Man Group to Acquire Varagon Capital Partners

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Man Group announces it has entered into an agreement to acquire a controlling interest in Varagon Capital Partners, L.P., a leading U.S. middle market private credit manager with $11.8bn of AUMs and $15.4bn of total client commitments.

Founded in 2014, Varagon is a leader in the core U.S. middle market, having completed $24.5bn of financings to over 300 companies and 138 sponsors. The firm focuses on senior secured loans with multiple covenants to cash generative, high-performing sponsor-backed companies in non-cyclical industries, and typically serves as a lead or co-lead lender, with origination capabilities that support enhanced terms and differentiated returns for investors. Varagon offers this strategy through a range of market-validated investment vehicles, including separately managed accounts, private funds, and rated note products.

Upon completion of the transaction, Walter Owens, CEO of Varagon, will continue to manage the Varagon business, supported by its existing 88 team members across offices in New York, Fort Worth and Chicago. Varagon’s investment committee, investment team and investment processes will remain unchanged, and the firm’s access to new investors will be bolstered by Man Group’s global distribution.

Varagon’s strong and experienced management team and high-quality, sophisticated client base, with a particular emphasis on the insurance channel, bring significant institutional credibility to support Man Group’s growth in U.S. private credit. The acquisition will enhance Man Group’s investment capabilities, equipping the firm with a complementary U.S.-focused direct lending strategy designed to provide consistent risk-adjusted outperformance. Crucially, Varagon brings the ability to deploy these investment capabilities at scale in a customisable format to the world’s largest institutional investors.

Under the terms of the Acquisition Agreement:

  1. At completion, Man Group will pay $183m in cash to selling interest holders Aflac, Corebridge Financial, American International Group, and former members of Varagon’s management team.
  2. The cash consideration will be funded using existing internal resources. It will be subject to a closing balance sheet adjustment reflecting any excess or deficit against a minimum working capital target.
  3. Aflac, Corebridge and AIG, which account for over half of Varagon’s client commitments, have agreed to continue their existing multi-year investment management agreements. Subject to maintaining a predetermined level of capital commitments over a nine-year period, extension payments of up to $93m in total will be payable in cash to Aflac, Corebridge and AIG.
  4. Varagon’s management team will roll all of its existing 27% interest into a structure that ensures long-term alignment with the combined business; + and management will have a reciprocal put / call option over the residual stake at fair market value in years 8, 9 and 10, subject to certain conditions.

Eric Burl, Head of Discretionary at Man Group, said: “This acquisition reflects our long-term strategy to move into new market segments where we can differentiate ourselves with talented, specialised teams. Man Group has built a rich and diversified credit offering to date, and as client demand for credit strategies is increasing, we see a significant growth opportunity in direct lending, particularly against the backdrop of regional banking difficulties in the U.S. This transaction enhances our ability to provide deep, fundamental credit expertise through a cycle, underpinned by risk management of the highest quality.”

Robyn Grew, Incoming CEO at Man Group, commented: “We are thrilled to have Varagon join Man Group as an additional investment engine. This acquisition is indicative of our commitment to diversifying our client offering and our strategic expansion ambitions in the U.S. Varagon has built a high-quality investment platform and shares our vision to deliver outperformance for clients. Our extensive distribution network and operational expertise will support Varagon with its continued growth and delivery for clients, and we very much look forward to working with such a strong team.”

Walter Owens, CEO at Varagon, said: “We are excited to be joining Man Group, a world-class investment firm with global distribution capabilities, a strong brand and infrastructure, and a like-minded, collaborative culture. Man Group’s deep experience building bespoke solutions for clients and best-in-class technology will help us to better serve our clients and further reinforce our position as a differentiated capital solutions provider in the core middle market. The private credit market continues to grow in relevance for many investors, and fundamental credit analysis and disciplined underwriting skills will come to the fore as the environment for borrowers in the U.S. becomes more challenging. We believe a combination of Man Group and Varagon will enable us to preserve our proven investment process while helping us scale our suite of products and continue to deliver compelling results to our clients and sponsor partners.”

The U.S. middle market is one of the world’s largest, with over 200,000 middle market companies generating one third of U.S. private sector GDP. U.S. pension fund allocations to private credit stood at $3.2 trillion in 2022, representing 3.6% of total allocations compared with 2.1% in 2017.

