Women Express Greater Concerns about Cost of Living and Inflation than Men

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A recent survey by BMO Real Financial Progress Index has found significant disparities between men and women when it comes to concerns about cost of living and inflation.

Over the past three months, 61% of women expressed concern about the cost of living, compared to 54% of men. Similarly, 59% of women voiced concern about inflation, compared to 52% of men.

The survey also found that women are more likely than men to identify certain expenses as barriers to making real financial progress. Specifically, family-related expenses and monthly bills are more likely to be seen as obstacles by women (24% vs. 21% of men and 38% vs. 30% of men, respectively).

The BMO Real Financial Progress Index finds that more women than men say they share financial responsibilities with their partners, such as setting financial goals for the family (68 percent of women compared to 57 percent of men) and managing day-to-day finances like paying bills (50 percent of women compared to 44 percent of men).

Additionally, women are more likely to experience financial anxiety when it comes to keeping up with monthly bills (67% vs. 60% of men).

Overall, women are also more likely to be concerned about their financial situation, with 44% saying their concerns have increased over the last three months, compared to 35% of men.

Furthermore, women are less likely to feel in control of their finances, with 82% of men saying they feel in control compared to 71% of women.

Despite recent strides made by women in terms of pay, education, and workplace representation, these findings suggest that there are still ongoing challenges when it comes to achieving financial security and long-term wealth.

This article has been prepared with information from BMO, to see the full report of the firm click on the following link.

Three Lessons We Learned in 2023: Insights for the Future

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Pixabay CC0 Public Domain

In the journey of life, we are constantly learning and growing. Each lesson we learn is a steppingstone toward a brighter future, with fewer mistakes and greater rewards, if we are attentive and apply those lessons. Last year, we gained a wealth of valuable insights; here are the three most significant.

The first one is about investment income – without pain, there’s no gain.

For years, investors have been disappointed by the low income generated by traditional interest-bearing investments. This trend led market experts to believe that the golden age of fixed-income investing was a thing of the past. However, inflation and the Federal Reserve’s approach to slowing inflation using increases have changed the landscape. In 2022, inflationary pressures led to a significant increase in the cost of living, as prices reached a 40-year high. In response, the Federal Reserve took action to maintain price stability and low unemployment. During 2022, they raised the Fed Funds rate seven times from .25% to 4.50%. In 2023, they increased rates four times from 4.50% to 5.50%. The short-term pain of inflationary pressure and the Fed’s interest rate increases rewarded investors with the higher income they’ve sought for years as government and corporate borrowers increased the coupons on their debt offerings.

Our second learning is about how music soothes the soul and the economy.

While a musician’s tour usually lines the pockets of a small number of individuals that includes headliners and promoters, that wasn’t the case when Taylor Swift and Beyonce hit the road in 2023. According to Pollstar, Time’s Person of the Year, Taylor Swift’s Eras Tour was the highest grossing tour in history, bringing in a whopping $1.04 billion in ticket sale revenue, but the big bucks didn’t stop there. The New York Times estimates that the tour’s North American stops will generate more than $5 billion when the concertgoers’ expenditures on hotel rooms, travel, clothing, food, concert-related parties, manicures, tattoos, and Swift-related activities are tallied up. According to Dan Fleetwood, President of QuestionPro, “if Taylor Swift were an economy, she’d be bigger than 50 countries”. Beyonce also toured last year with her Renaissance tour. With more than $575 million in ticket sales, Forbes estimates that by the end of the tour, Beyonce’ will have contributed $4.5 billion to the American economy.

Next time we anticipate an economic downturn, instead taking the age-old approach of flooding the system with money, igniting inflation, and then dealing with the harsh medicine of interest rate increases, let’s just “shake it off” and call out “all the single ladies”, and the partnered ones too.

