John Kolz
Hello, and welcome to Strategic Alternatives, where we uncover new ways to raise capital drive growth and create value in an ever changing world with insights and outlooks from RBC Capital Markets. I'm John Kolz, global co-head of equity capital markets here at RBC. I'm joined today by my colleagues, Paul Betts, managing director in M&A in Europe, and by Beatrix Pratte-Ness, also in our M&A team but focused on private capital markets.
Beatrix Pratte-Ness
Great to join you for this discussion, John.
Paul Betts
Great, thank you, John. And we look forward to this discussion.
John Kolz
In this episode, Paul Beatrix and I will be exploring key themes in private capital markets in Europe in particular, and shedding some light on how those forces are shaping not only private capital transactions, but also their interplay into the public equity markets and the M&A market.
John Kolz
Let's dive a little deeper into some of the trends in Europe in particular. Private placement volume in Europe is down a little bit from the peak in 2021. And that's somewhat in contrast to what's going on in the US where things have ticked up a little bit. But talk to us a little bit about the trends overall in the market, the key themes that we think are shaping the landscape now and heading into the future across Europe.
Beatrix Pratte-Ness
So I guess you mentioned it. But from the peak in 2021, we've seen activity in the private markets in Europe revert to the pre pandemic levels, as cost of capital has increased and are our exit markets are open but muted. Transaction count and volume in 2023, we're closer to 2020 - 2019 levels. But that being said, the private markets continued to remain resilient, open and conducive for high quality opportunities. We've seen that, for example, in the first quarter of 2024 that resulted in capital deployment in line with the same quarter last year. Another key theme we're seeing is unpriced capital raises that are silent on valuation, hybrid capital solutions, and earnouts that are tools being employed to bridge valuation gaps, as these have contracted with the correction and broader public equity markets. In this market backdrop, another one I'd mentioned is the global private credit markets that grew last year in total assets and in committed capital. What that means is that we're seeing equity investors broaden their mandates to encompass structured strategies that were formerly limited to credit funds. That includes downside protection mechanisms, while maintaining their exposure to the equity upside. And a lot last one we touched on at the beginning, but as the companies are staying private longer and the market searches for liquidity, we've seen a lot of growth and innovation in the secondary markets for private company shares that was fueled in 2023.
John Kolz
Yeah, and Paul, maybe I'll kick it over to you as you as you take those themes into consideration and the dynamics out there in the market. How does that shape the advice that we're giving to clients looking to raise capital in 2024?
Paul Betts
I think high quality companies are still commanding premium valuations, regardless of the market backdrop, and these businesses tend to be category leaders with defensible business strategies, and are able to demonstrate a strong and clear path to profitability. think also having an off day contract in place in a robust commercial framework is something that investors are looking for. And so when we think about valuations, I guess companies should consider their valuation uplift not only for upcoming rounds, but also for future rounds. And what I mean by that is correctly setting valuations at levels at which there is enough headroom to move that valuation up in in subsequent follow on rounds. We're also noticing diligence processes by investors taking a lot longer. And so you know, as we look to prepare to launch preparation is absolutely key to ensure best in class execution, alleviating the burden on management's time during the process, and also minimizing any closing adjustments. So providing a consistent message to the market as well as meeting milestones set out, I think in my view is paramount to ensure a successful raise. Investors are certainly prepared to take ramp up risk but are they are more adverse to technology risk, and so, off-take contracts, as I mentioned before are becoming increasingly important. And in particular, off-take contracts from credible parties that can endorse the equity story, remove counterparty risk, and provide both equity investors and lenders with strong conviction around the investment story. The more challenging part is actually securing that capital to bridge between seed capital and the time it takes to get to that off-take contract.
John Kolz
Yeah, thanks for that, Paul. It's interesting. I mean, there have been some reports that suggest that there's some $3.7 trillion of dry powder that's still on the sidelines looking for deals. And so with a slowdown in activity over the last couple of years, and this massive amount of dry powder built up on the sidelines. Where do we see… where do we see that activity level of capital deployment? Where are the industry sectors, where are the areas and companies that are most benefiting from dry powder on the sidelines now looking for more opportunities to deploy?
Beatrix Pratte-Ness
So unsurprisingly, in 2023, we saw technology lead as the most active sector in terms of capital deployment in Europe. And that's following the same trend as we're seeing in the United States. But also in Europe, technology and healthcare have been capturing a slightly larger share of the market compared to 2021 and ‘22. One of the areas that I like most about the private markets is that they're often leading indicators of new industries and capital formation. So notably, as we've been mentioning, throughout, we're seeing an increase in capital being deployed in the energy transition and climate tech sectors, both in North America and in Europe.
John Kolz
Thanks, Beatrix. Paul, as we try to evaluate all of these crosscurrents that we've talked about, how do they impact the M&A market? How do you how do you see this intersection between private capital market activity and M&A?