Varagon has delivered compound AUM growth of 13% over the three years to 31 December 2022. In 2022, Varagon generated total revenues of $116.3m and profit before tax of $30.9m. Total gross assets were $165.8m in December 2022. These figures have been extracted from the audited accounts of Varagon for the year ended 31 December 2022, which have been prepared in accordance with U.S. GAAP. Man Group expects the transaction to be meaningfully accretive to management fee and total EPS in the first full year following completion, according to the firm.

Wells Fargo Securities is acting as lead financial advisor and Willkie Farr & Gallagher LLP is acting as legal advisor to Man Group and/or its U.S. affiliates. Rothschild & Co. Inc. is acting as lead financial advisor and Davis Polk & Wardwell LLP is acting as legal advisor to Varagon.

The transaction is subject to regulatory approvals and is expected to complete in Q3 2023. On completion, Varagon will become known as Man Varagon. The proposed acquisition of Varagon is a Class 2 transaction pursuant to the UK Listing Rules. This announcement contains inside information and the person responsible for arranging the release of this announcement on behalf of Man Group is Elizabeth Woods, Company Secretary.

Pictet Asset Management: Neutralising risk

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China’s re-opening has failed to deliver a market rally, US banking sector remains jittery and inflation is proving sticky. We extend our already cautious stance by shifting more positions to neutral.

Asset allocation: never mind the debt ceiling

The Unites States debt ceiling has filled column inches, but throughout, the markets have been sanguine that a compromise would be struck, limiting the scope for any relief rally in equities.

More pertinent, however, are questions over the direction of the global economy, with the US’s outlook worsening in recent weeks, China’s post-Covid performance starting to disappoint and Germany wobbling.  And as inflation fails to fall as fast as anticipated, investors are reconsidering how quickly central bankers might be prepared to ease monetary policy or how soon rates might peak. That’s one reason equities failed to respond more positively to what was a strong first quarter earnings season – the recent past might have been good, but the future’s looking increasingly uncertain.

As a result, we remain cautious in our general asset allocation, with an  overweight on bonds and underweight on equities.

Our globalbusiness cycle indicators show signs of softening momentum in developed markets, but with emerging markets still registering positive growth. We also detect a growing divergence within developed economies.

The US Federal Reserve’s dramatic series of rate hikes since the start of last year finally seem to be taking a bite out of the US economy. US consumers are responding by increasing their precautionary savings, though the stock of excess savings and relatively low household leverage ratios suggest that while growth will dip below potential, the US shouldn’t slide into recession.

By contrast euro zone growth is picking up – though even here the signals aren’t all positive. The economy continues to be two paced with a persistent gap between the more buoyant services and a contracting manufacturing sector, according to sentiment indicators, despite German unfilled orders remaining well above trend.

Overall, the euro zone’s trade balance has rebounded following the energy shock triggered by Russia’s invasion of Ukraine which should add to deflationary trends. Meanwhile, Japan is in its own virtuous economic cycle, with GDP growing solidly thanks to healthy domestic demand. The Bank of Japan, might, however, start to temper this if, as we expect, it winds up its ultra-accommodative monetary stance.

We remain positive on the Chinese economy as post-pandemic pent-up demand is significant and mortgage rates are falling.  However, the timing of the recovery appears somewhat uncertain with April activity data clearly weaker than expected. Retail sales are running at 12 per cent below trend, and the real estate sector still struggling.

Our liquidity indicators show a desynchronised global cycle, with liquidity contracting in developed economies and expanding in the emerging world. But even in the developed markets, the contraction is less severe than it was at the start of the year, amid moderating inflationary pressures and – in the case of the US – the Treasury in essence injecting liquidity by drawing down its cash pile and the Fed providing emergency assistance to the financial sector.

Though the Fed retains a hawkish bias, we think it’s now on pause. That, however, won’t necessarily improve liquidity conditions – falling inflation means real rates are going up. At the same time, once the debt ceiling drama is resolved, the Treasury could be expected to rebuild its balances. That will also represent a liquidity squeeze (see Fig. 2).  Still, the market is ambitious in its expectations for rates – 170 basis points of cuts over the next 18 months.

Our valuation metrics show that most asset classes are priced in broadly neutral territory – though the dispersion of valuation and yields for major asset classes is abnormally low, suggesting an under-pricing of market risk. Emerging market equities look cheap, broadly because of weakness in Chinese equities. Meanwhile, the gains of the past month have taken Japanese equities from cheap to neutral.