Finally, 2023 has taught us that ‘It’s about my economy, not the government’s’. The economy recovered during 2023, and we’ve got the numbers to prove it:

    • During the third quarter, the Gross Domestic Product (GDP) grew at an annual rate of 5.2 percent, indicating a strong expansion in economic activity.
    • November’s unemployment rate dropped to 3.7 percent, reflecting a healthy labor market and increased job opportunities.
    • The average inflation rate for 2023 was 4.2 percent, a far cry from the prior year’s 8 percent average. This indicates a more stable and controlled price environment.
    • The year’s biggest shopping season which included, Black Friday, Cyber Monday and the December holidays, proved to be another record for online sales.

Yet, even with positive results like those, Americans grumbled for much of the year, complaining that the bad economy was making their lives worse.

Both the government and those in the financial services industry often assume that Americans form their assessment of the economy based on regularly released data. However, this is not the case. Instead, our perception of the economy is primarily influenced by our personal economic situation. The Financial Times and University of Michigan Ross School of Business proved that point when they reported that 74% of respondents to a recent poll said that rising food prices were having the greatest impact on their personal finances.

Every year brings its fair share of positive and negative news, unexpected events, and natural disasters. In this way, 2024 will be no exception to this pattern. Throughout history, individual investors have often needed help to make wise long-term decisions in the face of rapidly changing circumstances. To navigate the challenges and opportunities that they will face in the next 12 months and beyond, they’ll need your experience, expertise, and wisdom as a financial advisor.

 

 

Opinion article by Jan Blakeley Holman, Director of Advisor Education at Thornburg Investment Management

State Street Ventures into the US Offshore Business

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Heinz Volquarts, Head of Americas International (Canada and Latam) al State Street | LinkedIn

State Street has entered the US Offshore business after solidifying its position in Latin America. With approximately $10 billion in Mexico and a presence of $7 billion in the Andean region, through Credicorp Capital, the ETF-specialized manager meets a growing demand from banks, Heinz Volquarts, Managing Director, Head of Americas International (Canada and Latam) of the firm, told Funds Society.

Volquarts highlighted that US Offshore “is a really new business” for the firm and that it emerged as a response to major financial entities in the U.S., which were inquiring about products for non-residents.

State Street spent the year 2023 laying the groundwork for the business to start a “proactive” strategy from 2024 onwards. For this, they have promoted Diana Donk as the person in charge of ETF sales for the US Offshore business. 

Latin America

The executive reviewed the importance of the Americas market (excluding the U.S.) in terms of assets, highlighting Canada as the largest, followed by Mexico with about $10 billion, and then Chile, Peru, and Colombia, which together are close to $7 billion dollars.

Volquarts talked about the work they do alongside Credicorp Capital as a distributor and highlighted a synergy in the “sales effort and leadership vision”. The State Street team works in conjunction with the distributor: “we travel with them probably five or six times a year,” he explained.

Mexico, on the other hand, has a team in which Ian López is responsible for the business. They have around 83 products listed in the U.S. market that trade on the SIC of the Latin American nation. In addition, a list of 35 UCITS funds in the same country.

Regarding investor preferences, both in Mexico and US Offshore, the expert said that accumulation classes are the most requested strategies, however, not all State Street products are of these characteristics.

Consequently, Volquarts emphasized that if there is demand, they “could launch a new accumulation class in Mexico” and commented that a very effective way to expose oneself to the S&P 500 with UCITS is through the SPYL (TER=3bps) with State Street’s accumulation classes.

Regarding Chile, he said that UCITS are no longer the market’s biggest concern. While it is a very new regulation, the new double taxation treaty with the U.S. allows “to use U.S. products,” thus opening up a “more attractive” proposal, he argued.

Meanwhile, in Colombia and Peru, the opportunity for UCITS is more latent. In the Caribbean country, about 80% of the assets are housed in sectorial ETFs. In an election year in many influential countries such as Mexico, the U.S., India, and Russia, to name a few, investors “look for ways to position themselves depending on the market.” 

