Week of June 26, 2023
Dec Mullarkey, CFA , Managing Director, Investment Strategy and Asset Allocation
It is no secret that U.S. banks are tightening lending standards. In fact, the Senior Loan Officer Opinion Survey scores this on a quarterly basis. Right now, this index is telegraphing a very tight-fisted bunch of bankers. And dealmakers are seeing the effects firsthand in both private and public markets.
Large private equity (PE) firms that normally favor megadeals partly financed with debt are now opting for smaller deals financed mainly with equity. The average value of a PE-backed deal is the lowest since the global financial crisis. However, the number of transactions is one of the highest in three decades as PE still has money to spend, but is focused on smaller acquisitions.??
On the public side, initial public offerings are also seeing one of the most inhospitable environments since the Global Financial Crisis. A major reason for this is a mismatch between the price investors are willing to pay and the value owners believe they deserve. Before 2022, the IPO market quickly snapped up young growth companies. Investors are now demanding more cash flow discipline and believe owners haven’t made that adjustment. This should force some companies to stay private longer until they build more scale.???
Lenders and markets have certainly turned cautious, demanding more evidence about cash flow prospects. And at this stage in the valuation cycle that’s probably a healthy reset.?
Source: Bloomberg, Wall Street Journal, 2023.
Andrew Kleeman , Senior Managing Director, Head of Corporate Private Placements
The state of the investment grade private credit market at mid-year depends on who you ask. Numerous deal sources that we speak with describe the market as “uncertain.” Agents comment that issuers don’t like the current rate environment, and if they have to raise capital they prefer to issue shorter tenors.
However, from our vantage point, investors appear to be looking for duration. Market issuance for tenors shorter than 10 years has been very robust so far this year and competition generally seems thinner in these durations. We also hear that some investors are less active because of performance or allocation dynamics in their own portfolios or slower product sales, or because they have had a strong first half and are now more selective. Agents tell us that pricing a deal in today’s market is tough because of the wide dispersion in investor bids. All of this stated uncertainty has resulted in promising investment opportunities so far this year, in our view. We have been busy and have seen attractive pricing and allocation prospects for the first six months of 2023. As we move into the second half of the year our strategy remains the same, to capitalize on the perceived uncertainty and invest in compelling opportunities for our clients.
Source: Private Placement Monitor, 2023.
Randall Malcolm, CFA , Senior Managing Director and Portfolio Manager, Public Fixed Income
Canadian inflation continued to fall in May according to data released this week from Statistics Canada. Year-over-year headline inflation declined from 4.4% in April to 3.4%, largely as expected, with the decrease driven by base-year effects in May. Both the year-over-year common and median Consumer Price Index measures of core inflation also decreased from April’s levels. Energy costs, including gasoline, helped drive inflation lower while elevated food costs remain challenging. The Canadian bond markets reacted positively to the news, with Canadian two-year bonds outperforming U.S. two-year bonds on the day and this week. Inflation seems just high enough to keep the market guessing about the Bank of Canada’s next interest rate decision expected on July 12, but they might also take some direction from June’s employment data (to be released on July 7), which had previously showed signs of softening in May.
Sources: Statistics Canada, Bloomberg, 2023.
Market insights are based on individual portfolio manager opinions and market observations. These are observations only and are not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not?constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information posted here.
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