Overall, equity multiples have limited upside over the next 12 months on our model. The US market’s multiple is 15 per cent above our medium-term fair value, though falling inflation could cause it to overshoot further in the short term. We see corporate earnings staying flat in US and Europe this year, though there’s scope for upside surprises in emerging markets.

Our overall technical signal remains positive for equities, with momentum firming further in the Japanese and Swiss markets. Seasonality turned negative for European and UK equities, however. Generally, sentiment indicators are neutral, except for Japanese equities, which now look overbought. The bond score was unchanged at neutral, with the US Treasury market upgraded to neutral.

Most investor surveys point to weakening risk appetite, with fund managers stating their bond allocation is at a 14-year high. Equity outflows accelerated during the month, mostly driven by the US. At the same time, money market and government bond flows remained strong.

Opinion written by Luca Paolini, Pictet Asset Management’s Chief Strategist.

Discover Pictet Asset Management’s macro and asset allocation views.

Duration risk: if not now, when?

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Duration is a measure of how sensitive the value of a bond (or a portfolio) is to changes in yields. If yields fall – all things remaining equal – a bond with a higher duration should experience a higher total return than a shorter duration bond. Equally, they should fall more in value in percentage terms when yields rise.

A cruel quirk of fixed income assets is that the more expensive they get (the lower the yield) the riskier they become, as their duration risk rises. This created the ingredients for the perfect post-pandemic storm that struck the bond market, causing it to have one its worst years on record in 2022.

Nothing lasts forever, though. Various factors have emerged that favour taking risk. So the question for investors is: if not now, when?

As Exhibit 1 shows, government bond markets have experienced an extreme repricing since their yield lows of 2020. Since then, 10-year UK Gilt and US Treasury yields increased by almost 450 bps, with 10-year yields in Germany rising by around 350 bps over the same period. This repricing was necessary to reflect the macroeconomic backdrop of the time, and in many markets pushed yields to their highest levels since the financial crisis.

The opportunity to buy ‘risk-free’ assets at yields around 4% is not to be sniffed, especially after years of investors being forced into taking ever more risk to achieve any sort of yield or income. As a key cornerstone for any investment decision, government bond market valuations are compelling again, creating a solid foundation for future total returns.

Another support for improved valuations is that duration can again act as a risk-off hedge. With a higher starting point than in recent years, yields now have room to fall in a flight-toquality situation. We saw this when the US regional banking stresses emerged in March, and then again when First Republic failed in early May. With duration acting as a stabilising factor again, this adds to its attraction at a time of macroeconomic uncertainty.

The unprecedented fiscal and monetary stimulus in response to the Covid-19 crisis drove the initial sell-off in government bonds. There followed a jump in commodity prices in 2022, which saw inflation reach multi-generational highs, with central banks increasing interest rates aggressively in response.

We are now seeing this in reverse. After peaking in the summer of 2022, US Consumer Price Inflation (CPI) has fallen steadily from over 9% to less than 5%. As Exhibit 2 shows, headline inflation in both the UK and Europe peaked in October 2022, with prices in Europe already falling sharply. In the UK, we expect the more modest falls so far will give way to sharper declines in the coming months.

On the growth side, the picture is similar. Economic activity is slowing, with forwardlooking indicators and survey data highlighting that risks are skewed to the downside around the consensus view of a ‘managed slowdown’. Some recent data releases have stood out:

• German GDP slipping into negative territory in Q1, alongside a collapse in European lending.

• The sharp fall in UK mortgages, with net lending falling to zero in March.

• Cracks emerging in the US labour market, with the rise in weekly jobless claims and the fall in job openings, as measured by the US JOLTS report.

None of this feels consistent with the need for government bond yields to be higher. Instead, it increasingly supports the case for yields to be lower.

Falling inflation, weaker forward-looking data and tensions in the financial system all point to central bank rates not needing to move much higher. We believe we are now entering the end game for the hiking cycle of the major central banks. After almost 18 months of global rate hikes that were kicked off by the Bank of England, the lagged impact of monetary tightening is now starting to bite: the arguments against hikes and in favour of a ‘pause’ are growing.

For investors in bonds with any duration risk, this is a crucial development. Central banks reaching their terminal rate helps to put a ceiling on yields, reducing the downside risk to holding bonds. The debate over whether to favour a short duration vs. long duration stance has become more clear-cut, with conviction now higher on the need for additional interest-rate risk.