State Street is a manager heavily skewed towards equity ETFs given the enormous relevance of the SPDR ETF and all products related to the S&P500. Latin America follows the same pattern, and 90% of its assets are in equity ETFs, compared to 10% in fixed-income ETFs.

Finally, the Managing Director, Head of Americas International (Canada and Latam) of the firm highlighted “the success they have had with ESG strategies”. For example, one of their products, EFIV, has reached $1 billion in assets. Volquarts estimated that 70% has been sold to pension funds in Latin America, mainly in Chile, Colombia, and Mexico.

Vontobel SFA Expands Team in Miami with Alejandro Botero

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Photo courtesyAlejandro Botero

Vontobel Swiss Financial Advisers (Vontobel SFA) has appointed Alejandro Botero as Senior Relationship Manager to provide Latin American investors with diversified wealth management solutions.

With nearly 20 years of experience in relationship management and business development, Botero will focus on advancing Vontobel’s private client relationships with investors in Latin America, primarily in Colombia, Peru and Argentina.

Prior to joining Vontobel, Alejandro was a relationship manager and wealth strategist at BBVA Compass / PNC Private Banking, where he managed portfolios for Latin American and US clients and customized investment strategies and asset allocations based on client needs. Previously, he held senior roles at Santander Private Banking and HSBC.

He studied Economic Sciences at Pontificia Universidad Javeriana in Bogotá, Colombia.

“We are committed to helping investors achieve their financial goals through global investment diversification and customization,” said Victor Cuenca, Head of Vontobel SFA Miami Branch. “We are pleased to welcome Alejandro to our team in Miami and look forward to strengthening our reach to investors in Latin America.”

Vontobel SFA offers US and Latin American investors tailored solutions, centered on jurisdictional, geographic and currency diversification. Headquartered in Zurich, with offices in Geneva, New York and Miami, Vontobel SFA is the largest Swiss- domiciled wealth manager for US clients.

Pictet Asset Management: Credit Where Credit is Due

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Investors can’t afford to ignore credit, especially European investors.

We find that a balanced mix of euro investment grade credit and euro high yield credit would have outperformed an equally balanced allocation split between German government bonds and European equities over the period since a European high yield index was first launched in 2001. What’s more, the credit portfolio’s return and risk profile has been better in both rising and falling interest rate environments.

Overall, credit offers better Sharpe ratios – the balance between risk and return – than the more traditional asset classes. So, for instance, euro investment grade credit has offered better returns at lower volatility than German government bonds – the standard “risk-free” instrument. And high yield credit has generated considerably better returns for substantially lower risk than European equities. At the same time, investment grade and high yield credit have had substantially lower maximum drawdowns than German government bonds and European equities respectively (see Fig. 1), while corporate failure is more catastrophic to equity investors than to corporate bond holders.

 

Figure 1 – Performing credit
Asset class summary 2001-23

*Average return of the 5% worst months over the 2001-2023 period. Source: Pictet Asset Management Developed Markets Credit, ICE BofA, Bloomberg. Data covering period 31.01.2001 and 30.11.2023.

 

And unlike investing in equity where market timing can make a very significant difference in long-run returns, the fact that bonds come with fixed maturities makes market timing less important. Economic growth matters less to holders of corporate debt than it does to owners of equity. And while credit is often seen as a hybrid asset class, showing both bond- and equity-like characteristics, that’s also true of equities, especially in some sectors.

In a nutshell, investors need to re-think the role of credit in their portfolios. Credit should be core.

When investors think of credit, they tend to focus on risk. Investment grade credit is seen in light of corporate uncertainty while government debt represents safety.  High yield is often associated with default risk whereas equities represent opportunities such as growth and value. To be sure, investors ought to balance opportunities and risks. The evidence shows that credit offers a better risk-reward profile than corresponding equities and government bonds.

History shows investing in credit delivers steady returns. The asset class’s drawdowns have been temporary, and have always been followed by strong performance rebounds, rewarding the patient investor.

