strategies, far different than a traditional manager, a mutual fund, or someone that's long only. And really, their business model is predicated not only on stock picking performance and all those things, but AUM, and if you look at where capital is going, it's going to the alts area, predominantly, we are starting to see capital go back into the passive and active traditional managers.
But there's a big valuation gap, right? Where those folks are trading in the public markets versus where the alternative asset managers are trading. So if you go back to 2007, the first to go public was Blackstone. And then we had the global financial crisis took a while for them to get their public footing from a valuation standpoint, they're executing on their business quite well, but they never or at least for a period of time, didn't get the valuation they deserve. Then you had KKR, you had Apollo, you had Carlyle, all coming out after that over, you know, a series of years, I anticipate we're going to see a healthy amount of, you know, private alternative asset managers come to the market. Quite big ones, you know, that have, as I said, multi prong strategies, and they're going to continue to grow, you know, behind the public curtain and then present themselves to the public, I think in pretty short order gives them a currency to continue to grow not only you know, organically, but also externally. Having that currency is quite appetizing for sellers and right now if you look at kind of the traditional managers or you look at some of the smaller all guys, you know, it's a race, you know, who's gonna get larger, and if your subs kale, you know, chances are, it's going to be harder for you to compete with the big guys. And so having a currency, I think it's going to be helpful for some of the folks that are considering coming to the markets.
We’re hearing from investors on a pretty consistent basis, they would love to see more investment opportunities in the asset management sector. They're not asking for traditional asset managers, they're asking for the alts guys. So, you know, consistent with the feedback we're getting from investors right now on the alts. We're seeing that on insurance, we're seeing that on specialty finance. So I do think that we're the supply that we anticipate is going to be met with pretty robust and healthy demand, I will say, investors are very disciplined and how they underwrite companies. And I think the best management teams will have a good show. You can imagine who those folks are. And I think this year is going to be pretty constructive, as we sit here in the first quarter of 2024, with a growing pipeline of not just financial oriented platforms, but more broadly, here at RBC, we've got a pretty healthy pipeline of, of, I would say, pretty well diversified. Businesses by sector, and as long as we continue to have a constructive backdrop, which I think we will, and as interest rates, start to have a clearer picture and where we're going to go, and I think we're getting there. I think the equity markets going to continue to get support from all parts of the world, not just here in the United States, but global dollars will come into the marketplace.
Joe Coletti: Thanks for listening in to this episode of RBCs equity capital markets roundtable. Join us next time as we continue to discuss the latest issues in the ever changing ECM landscape. If you have any questions or want to continue the conversation, feel free to reach out to JT or Neil or any member of our equity capital markets team. Thanks and see you next time