The focus will then shift to how long central banks can keep rates on hold. Given the current macroeconomic outlook, the balance of risks would be biased towards interest rates being reduced rather than increased after they pause. Again, this would be supportive for duration risk.

After the fall-out of the great-repricing of 2021-22, investors now no longer need to fear duration risk. With the risk of higher yields now much diminished – replaced with the potential for lower yields – and government bonds acting more like a ‘risk-off’ hedge again, the benefits to investors of embracing duration risk within their fixed income allocations are clear.

Of course, nothing ever moves in a straight line. The need to actively manage duration will continue to be key – both in terms of overall level of risk and which markets to get our duration from. But our starting point is to hold more rather than less duration risk.

Piece of opinion written by Colin Finlayson, Investment Manager, Fixed Income at Aegon Asset Management. 

BofA Data Finds Men’s Average 401(k) Account Balance Exceeds Women’s by 50%

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Bank of America released its 2023 Financial Life Benefits® Impact Report, revealing that the average 401(k) account balance among men is 50% greater than women’s overall ($89,000 vs. $59,000).

However, this gender imbalance is closing among younger generations. Baby Boomer (ages 58-76) and Gen X (ages 43-57) men have significantly greater account balances than women in their generations (87% vs. 53%, respectively). However, the gap between Millennial (ages 28-42) men and women is only 23%. Gen X continue to have the highest 401(k) participation rate (65%) across generations, followed by 57% of Baby Boomers and 55% of Millennials.

“The gender savings gap is an issue we can and must address. It carries personal implications for many, as well as macroeconomic implications for us all,” said Lorna Sabbia, Head of Retirement and Personal Wealth Solutions at Bank of America. “We are encouraged by the strides young, female employees are making, and want to encourage everyone to invest in their futures and leverage the workplace benefits available to them.”

Based on data across Bank of America’s proprietary employee benefits programs, which serve more than 25,000 companies and more than 6 million employees, the Financial Life Benefits Impact Report examines trends within 401(k) plans, Health Savings Accounts (HSAs), equity compensation and employee banking programs.

When looking at 401(k) savings plans as of the end of last year: Participation rates dropped only slightly to 56% from 58% in 2021; Average contribution rate declined to 6.4% from 6.6% in 2021; 26% of participants increased their contribution rate as compared to 8% of participants who decreased their savings rate; The number of participants contributing small amounts (less than $5,000) increased to 66% (from 61% in 2021), while only 9% took full advantage of their 401(k) plan by contributing the maximum amount allowed; Overall account balances declined by 17% related to stock and bond market declines; When 401(k) plans include an auto-enroll feature, most employees (85%) participate, compared to just 36% participation without this feature; Plans with auto-enroll that also have auto-increase rose (57% vs. 55% in 2021).

In addition to 401(k) savings plans, employees are leveraging other benefits such as HSAs, equity awards and other financial resources to pursue their goals. Top findings related to these benefits include more employees received equity awards in 2022, though values were lower; HSA account holders are evolving from “spenders” to “savers; financial education resources are top of mind; participants want to engage digitally.

“Employers serve an important role in ensuring that their employees are equipped with the best possible tools, resources and solutions for financial success and retirement planning,” said Kevin Crain, Head of Retirement Research & Insights at Bank of America. “We’re committed to working with employers to meet the needs of their employees, wherever they are in their financial journey.”

Candriam and New York Life Investments Partner to Expand Candriam’s offshore business

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Candriam and New York Life Investments announced their expanded partnership to deliver offshore capabilities and solutions reaching global investors whose wealth is managed in the US.

With this expanded partnership, investors in the US offshore market will gain access to certain Candriam multi-billion-dollar flagship UCITS funds with deep expertise, long track records, global investor bases and sizeable assets under management.

The range of UCITS funds cover strategies including US high yield corporate bonds, emerging market equity and debt, and thematic strategies that are actively involved in areas such as cancer research, innovative technologies, and biotechnology. In some cases, Candriam will be able to offer clones of existing US mutual funds, managed by its affiliates, for the first time to these investors.

New York Life Investments’ sales teams will use their on-the-ground relationships in the US and leverage the company’s scale to support introductory conversations with US-based broker-dealers and financial firms. This approach aims to unlock new opportunities, enabling these groups and their end clients to benefit from Candriam’s proven investment strategies.