Since 2001 (when data was first available) European investment grade has generated superior returns to German bunds for a similar level of annual volatility, resulting in a significantly better Sharpe ratio.

Over the same period, European high yield credit has generated better returns at lower volatility than European equities, which have failed to compensate investors for the very high level of risk taken, resulting in a poor Sharpe ratio, and have been exposed to extreme negative returns, as shown by the maximum drawdown and expected shortfall.

As a result, replacing German government bonds with European investment grade credit and European equities with European high yield credit delivers 0.77 percentage points more in annual return, with significantly less volatility and less drawdown. At the same time, the credit portfolio posts smaller average losses during the worst market downturns (see Fig. 2).

 

Figure 2 – A fine balance
Asset class combinations, 2001-23
Source: Pictet Asset Management Developed Markets Credit, ICE BofA, Bloomberg. Data covering period 31.01.2001 and 30.11.2023.

 

This result remains the same whether central banks are raising interest rates or cutting them (see Figs. 3 and 4). Setting the 10-year German sovereign rate as the reference rate, the properties of the two portfolios have been computed during the years when the interest rate has been increasing (10 years out of 23) and during the years when the interest rate has been decreasing (13 years out of 23). In both environments, the credit portfolio exhibits superior returns with lower volatility, and therefore a better Sharpe ratio, in comparison to the mix of government debt and equities.

 

Figure 3 – When rates go up…
Blended portfolio performance in rising rate years
Pictet Asset Management Developed Markets Credit, ICE BofA, Bloomberg. Data covering period  31.01.2001 and 30.11.2023.

 

Figure 4 – …and when they fall

Blended portfolio performance in declining rate years

Pictet Asset Management Developed Markets Credit, ICE BofA, Bloomberg. Data covering period  31.01.2001 and 30.11.2023.

 

When faced with interest rate and growth risk, investors also often downplay credit as a hybrid asset class relative to “pure” equities and government bonds. That’s a mistake. In reality, all of these asset classes incorporate opportunities and threats that are related to interest rates and systemic risks. Credit, however, offers better risk-adjusted returns and stronger recover rates after temporary downturns.

 

Opinion article by Ermira Maricka, Head of Developed Markets Credit at Pictet Asset Management.

 

 

Discover how to optimise your portfolio with European credit here.

India’s Changing Demographics Offer Investment Opportunities, but Beware of High Valuations

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emergentes
Pixabay CC0 Public Domain Author: Pexels from Pixabay

India is known for its vibrant economy, diverse sectors and robust growth potential. The country recently surpassed China as the most populous in the world, making it an attractive destination for investors looking to capitalize on its dynamic market. In recent years, India has witnessed a transformative wave of economic reforms, coupled with a thriving entrepreneurial spirit, paving the way for interesting investment prospects.

Indian equities offer a wide range of sectors that present compelling opportunities for investors seeking long term growth from technology and consumer goods to health care and housing. Josh Rubin is portfolio manager at Thornburg Investment Management and recently visited the country.

The Modi-led government, which actually faces General election here in just a few months, has done a lot to try and bolster the Indian economy over the past several years. What is there still left to do and what are some of your general thoughts around the upcoming election?

The spring elections are very important for both capital markets and corporate confidence. For the next five years, we would be entering Modi’s third term. His first term was about learning how to govern. That coalition had never governed before. The second term was more about solidifying the policies they’ve been putting in place.

I think the third term would be about finalizing the muscle memory of the whole economy for how to operate going forward. What we’ve seen over time are improvements that reduce friction for interstate commerce, and that’s really important in a country as big as India, along with tax collection, which reduces the informal economy, the gray market economy, and strengthens the formal economy along with land use policies that make development easier.

During these two terms, corporates and individuals were really learning how to adapt their lives to the new policies. Stability in the third term can really make all of those a permanent part of the Indian economic structure.

Although India has plenty of attractive opportunities, it also has a great disparity between the wealthier urban cities and the poor rural areas. How do you think about the contrast between those two groups and how does it factor into your investment thinking?

