From Private Markets to IPOs: Decoding the Investment Landscape with Fidelity’s Karin Fronczke

In September 2023, Jefferies hosted its seventh annual Tech Trek, Israel’s largest institutional investor conference. The three-day event connects leading global investors with the Israeli tech ecosystem through a series of panels, presentations, and meetings.

At the conference, Jefferies’ Ashley Walker sat down with Karin Fronczke, Global Head of Private Equity at Fidelity Investments. They explored Fidelity’s investment criteria, opportunities in today’s market, and how recent valuations and public offerings could shape a more dynamic 2024.

Fidelity’s Approach: Focus on Fundamentals

Declining valuations create enticing investment opportunities, but for Fronczke and Fidelity, fundamentals come first. “We start with our investment checklist,” Fronczke shared, highlighting Fidelity’s four-tiered analysis.

Key components include a robust total addressable market, an experienced and motivated management team, a clearly defined product-market fit, and durable competitive moats. The ebb and flow of actionable opportunities, Fronczke said, are only relevant after these criteria are met.

Key Geographies and Sectors: Opportunities on the Horizon

Valuation multiples reached record levels in 2021, against a backdrop of low interest rates and stimulus-fueled liquidity. Two years later, as valuations undergo a reset in private markets, new opportunities for investors emerge. Some regions and sectors are particularly well-positioned for an influx of new capital. Fronczke highlighted the areas where she and Fidelity are most focused. 

On regions of interest, Fronczke spoke to the importance of density. Fidelity targets areas where many opportunities have the latitude to surface. “Outside the US, Israel and India are the two regions where we’re really focused.”

Note: Fronczke’s comments on Israel were made before the events of Oct. 7. The ongoing conflict may influence the region’s tech ecosystem and investment landscape.

On sectors of interest, artificial intelligence takes center stage. Fronczke emphasized generative AI (GenAI), and its potential to elevate productivity and produce original content. GenAI’s applicability across sectors – from real estate and marketing to software development – is a focal point for Fidelity.

Fronczke emphasizes that in the age of GenAI, “any model is only going to be as good as the data that feeds it.” Fidelity will focus on companies with adept data management, as they will prove best equipped to harness AI’s opportunities.

Public vs. Private Valuations

The discussion turned to the widening gap between public and private market valuations. Fronczke reflected on the 2021 capital environment, when low interest rates, quantitative easing, and pandemic stimulus packages flooded global markets with liquidity.

This surge in capital, she believes, was an impetus for the current disparity.

“Companies that raised capital in 2021 still had cash on their balance sheets in ’22 and ’23,” Fronczke observed. “As we move into 2024, that cash runway is running out, and there should be new rounds of fundraising at new valuations.”

This may spur a reset in private markets, bridging the valuation gap between public and private entities.

Advice to Founders and Management Teams

Acknowledging that fresh fundraising rounds might pose challenges, Fronczke offered wisdom to founders and executives. For those considering raising capital through private markets, she advised fostering relationships with investors well in advance. Long-term, organic relationships, Fronczke believes, are key to synergistic growth.

“At Fidelity, we like to know companies for a couple years before investing,” she shared. “Those two years of diligence help us really understand your position in the market.”

The IPO Market: What Comes Next?

After a historically quiet period, the IPO market enjoyed a series of notable listings, including Birkenstock, Klaviyo, Instacart, and Arm. Fronczke shared a positive outlook, believing these businesses set the stage for a stronger IPO pipeline in 2024.

“These types of companies needed to take the first steps – companies with scale, brand recognition, and profitability.” As they trade over several quarters, meeting the milestones they promised, these new public entities should inspire confidence in the broader market.

However, the resurgence in public market listings hasn’t been challenge-free. Many high-profile businesses faced lukewarm reception, now trading below their IPO prices. Today, some IPO candidates are retrenching and reassessing, despite the uptick in activity. The trajectory of IPOs may prove unpredictable in the near future.

Fronczke’s insights offer a glimpse into the strategies and criteria guiding leading global investors through a shifting market landscape. With new fundraising rounds and public offerings on the horizon, a commitment to fundamentals, relationships, and transparency remains a reliable roadmap to success for both founders and investors.

Prime Services C-Suite Newsletter – October 2023

Jumping into Fall with Current Employment, Regulatory, and Governance Updates

Our monthly newsletter for multi-hat-wearing C-suite leaders covers the latest and greatest insights across the hedge fund industry.