Jac McLean, Head of U.S. Distribution at New York Life Investment Management, said: “With Candriam’s investment excellence and track record in Europe and across the globe, combined with our relationships with major platforms in the US, we are well positioned to leverage our scale, resources, and distribution channels to meet the evolving needs of US offshore clients. Our daily conversations with US advisors enable us to see first-hand how tricky market dynamics are driving their offshore clients to seek new investment ideas; these insights, in turn, empower our sales teams to work closely with intermediaries and platforms to deliver best-in-class solutions to this market segment.”

“Expanding access to Candriam’s renowned global strategies in the US offshore market aligns with our commitment to continue to provide a range of new and creative investment opportunities for intermediaries and end clients.”

Keith Dixson, Head of International Development at Candriam, continued: “There is a significant opportunity in the US offshore market to match evolving investor demand in these regions with innovative solutions. International investors are seeking high yielding strategies, along with diversifiers for their portfolios which are increasingly centered on global thematic solutions that take advantage of structural trends.”

“We look forward to expanding these solutions for clients and working closely with intermediaries to bring new opportunities to their clients in these markets. This increases our global coverage and is a natural next step to growing the business.”

Candriam is a first mover in multiple strategies. The firm was one of the first market participants to offer a range of long-term thematic investments driven by megatrends, and now has over 20 years’ experience and $16bn AUM across thematic strategies.

Candriam’s growth in the US offshore market will support ongoing sales efforts in Latin America, led by Candriam’s sales team in Spain.

The 10 most common mistakes made when investing in an ETF

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The team at FlexFunds, a fund manager specialising in the creation and launch of customised investment vehicles (ETPs), discusses in the following article the advantages of ETFs for an investor, as well as the most common mistakes that are often made and how they can be avoided:

What are ETFs, and how do they work?

One of the possibilities for investing in the stock market when you have little experience and fundamental knowledge is to do so through passive management funds, since they are usually characterized by their greater diversification and lower risk, in addition to having lower commissions.

An ETF is a publicly traded investment vehicle comprising a basket of assets such as stocks, bonds, and commodities. Its operation is simple, and the most common replicate indices, such as the S&P 500 and NASDAQ-100, metals such as gold, or sets of shares, are grouped by sectors such as biotechnology, information technology, or geographic markets.

Advantages of ETFs: liquidity, transparency, and lower volatility

In addition to lower volatility, their main advantages include being listed on the stock exchange, which enables them to be traded like shares, improving their liquidity. Additionally, their commissions are low, as the vast majority of them are passive management products, and their great transparency, as the assets that make up the ETF portfolio and their net asset value are published daily. If, in addition, as numerous studies have shown, the managers of actively managed investment funds are not usually able to outperform the indexes they replicate, their high fees are unjustified, which improves the attractiveness of ETFs for investors.

Although ETFs are an excellent investment vehicle, their high demand among beginners and experienced investors has encouraged the design of different types, from traditional to synthetic, inverse to leveraged, and different variations that can be created in a portfolio. But sometimes, the product is not known, and mistakes and misinterpretations can be made, leading to unpleasant surprises. For this reason, FlexFunds has a specialized team that can guide you through the process of structuring investment vehicles similar to ETFs, allowing you to expand access to international investors for any investment strategy you design.

The 10 most common mistakes when investing in ETFs

Among the most common mistakes, made by those who invest in ETFs, are those that are due to the lack of attention to certain key factors such as:

  1. ETF Investment Strategy

Not analyzing the investment strategy of the ETF or its composition is one of the most common mistakes since it is essential to understand what underlying the ETF follows to see if it adapts to the investor’s objectives. On the other hand, knowing what you are investing in and understanding it is decisive. It must be analyzed to what extent the return of the ETF is close to that of the index that it replicates and how consistent the monitoring is.

  1. Buyer Investment Plan

Not having a long-term investment plan, which allows the roadmap and the objectives to be pursued, as well as the risks to be assumed to be designed, can lead to making decisions based on emotions, impulsive, and not very rational. Having a roadmap and setting goals for the future, along with a contingency plan, can be a good idea to avoid disappointment.

  1. Monitor the portfolio and its evolution

Not monitoring the portfolio regularly and thinking everything will be fine is a bad decision. A certain majority of listed ETFs have a high probability of underperforming and disappearing. Portfolio monitoring is key to avoiding upsets and making the necessary adjustments.