Demographics are definitely an important starting point for any Indian equity investor. But we believe it’s important to think about the construct today compared to what it will look like in the future. Today, the population looks like the base of a pyramid at its lowest end. The greatest part of the population is at poverty level, earning enough to eat, but not to do much more for the next decade.

We think that pyramid will turn and look much more like a diamond, meaning the middle-income levels should be about 50% of the population a decade from now rather than 25% today. The other part of it is we certainly know population growth, but it’s not just the absolute number of people in the country. A lot of it has to do with household growth.

Historically, India has been a country of multigenerational households where the grandparents, the parents and the kids live together. The household might be eight or ten people. With rising incomes, we have begun to see just single-family units living together. As result certain aspects of consumption are growing much faster than the population, both because of income growth and because of the increasing number of households as households get smaller.

What are some areas of the Indian economy that really stand out right now?

The good news is the top-down picture for investing in India is very attractive and the breadth of offer opportunities is very high across all sectors. There are interesting themes and great companies to invest in. The bad news is valuations are also very high in India today. Therefore, discipline and caution are important when thinking about the entry point for stocks, since both on an absolute basis and relative to the rest of emerging markets valuations are elevated.

We are finding opportunities in areas that pivot around a popular theme. For instance, people generally think of the consumer as being discretionary consumption in stores, retail and so forth. But housing in India certainly is a consumer product that has been underinvested in for the last decade. What’s really interesting is that across the rest of the world, we’ve seen rising home prices and now peak interest rates, making housing affordability at an all-time low across the world. But in India, even after a decade of underinvestment, house prices have basically been stable while incomes have been growing. Affordability is at all-time highs in India today.

Indian Consumers are ready to buy a new home, especially after Covid. It’s a catalyst for people to move out of a ten-person household into just a single-family household. Some home builder companies believe they have the opportunity for 15 to 20% growth over the next decade at multiples that are in line with or sometimes even cheaper than other consumer discretionary companies.

Another area of underinvestment but with a long runway for growth is health care. India has been a great training ground for doctors and other healthcare professionals for the rest of the world for the last 20 to 30 years. But today, with rising incomes, there’s a chance for those professionals to stay in country and provide health care to the general Indian population. Looking at a variety of metrics, primary care and insurance coverage are generally low, so we think there are very attractive opportunities for investing in the healthcare space in India today.

The third area we think still has growth potential the financial sector. There are three parts to it. One is for India’s growth; corporates still need to borrow to invest in additional capacity for anything they’re providing. The second area is wealthier and middle income households that are growing more sophisticated in the needs they have for financial products. And finally, that bottom of the pyramid we discussed needs products and financial inclusion as it moves into the middle of the diamond.

US Deal Activity is Providing Investors with New Opportunities to Deploy Capital

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Pixabay CC0 Public DomainAuthor: Alessandro D'Andrea from Pixabay

U.S. equities maintained their upward trajectory in February as the S&P 500 breached 5,000 for the first time. Building upon January’s momentum, the S&P 500 delivered its best two-month performance to start a year since 2019.

Playing a pivotal role in this sustained performance were several of the mega-cap tech companies often referred to as the “Magnificent 7”, notably Nvidia (NVDA), Amazon (AMZN), and Meta (META). Their earnings were bolstered by tailwinds in artificial intelligence, accelerated growth trajectories, and strategic initiatives aimed at enhancing shareholder value.

While the Federal Reserve is unlikely to raise rates further, the timing and pace of potential rate cuts remain uncertain. Federal Reserve Governor Christopher Waller stated that he would require “at least another couple of months” of data to determine if inflation has sufficiently moderated to justify interest rate reductions. The Fed will persist in monitoring incoming data and progress towards achieving their 2% inflation target. Despite investor eagerness for imminent interest rate cuts, initiating them prematurely could potentially lead to a resurgence of inflation.

