What’s the current picture on financial sector activity in the capital markets?
J.T. Deignan: In the latter part of last year, we started to see some of the sectors come back to life: insurance, in particular. The business development corporation (BDC) sector also started to show great performance in the secondary market, which gave more comfort for issuers to contemplate raising IPO capital.
In the back half of Q4, we started to see insurance companies contemplating moving their time frame up – when they were actually going to hit that ‘go’ button to go public. We’re likely to see a handful of private assets come to the public market, each with a different approach to their businesses.
BDCs has been an area of specialty finance where there’s been significant increase in activity, both from an IPO standpoint and also in follow-on, where we’re seeing capital being raised for growth and deployment.
What are the prospects for continued strong performance in the insurance sector?
Deignan: Property & casualty (P&C) insurers delivered broad-based updates over their earnings cycle. Premium growth is doing quite well, and pricing trends are favorable.
There’s some question around how long the hard market is going to last. I don’t think anyone knows exactly.
Neil Chawhan: Broadly speaking, I think there’s a favorable upward trajectory and rates. The important question is whether we are getting rate in excess of loss cost trend, because the other factor here is inflation.
Loss costs are going up, and that’s part of what’s driving the hard market. Insurance companies are realizing they need additional rate in order to achieve the level of profitability they need to meet their cost of capital.
“Insurance companies are realizing they need additional rate in order to achieve the level of profitability they need”
Neil Chawhan, MD, Insurance Investment Banking
What will be the key differentiator for issuers in insurance IPOs?
Chawhan: The right management team is one of the first things investors ought to think about as they consider these private names and their desire to go public. Who has a management team that’s going to execute in this market?
A few names in the fourth quarter had adverse development on some reserves: that really does shake investor confidence. Having confidence in the balance sheet is important, as well as the ability to generate a return on equity. There’s a high correlation between valuations and return on equity.
How are BDCs positioned to go public in the current lending landscape?
Deignan: There’s no question that BDCs are competing with the investment banks and providing capital to corporate America. But some of the larger credit providers and BDCs, public and private, are also collaborating with those investment banks.
Scale is really critical for BDCs. We’ve had three go public in 2024, and a handful of others will likely come. One of the first questions institutional investors ask is not just about their track record, but how scalable is the business?
The bigger platforms out there are definitely competing with the banks, but they’re also partnering with the banks. These ‘category killers’ are creating a more institutionally-followed segment in the public markets. That’s allowing smaller entities to come to the markets.
As the marketplace continues to grow, we’ll see even larger IPOs and bigger platforms come to the market, with continued institutional support.
“The bigger BDCs are definitely competing with the banks, but they’re also partnering with the banks”
J.T. Deignan, MD, Head of Real Estate and Financial Institutions Equity Capital Markets
What other sectors of the market are likely to see IPO activity?
Deignan: I anticipate we’re going to see a healthy amount of private alternative asset managers come to the market. They’re going to grow behind the public curtain and then present themselves to the public.
We’re hearing from investors on a pretty consistent basis that 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 the supply we anticipate is going to be met with robust and healthy demand.
Overall, we have a growing pipeline not just of financial-oriented platforms, but well-diversified businesses by sector. As long as we continue to have a constructive backdrop, and a clearer picture on interest rates, I think the equity market’s going to continue to get support from all parts of the world.
“We’re going to see a healthy amount of private alternative asset managers come to the market”
J.T. Deignan, MD, Head of Real Estate and Financial Institutions Equity Capital Markets