  1. Associated expenses and commissions

Buying and selling too frequently can lead to higher-than-expected expenses, eroding profitability. Readjusting an investor’s ETF portfolio means facing sales commissions, purchase commissions for the new ETF, and taxing capital gains. The associated expenses erode the returns obtained and the gap compared to those expected.

  1. Liquidity

Not analyzing the liquidity of the ETF can generate losses or problems when it comes to recovering the money in the sale. Suppose the values that make up the index that replicates the ETF are not negotiable or are not very liquid. In that case, the ETF can be listed at a premium, in the purchase, or at a discount in the sale; the range of purchase and sale prices will be wider. It may be listed at a premium when the price is higher than the net asset value or at a discount in sales operations when the price is below said value. In these cases, buying or selling orders should be limited instead of at market prices.

  1. Structure and internal functioning

ETFs have a structure and operation that is important to know before investing because it can impact your level of risk, commissions, and losses. Assessing it in depth allows you to understand how it follows the index you want to replicate and what assets can form it, which affects risk and cost. It can be a full replica ETF (investing in the same assets as the index) or synthetic, supported by futures and derivatives issued by a third party, increasing risk exposure for both the underlying and the third party.

  1. Profitability

Assuming that the past performance of the ETF is going to be transferred to the future tends to occur in less seasoned investors since, many times, they are attracted by the announced historical performance without taking into account the period of time where it has been reached and if it has been done continuously or punctually. The consistency of this aspect in the long term should be one of the criteria to consider since if the announced return is similar to the average of the last five years, the probability of being faced with a good choice will increase. However, this does not guarantee that any change in the environment won’t affect negatively.

  1. Changes in volatility

Many times, an ETF is bought without considering the factors that drive its greater volatility, which may be derived from the volatility of the underlying or the lack of liquidity of the ETF itself. In both cases, the consequence is a widening of the price range, which can be detrimental. Another similar situation is their operation when the price variation is greater, such as during the first and last minutes of the opening and closing of the market where they are listed, respectively. Thus, avoiding trading in these time intervals helps to deal with less volatility and, therefore, less risk.

  1. The ETF Market

Care must be taken with the geographic exposure of the ETF since it can focus on a specific market that may not adapt to the investor’s interests or not mitigate the risk due to overexposure to a certain market. The net asset value of an ETF is calculated at the close of the local market, which can cause problems if you wish to operate when the associated underlying market has different hours than the market on which the ETF is listed. The latter is listed at a value other than the net asset value, therefore, increasing the premium or discount, due to the existing divergence between the prices. Therefore, it is advisable to diversify geographically and by asset class.

  1. Taxation

As with investing in other financial products, you must always take into account their taxation and the tax obligations that it entails since failure to comply with some of them can bring significant sanctions that dilute the final profitability of the ETF. In some countries, unlike index funds, transfers from one ETF to another are not exempt from tax. On the other hand, if the broker has the depository abroad, likely, it will not notify the treasury of the country where the holder resides, neither the yields nor the capital gains generated and, therefore, it is the investor himself who must make the corresponding informative declarations, being able to carry a sanction if it does not do so.

Although many other risks are associated with ETF trading, those detailed above are often the most common. Therefore, great attention should be paid to all of them, especially by those investors who could be blinded by the benefits of this product and make inappropriate decisions for their profile.

For more information on the setup and issuance of investment vehicles similar to ETFs, please get in touch with our specialists at info@flexfunds.com.

Rookie Advisors Are in Short Supply 

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The number of new advisors entering the industry is barely offsetting retirements and trainee failures as firms struggle with high wash-out rates. To help advisors succeed, firms across all channels must work to build a diverse talent pipeline and enhance rookie development programs, according to the latest Cerulli Edge—U.S. Asset and Wealth Management Edition.

Financial advisor headcount grew by just 2,579 advisors in 2022, after a rookie advisor failure rate of more than 72%. In response to high attrition, financial services firms must work on developing sustainable talent pipelines that capture a wider range of talent.

Currently, new advisor recruiting is driven largely by word-of-mouth referrals—nearly two-thirds (64%) of rookie advisors were recruited this way. This informal recruiting process makes it more challenging for firms to reach a broad cross-section of applicants.