The Russell 2000 outperformed the S&P 500 in February, but remains below its all-time high set in November 2021. We anticipate a favorable environment for smaller companies in 2024 as post-peak rates and necessary consolidation in certain industries like media, energy and banking should lead to a more robust year. M&A activity began the year strong, setting the stage for catalysts to emerge within our portfolio of companies.

Merger arbitrage performance in February was bolstered by deals that made significant progress towards completion. Immunogen, a biotechnology company developing targeted therapies to treat cancer, was acquired by Abbvie in February for $31.26 cash per share, or about $9 billion. Shares of Immunogen traded at a 6% discount to deal terms days before the deal closed, reflecting the uncertainty over whether the US FTC would launch a phase 2 antitrust investigation, but the FTC approved the deal and it subsequently closed on February 13.

Deal activity was vibrant in February, giving investors many new opportunities to deploy capital including: Masonite’s $4 billion deal to be acquired by Owens Corning, Catalent’s $16 billion deal to be acquired by Novo Holdings, Cymabay Therapeutics’ $4 billion deal to be acquired by Gilead, and Everbridge’s $2 billion deal to be acquired by Thoma Bravo. Deal activity in 2024 has improved compared to 2023, and attractive spreads on deals have created additional opportunities to generate absolute returns.

February was a relatively good month for the convertibles market. With a few notable exceptions, many companies reported earnings and issued guidance that was better than anticipated moving underlying equities higher. Additionally, there has been a bid for convertibles that will need to be refinanced in the coming year. In some cases, this has been from the issuer themselves, but we have also seen a number trade higher in anticipation of a refinancing round. Issuance has picked up substantially with many companies coming back to our market to refinance these upcoming maturities. This new paper has largely been attractive, offering higher coupons and a greater level of equity sensitivity.

 

Opinion article by Michael Gabelli, managing director at Gabelli & Partners 

Artificial Intelligence: Psychotropics for nerds

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Photo courtesy. FII Priority Miami - Gavin Baker and Antonio J Gracias

In a conversation at FII Priority Miami 2024, Gavin Baker, Managing Partner and CIO of Atreides Capital, LP, and Antonio J Gracias, Founder, CEO, & CIO of Valor Equity Partners, delved into the intricacies of investing in the field of artificial intelligence (AI), one of the main topics of the conference. Their discourse provided a panoramic view of the AI landscape, offering insights into the future of technology and investment strategies.

Gavin Baker illuminated the evolution from mini computers to PCs, then to mobile and cloud computing, positioning AI as the current fundamental platform shift. He emphasized the strategic importance of focusing on the infrastructure layer for initial investments in AI, highlighting the significant role of GPUs in this new era.

Gracias’ analogy of GPUs as “psychotropics for nerds” resonates with the hype in the investment industry toward AI. Gavin Baker, who ran Fidelity’s OTC portfolio with US$17 billion under management before founding Atreides in 2019, compared the current situation to a high-end restaurant where the star chef is powered by AI provided by an Nvidia’s GPU which makes him 50 times faster than four years ago, while the rest of the staff is working at yesterdays speed. “So the food needs to be delivered, the sous chef needs to prepare it. And because the GPU has gotten so much faster, it is doing nothing most of the time. 70% of the time, it’s doing nothing. It’s just drawing power”, explained Gavin, “so our kind of shared core infrastructure level thesis is we’re investing in things that increase the GPU utilization. Because if you can take that GPU from being utilized 30% of the time to 60% of time you can double the output of that restaurant, or that AI factor.”

Antonio J Gracias pointed to the real value in data and reinforcement learning, signifying a pivot towards investing in companies excelling in these areas. This perspective aligns with the broader vision of harnessing AI’s capabilities for transformative purposes across various sectors.

The conversation also touched on the valuation dynamics of foundational model companies within the AI sphere. Baker suggested that companies integrated with major internet platforms and possessing proprietary data stand to be immensely valuable, predicting that entities like Google, Meta, Microsoft, and OpenAI, along with emerging players like xAI (Grok), could dominate the landscape.