Paul Betts
I think there's always been a lot of debates as to whether private placements fall within M&A or within ECM. I think in terms of what we're doing here and Europe, specifically around our focus on energy transition, and the fact that there are a number of infrastructure funds which are invested in … in the space in particular, who are our traditional M&A investors for lack of a better word, and what I mean by that is seeking to buy minority stakes; coupled with the fact that when we do run a private placement process, we tend to try and find a lead investor, which are typically strategic investors with offtake contracts ideally, and then crowd and capital from other financial sponsors. Just given that dynamic, we do tend to try and run some of the processes on a dual track basis and what I mean by that is having a typical two stage process, as we do in M&A, to try and create some competitive tension and security lead investor in round one, and then to bring in financial sponsors and try to crowd in other capital to fill the book off the back of that lead investor, requires a hybrid deal process structure including both a typical M&A process and an a book building syndication process. And so for that reason. I think we are seeing quite a large intersection between what we would typically refer to as the M&A market in private placements. Safe to say that the European M&A market in particular, has faced some challenges over the last two years but we certainly are seeing a resurgence going forward. And so we do expect activity to pick up as it were leads to both M&A and private activity. And the last point probably to make is in terms of investors that are participating in these private placements. M&A is a potential exit option going forward. So hopefully we have a lot of tailwinds behind us now, and we should see activity within both M&A and private placements ramped up together as we look to fund both the energy transition space but also the private capital markets in terms of other emerging and startup companies.
John Kolz
Well, maybe one thing I just add on here is the interplay into the core equity capital markets. Paul just addressed how private capital is impacting M&A. On the on the equity markets we're off to a very good start globally of the into the year. Volumes globally and ECM are up call it 8-9%. And that has been really significantly benefited by the US market. US ECM is up over 50% so far in ‘24, I think Canada is up similarly 55ish percent and Europe maybe 6-7-8% percent too, to round out the core markets where RBC participates. And I think the themes that were discussed are largely similar and spilling over into ECM, which is companies had stayed private longer, had done more private capital raises to get themselves a little bigger, a little more ready for the public markets, to have options to go when it was right for them both in market receptivity and evaluation, etc. And we're seeing we're seeing that now; I wouldn't, I wouldn't quite say floodgates opening up by any stretch, but receptivity is there and deals are generally working. The bar is higher, but there is broad based appetite across sectors, there is a general view of that there are they're ready for investors are ready to be stock pickers again, and that always benefits the IPO market in particular and, to a lesser extent, the follow on market; that market has been dominated more by private equity who has very much been in the mode of selling down positions that they have held for quite a bit of time. And this trend exists both in the US, Europe, Canada really all across the globe, and has buoyed the follow on portion of the market. So I think as always private markets connect very closely to M&A, connects very closely to what's going on in ECM.
John Kolz
Paul, Beatrix, how's RBC positioned to provide support to our clients in this ever changing private capital market?
Beatrix Pratte-Ness
RBC is very well positioned to provide bespoke private capital expertise in Europe. And we work very closely with our dedicated teams in the United States and Canada, as well as our partners in Australia. So a global team really provides customized solutions to clients spanning the company lifecycle, the capitalization table, as well as all industries. So what that looks like in practice includes growth capital to scale businesses and fund acquisitions that can be very wide ranging anywhere from Series B all the way to pre IPO, or crossover rounds, venture debt and hybrid capital solutions. We also help in the secondary markets, so for shareholder liquidity for the very early investors or even management and lastly, once the company's become public, we're also helping support them around validation capital or catalyst driven PIPEs as well so a very broad offering.
Paul Betts
I think the development of our private placement capabilities is becoming increasingly important, especially as we continue as a firm to prioritize climate change. And we seek to support companies playing a key role in in driving decarbonization. Now, most of these companies are private startups, obviously seeking to raise capital. And our role is to support them in raising both equity and project financing. And I do believe we are well positioned to do this, given our extensive expertise and track record. In having previously done this in infrastructure and renewables when those sectors were both emerging. As a firm, we are also committed to deploying $1 billion into private funds that are focused on investing specifically in the energy transition. So it's a fund type investing model. And by partnering with these funds, we also get the opportunity to work closely with their portfolio companies in helping them raise capital. And then in the future obviously as they continue to explore growth, potential future IPOs or M&A activity, we are able to closely coordinate private capital efforts with our M&A and ECM colleagues, to ensure that we are able to provide these clients with a holistic approach and advice to help them grow in the future, achieve both near term capital ease, but also help them optimize and position themselves for longer term success.
John Kolz
Thanks again for those comments. Paul. And Beatrix, we really look forward to speaking to you again soon for a deeper dive on the role of the private capital markets in driving forward not only the markets but also energy transition in particular. You've been listening to Strategic Alternatives the RBC podcast, this episode was recorded on April 18, 2024. Listen and subscribe to Strategic Alternatives on Apple podcasts, Spotify, or wherever you listen to your podcast. If you enjoyed the podcast, please leave us a review and share the podcast with others. Thank you.