“Rookie advisors come from all different backgrounds,” says Stephen Caruso, research analyst. “Just 15% of rookies report financial advisor as their first career and only 43% of rookie advisors have previously worked in financial services. Broker/dealers (B/Ds) and registered investment advisors (RIAs) must find new avenues for connecting with potential candidates and spreading awareness about the profession,” he adds.

Within the firm, structured training programs will be key to advisor success. Almost half (45%) of rookie advisors report that their responsibilities include managing small-balance accounts for a senior advisor, which can be a great learning opportunity for rookies who need client-facing experience. However, keeping rookies in a support role for too long can limit their growth and make it difficult for them to develop their own clients, given that 69% are responsible for building their own client base from scratch.

“A well-structured training program should gradually shift rookie advisors into production and provide a natural progression of their roles and responsibilities, so that practices can capitalize on a new resource without boxing a rookie into an operational or support role,” says Caruso. “RIA custodians and B/D home offices should actively support this transition process by providing best practices and a framework advisors can use to train future successors.”

Overall, as advisor headcount weakens, firms will need to focus their efforts on developing talent in-house. While historically, large B/Ds have driven headcount growth primarily by luring away experienced advisors from competitors, firms will need to shift gears to the growth and development of rookie advisors.

Emerging Markets are Thriving Amid a Slow Global IPO Market

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Globally, year-to-date (YTD) 2023 recorded 615 IPOs with US$60.9b capital raised, a 5% and 36% decrease year-over-year (YOY).

Larger deals came to the market in Q2 compared to Q1, even though it has been a slow recovery. These modest results reflect slower global economic growth, tight monetary policies and heightened geopolitical tensions. However, some emerging markets are booming with IPO activities, as they benefited from the global demand for rich mineral resources, their vast population, growing unicorns and entrepreneurial small- and medium-sized enterprises (SMEs). These and other findings are available in the EY Global IPO Trends Q2 2023.

While the technology sector continues to be the leading sector in IPO activities to date in 2023, IPO proceeds raised by companies of the energy sector have dwindled on the back of softer global energy prices. As well, cross-border activity has experienced a significant surge in both volume and proceeds, primarily attributed to the growing influx from China into the US and a steady flow into the Swiss Stock Exchange.

The special purpose acquisition company (SPAC) market continued to be challenged with negotiations becoming increasingly complex. There is still an exorbitant number of SPACs yet to announce or complete a de-SPAC, which are facing liquidation by the expiration period in the next six months. However, we do expect SPAC IPO activities to return to a more sensible and sustainable level that were seen pre-2021.

Overall regional performance: Q2 performed better than Q1

While the number of IPOs remained flat, the Americas region saw an increase in proceeds of 86%, raising US$9.1b, YOY. This growth was primarily attributed to a single mega spin-off IPO, which happened to be the largest US IPO since November 2021. The US experienced an uptick driven primarily by a few large deals and recent improvements in market sentiment could be a sign for more US IPO activity later in 2023 or 2024. However, despite the positive developments, it may take the overall Americas IPO market longer to recover than many market participants forecasted at the beginning of the year due to the unforeseen banking crisis in 2023.

YTD, the Asia-Pacific IPO market has maintained its position as the global leader in IPO volume and value, with an approximate 60% share. Of the top 10 global IPOs, half were from Mainland China and one was from Japan. The region saw 371 IPOs raising US$39.4b in this period, a YOY fall of 2% and 40% respectively – proceeds were down significantly due to a cooler-than-expected Mainland China IPO market, with many large IPOs waiting on the side-line. For the first time in more than 20 years, Indonesia has surpassed Hong Kong in the global stock exchange rankings by deal number.

EMEIA IPO activity has continued to shrink, with 167 listings raising US$12.4b YTD, a 12% and 50% fall YOY, respectively. Despite this, the region kept its position as the second largest IPO market with 27% of all IPO deals, and saw the second biggest IPO at US$2.5b. India exchanges also broke a two-decade streak, jumping to the top spot in deal count. However, inflation levels in most European countries remain challenging, and the lack of liquidity continues to hold back IPO activity.

2H 2023 outlook: pipeline still in holding

A resurgence in global IPO activity is anticipated to start late 2023 as economic conditions and market sentiment gradually improve with the tight monetary policy entering its final stage.

After the one mega spin-off IPO debut in the US that outshone all other traditional IPOs, there are strong indications that this trend will persist. Large corporate spin-offs and carve-out listings will likely surface across major markets, as companies seek to create more shareholder values through divestiture while investors lean toward mature, profit-making businesses amid a yet-to-revive IPO market.