How to avoid P doom

Furthermore, the dialogue addressed the critical topic of regulation within the AI domain, advocating for a multipolar AI ecosystem to prevent the consolidation of power and ensure a diversity of AI entities. “We want a multi polarity of AIs, we don’t want to live in a world where there’s one AI superpower or two AI superpowers,” argued Gavin. He pointed out that any survey of the top thousand people working on AI for the probability that AI is an extinction level event for humanity (P doom), consistently agrees on a 15% chance. “So that’s pretty high”, he said. “The most important thing is to lower the odds of that 15% and improve the odds of the 85% being awesome. I think if we have many AIs, it increases the odds that at least some of them are friendly to us as humans.”

White-Collar vs Blue-Collar Effect of AI

Lastly, the potential impact of AI on both white-collar and blue-collar jobs was discussed, with predictions of significant disruptions and opportunities arising from the integration of AI into various labor sectors.

Gavin argued that there has been a lot of focus on the impact of AI on knowledge work and white collar workers, “but I think when we see AI dropped into a very functional humanoid robot, there may be an immense impact on blue collar work, and this may seem very funny to historians, that anyone was worried about inflation in front of this kind of deflationary tidal wave.”

FII Priority Miami is organized by FII Institute, is a global nonprofit reflecting on ideas and real-world solutions and actions in four critical areas: Artificial Intelligence (AI) and Robotics, Education, Healthcare and Sustainability. It is backed by Saudi Arabia’s Public Investment Fund (PIF), and counts with numerous strategic partners including some of the most relevant names in the asset management industry (Franklin Templeton and State Street, among others).

 

Cherry Bekaert: Clearer Skies Emerge for Private Equity Amidst Challenges

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Tecnología y salud entre pequeñas y medianas ofertas
Pixabay CC0 Public Domain

Cherry Bekaert has published its annual year-end Private Equity Industry Report outlining important developments that impacted the private investment markets in 2023. The report found many headwinds that slowed private equity dealmaking in 2022 continued to impact the industry over the course of last year, causing deal activity to decline sharply for the second year in a row. The M&A environment is now grappling with its longest decline in over a decade.

The report highlights the many challenges faced by the sector over the last 12 months and features data provided by PitchbookTM and other sources, including proprietary Firm data.

Though many of the challenges were carryovers from the previous year (persistent high interest rates and inflation; a stark valuation gap between buyers and sellers; and general market upheavals), other emerging issues dampened deal activity.

Nevertheless, private equity as an asset class continued to show its resiliency as sophisticated dealmakers deployed innovative strategies to keep transaction activity on par with historic pre-pandemic averages.

The report unveiled several key findings, underscoring a trend where, for the second consecutive year, deal activity has trended downward. This trend was characterized by a sharp decline in deal volume and contracting valuation multiples, highlighting the challenges pervading the mergers and acquisitions (M&A) landscape. Deal makers have had to come to terms with the higher-for-longer interest rate environment, further complicated by the fallout from early 2023 bank collapses. These events have not only created longer-term liquidity concerns but also increased capital costs for private investment funds.

The landscape was further complicated by increased regulatory activity, generating uncertainty for limited partners (LPs) and general partners (GPs) alike. This uncertainty stems from various factors, including rulings from the Securities and Exchange Commission (SEC) and mandates related to Environmental, Social, and Governance (ESG) criteria, leading to increased scrutiny from regulators towards fund managers and investors.

Despite these challenges, the report identifies a few bright spots and pockets of opportunity that have generated optimism within the sector. Notably, the proliferation of carve-out and add-on deals has acted as a shock absorber for middle-market deal activity, helping to sustain momentum in the deal market despite significant headwinds. Furthermore, private credit has advanced its market share of M&A loan funding. As traditional lender sources have scaled back on debt funding, direct lending has stepped in to fill the financing gaps left by the pullback in syndicated debt financings.

