Valuable Moment in Time

Dear Clients, Colleagues, and Friends of Jefferies,

One of the most invigorating, challenging, demanding, frustrating, and enjoyable realities of our business is that the operating environment is always changing and evolving with macroeconomic factors such as interest rates, unemployment, inflation, deficits, politics, regulation, geopolitical developments, economic cycles, health concerns, technological innovation, general overall sentiment and mood, and many other variables.  Individual markets, regions, industries, products, and services can be wide open for one period and then be closed shut for capital formation and deals for the next month or year(s).  Anticipating and navigating this reality are necessary to build Jefferies, working in our industry, leading or working in any industry, and investing capital.

The two of us have been through more market cycles and swings in our careers than perhaps we care to admit.  With this experience, we would like to share our observations about today’s market sentiment, because we find it unique and one that must be appreciated and embraced.  It is possible that the current environment portends a sustainable long-term opportunity, or it could be a relatively short pre-cursor of a major market dislocation.  Nobody knows for sure, but if we had to put down our wager, we believe for many reasons this is real and durable.

There is a lot to do right now.

Jefferies today is perhaps the busiest we have ever been.  Yes, we have invested heavily in ourselves over the decades (particularly the past five years) and we have gained substantial market position thanks to the loyalty and support of our clients and the hard work and incredible capabilities of our people, but what we see and feel around our firm is beyond our gain in market share.  On a global basis and throughout every business we operate, there is a lot to do right now. 

There is ample liquidity in the equity markets across almost the entire globe.  The IPO market, while not at the peak we experienced in the late 90s/early 00s, is wide open for quality companies.  And it is a good thing that the new issuers do not resemble those that raised public capital towards the peak of that unfortunate bubble.  Aside from the incredible U.S. equity capital markets, we see healthy new issue activity throughout Asia, Australia, South America, and the Middle East and finally the early stages of a resurgence in Europe.  With interest rates no longer zero due to the great recession or COVID, there is no longer a massive correlation of every stock, and the dispersion allows for quality research from the sell-side and buy-side to help navigate opportunities and rediscover alpha.  Finally, active managers can participate and join the passive money-makers who have weathered many of the more recent storms more successfully.

There is increasingly more to do throughout the fixed income markets.  Origination in both the investment-grade and below-investment-grade areas is beyond active and healthy.  Liquidity is solid and CLOs, leveraged finance, emerging markets, rates, and distressed are all active.  Private credit continues to capture a lot of the headlines, but much of those stories do not reflect the depth, duration matching, and importance of this business.  These funds continue to be active drivers of capital formation and investment opportunity, and we think this is better understood by the institutional investors who have liabilities that are more suited to the duration of private credit.  We also believe that with the reversion in the price of oil, the potentially deflationary effects of technology advances, and other factors, there could become a greater consensus for not only interest rate stability, but perhaps an eventual and (hopefully) gradual decline over time.  Not only would this be beneficial to the critical housing sector, but it would add further opportunity throughout the fixed-income markets.

This leads us to Jefferies’ largest business, and the one we believe has the most implications globally for our clients, the markets and the world: Investment Banking.  To say there is a lot for our investment bankers to do today is a vast understatement.  The important derivative of this reality is that there is an enormous opportunity for business leaders and investors to use this moment and the strength of the markets to accomplish whatever you want to position your business or your portfolio for the future.  The world is open to buy, to sell, and to finance generally on reasonable terms.  Progress and affirmative effort are being rewarded.  M&A activity is robust.  Corporations are extremely healthy, earnings have held up nicely in most cases, leverage is not excessive, the consumer continues to be strong enough, and the world is transacting.  Healthy companies are expanding smartly through acquisitions.  Larger corporations are making decisions to focus on their best core opportunities and optimize exposure to those they deem unexciting.  Quality private companies can raise additional private capital or readily access the public markets.  Private equity firms that have been slower to return capital to their LPs are beginning to find opportunities to transact as markdowns, when necessary, in the portfolio become more in line with the rising public comparables values.  Well-priced IPOs can now once again allow private equity firms to set a price and hopefully allow their first sale via a new offering to be their worst sale as the issuer performs and their stock appreciates.  All this is possible again, and for a long time it was not.  And let’s not forget the incredible amount of dry powder throughout the private equity galaxy that is readily available and even more usable thanks to the opening of all capital markets.

Our goal here is not to sound oblivious to all the potential cross currents that are inevitable throughout the industry we all operate in together.  No war is officially over right now.  Local politics and geopolitics are incredibly complicated, and elections seem to be coming everywhere.  No interest rate direction has been determined.  Nobody can truly explain the short or long-term effects of AI on employment, specific industries, or operating margins.  Deficits and currency fluctuations are difficult to game.

We believe this is a time, perhaps unlike any we have seen in quite a while, in which every investor and every leadership team in every industry and geography, and every person at Jefferies has something important to do and the environment is wide open for quality execution.  Since these periods do not come along often, and nobody knows how long they will last, we thought this would be a good opportunity to tell you, our valued clients and friends, that all 6,500 of us at Jefferies are fully aware of this opportunity, and stand ready to help you in every way we can with a decisive sense of urgency and humble appreciation for the opportunity to be your partner.

Let’s do more and succeed together,

Rich and Brian