Understanding the different requirements of each IPO market that companies plan to enter is essential to meet investor expectations and avoid potential delays due to regulatory issues. Investors will continue to be more selective, orienting toward companies with solid fundamentals and proven track record. All options, from alternative IPO processes (direct listing or de-SPAC merger) to other financing methods (private capital, debt or trade sale), should be considered.

Big Banks Are Well Positioned to Weather a Severe Recession, Fed says

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The Federal Reserve Board on wednesday released the results of its annual bank stress test, which demonstrates that large banks are well positioned to weather a severe recession and continue to lend to households and businesses even during a severe recession.

“Today’s results confirm that the banking system remains strong and resilient,” Vice Chair for Supervision Michael S. Barr said. “At the same time, this stress test is only one way to measure that strength. We should remain humble about how risks can arise and continue our work to ensure that banks are resilient to a range of economic scenarios, market shocks, and other stresses.”

The Board’s stress test is one tool to help ensure that large banks can support the economy during economic downturns. The test evaluates the resilience of large banks by estimating their capital levels, losses, revenue and expenses under a single hypothetical recession and financial market shock, using banks’ data as of the end of last year.

All 23 banks tested remained above their minimum capital requirements during the hypothetical recession, despite total projected losses of $541 billion. Under stress, the aggregate common equity risk-based capital ratio—which provides a cushion against losses—is projected to decline by 2.3 percentage points to a minimum of 10.1 percent.

This year’s stress test includes a severe global recession with a 40 percent decline in commercial real estate prices, a substantial increase in office vacancies, and a 38 percent decline in house prices. The unemployment rate rises by 6.4 percentage points to a peak of 10 percent and economic output declines commensurately.

The test’s focus on commercial real estate shows that while large banks would experience heavy losses in the hypothetical scenario, they would still be able to continue lending. The banks in this year’s test hold roughly 20 percent of the office and downtown commercial real estate loans held by banks. The large projected decline in commercial real estate prices, combined with the substantial increase in office vacancies, contributes to projected loss rates on office properties that are roughly triple the levels reached during the 2008 financial crisis.

The $541 billion in total projected losses includes over $100 billion in losses from commercial real estate and residential mortgages, and $120 billion in credit card losses, both higher than the losses projected in last year’s test. The aggregate 2.3 percentage point decline in capital is slightly less than the 2.7 percentage point decline from last year’s test but is comparable to declines projected from the stress test in recent years. The disclosure document includes additional information about losses, including firm-specific results and figures.

For the first time, the Board conducted an exploratory market shock on the trading books of the largest banks, testing them against greater inflationary pressures and rising interest rates. This exploratory market shock will not contribute to banks’ capital requirements but was used to further understand the risks with their trading activities and to assess the potential for testing banks against multiple scenarios in the future. The results showed that the largest banks’ trading books were resilient to the rising rate environment tested.

The individual results from the stress test factor directly into a bank’s capital requirements, mandating each bank to hold enough capital to survive a severe recession and financial market shock. If a bank does not stay above its capital requirements, it is subject to automatic restrictions on capital distributions and discretionary bonus payments.

Asset Manager Fintech Dominion Brought Together 100 Financial Advisors in Buenos Aires

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Dominion Capital Strategies held a conference in Buenos Aires where it brought together 100 advisors from the Americas, a meeting that also served to introduce its partner Pacific Asset Management.

The event, held on May 3th and 4th, was attended by Pacific Asset Management CEO Matt Lamb and several of the Portfolio Managers, such as Christian Cole, from the Global Trends team, and Dani Saurymper, who presented one of the novelties of the Longevity & Social Change fund, which is categorized by the PRI as an Article 8 fund.

With some 20,000 accounts created worldwide, the Guernsey-based firm is a strong investor in technology (50% of employees are IT) and at the Buenos Aires event presented new investment options with a focus on multi-market strategies.

The company has two types of investment solutions, a recurring contribution account starting at $250 per month for a given term, and an investment account starting at $10,000, with a focus on flexibility and liquidity.

The investment alternatives are proprietary strategies, a core multiasset alternatives, a protected capital strategy and an S&P500 tracker, along with other individual solutions. Pacific Asset Management has managed the funds (17 in total) since 2023.

The group of companies is licensed and regulated in multiple jurisdictions, such as the GFSC in Guernsey.