The middle market, in particular, has shown resilience and outperformed other segments. Although not entirely immune from the stagnation affecting the deal-making world, the decline in the middle market was less acute compared to the broader M&A market. Additionally, the technology and professional services sectors have emerged as focal areas for private equity investment. Technology, especially with the growing segment of artificial intelligence (AI), accounted for nearly one-third of leveraged buyout activity. Meanwhile, professional services have garnered increasing interest from private equity investors, with particular emphasis on categories such as Certified Public Accountant (CPA) firms, wealth management, and consulting firms. This detailed landscape provides a comprehensive overview of the current state of M&A activity, highlighting the challenges, adaptations, and sectors of growth within the industry.

If you want to read the full report you can access the following link.

 

Small Companies: Pay More Attention to its Convertibles

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Pixabay CC0 Public Domain

U.S. equities were mostly higher for the month of January, with the S&P 500 hitting a fresh all-time high for the first time since early 2022. Stocks seamlessly extended their positive momentum from Q4 into the New Year, sustained by the stellar performance of several “Magnificent 7” names, including Nvidia (NVDA), Netflix (NFLX), and Meta (META). Despite caution prompted by overbought conditions lingering from year-end, the market continues to exhibit its resilience.

On January 31, the Federal Reserve maintained interest rates at their current levels while indicating a reluctance to initiate rate cuts as soon as March. During the press conference, Fed Chair Jerome Powell stated that the Fed needs to see more evidence that falling inflation is sustainable and that there is a ‘ways to go’ before declaring that a soft landing has been achieved. Investors have been encouraged by leading indicators such as the PMI, corporate results, and commentary, suggesting that an economic deceleration is already well underway. The next FOMC meeting is March 19-20.

Small-cap stocks began the month trailing behind large-cap stocks, which is unusual considering small-caps have historically performed well in January. The lackluster performance of small-caps can be largely attributed to their significant surge in December. However, we anticipate a favorable environment for smaller companies in 2024 as post-peak rates and necessary consolidation in certain industries like media, energy and banking should lead to a more robust year. M&A activity began the year strong, setting the stage for catalysts to emerge within our portfolio of companies.

Merger Arbitrage investors were crimped by widening spreads following the termination of Avangrid’s acquisition of PNM Resources and the overhang from two deals blocked by regulators – JetBlue’s $7.5 billion acquisition of Spirit Airlines and Amazon’s $1.4 billion acquisition of iRobot.  Spreads widened in sympathy on deals subject to extended antitrust reviews, including Albertsons, Capri, Hess/Chevron, Pioneer/Exxon. Our belief is that these deals will be completed allowing investors to earn greater returns going forward.

In the case of PNM Resources, after the companies received all other required approvals, the companies appealed New Mexico’s utility regulator’s rejection to the state’s Supreme Court. Avangrid then elected to let the merger agreement expire in January instead of waiting for a decision from the Supreme Court. While the outcome was disappointing, the downside in PNM was judged limited, and we sized the position appropriately. Furthermore, PNM provided updated guidance in February that positions it as one of the fastest growing utilities in the US and deserving of a premium valuation. We expect to work out of PNM in the coming months as shares narrow the valuation discount.

While equity market performance in January was driven by a few mega-cap tech companies, the convertible market has many small and mid-cap issuers, with opportunities for asymmetrical returns over the longer term. We continue to see a large number of maturities that will need to be addressed this year, which we expect to benefit convertible issuance. With interest rates remaining higher, convertible’s relatively low interest rates should make them a compelling option as companies look to refinance without a significant increase in interest expense. Recent issuance has come at attractive levels for investors while still offering companies an attractive cost of capital. Many of the new issues over the past 6 months have performed well out of the gate, and remain compelling portfolio holdings as they generally have lower premiums than many existing issues.

 

Opinion article by Michael Gabelli, managing director at Gabelli & Partners