Industry Insights:

1. Focus on Employment. The current “war on talent” in addition to the various regulatory changes from state legislature has led funds to thinking about how they can navigate the current hiring and employment environment. Some top of mind items in this the everchanging landscape include:
   • State Guidance: Salary Transparency. New York and Illinois have both recently passed state legislature around salary transparency. The NYS law applies to positions that will not be physically performed in NY, but report to a supervisor, office or other worksite located in NY. Despite this, many clients have opted for a uniform versus patchwork approach across their organizations.
   • Hybrid for Talent. Where most industry organizations have evolved to a more “back in the office model,” some flexibility component is still part of the equation from a hiring and retention perspective. Return to office amenities such as wellness rooms, health centers, and commuter benefits are continuing to be leveraged.
2. Enhancing Short Sale Disclosure. This October, the SEC finalized Rule 13f-2 and related Form SHO (Fact Sheet). This rule requires managers to submit monthly reports around short positions and short sales to the SEC. Funds will also have to produce calculations around “gross short positions” which are over the thresholds identified in the rule. The SEC will then aggregate the shorting data based on a monthly average. The effective date is set for mid-December.
   • Potential Solutions: Compliance and Software. The rule places additional reporting requirements, and operational considerations on managers. Questions remain around how the data will be aggregated however this will likely be different from the extent of reports in the EU on single name stocks. Some are considering additional compliance and software solutions for reporting and monitoring daily shorting.
3. Cayman Regulatory Update. In April, CIMA released a set of rules including the Corporate Governance Rule, the Internal Controls Rule, and Statement of Guidance (SOG) which went into effect this October. These rules cover various types of businesses and many in our industry are trying to understand how they apply to hedge funds, more specifically their relationships with their board of directors and their firms governance structures.
   • Off the List. Cayman has been taking a strong stance and offering guidance around their AML/CFT policies. As of Friday, October 27th, Cayman is officially no longer on the FATF Grey List. The island is still on EU’s list however are making strides towards also being removed.
   • Getting On Board with Onshore. Overall, much of the new rule is solidifying already common industry practices. Annual conflict of interest declaration at manual board meetings is now required has been industry practice. Funds with no advisory board on the LP side will likely feel the most change.
   • Keeping Compliant. Managers can make additions to compliance manual to address issues make sure it makes sense and that it works for the fund. Additionally, they may reach out to their offshore law firms regarding the CIMA analysis required.

Please reach out to your Jefferies contact for more information on any of the topics above.

Client Corner:

CRM Systems. In the current fundraising environment, many groups are exploring how a CRM system can help  them stay organized and create efficiencies in the marketing processes. There has been an increased preference for systems that cater to the alternative asset industry rather than the more generalist players in the space. These groups can often provide more specific fields and reporting which are specific to the hedge fund industry leading to less time spent on customizations. Additionally, we are seeing an increase in new launches consider this a day one initiative.

Spotlight on Content and Events:

Jefferies Capital Intelligence 2023 Roundtable Series | Wednesday November 1st, 2023 at 11:00AM EST

Join us for a Virtual Fireside Chat with Amy Flikerski, Managing Director, Head of External Portfolio Management, CPP Investments. Hear a comprehensive update on the external portfolio management program at CPP Investments, the role of hedge funds in the portfolio, and strategic initiatives for 2024 and beyond. This conversation will be moderated by Emily Corzel, Senior Vice President, Jefferies Capital Intelligence. Click here to register

Three Issues Alternative Fund Decision Makers Should Think About

What is on decision-makers’ minds as they prepare for 2024? Three major issues:

• Our new era of regulatory scrutiny.
• Major shifts in counterparty and third-party management.
• The new launch landscape.

Hear more from Shannon Murphy, Head of Strategic Content at Jefferies.

Interesting Service Provider Reads: Highlighting Topical Content from Industry Leaders

Beyond Alpha – The Impact of Cayman Regulatory Changes

Centaur – Operational Due Diligence: What the COO Needs to Know

Maples Group – Cayman Islands Removed from FATF Grey List

Seward & Kissel – The Seward & Kissel 2022/2023 Hedge Fund Side Letter Study

Sidley – ”Get Shorty – The Sequel”: SEC Implements New Disclosure of Short Positions and Reliance on Bona Fide Market Making Exception

Vigilant – 2024 SEC Division of Examinations Priorities | Key Takeaways

Jefferies Prime Services Contacts:

DISCLAIMER

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This is not a product of Jefferies’ Research Department, and it should not be regarded as research or a research report. This material is a product of Jefferies Equity Sales and Trading department. Unless otherwise specifically stated, any views or opinions expressed herein are solely those of the individual author and may differ from the views and opinions expressed by the Firm’s Research Department or other departments or divisions of the Firm and its affiliates. Jefferies may trade or make markets for its own account on a principal basis in the securities referenced in this communication. Jefferies may engage in securities transactions that are inconsistent with this communication and may have long or short positions in such securities.

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Three Issues Alternative Fund Decision Makers Should Think About

What is on decision makers’ minds as they prepare for 2024? Three major issues:

1. Our new era of regulatory scrutiny.
2. Major shifts in counterparty and third-party management.
3. The new launch landscape.

Each of these has a distinct, but material, impact on the state of the alts business.

First, regulation. One group that has not had a sleepy summer? The SEC. On August 23^rd, it passed new rules requiring registered investment advisers to – among other things – release standardized quarterly statements reflecting fees, expenses, compensation and performance. In the final rule – the phrase “simple and clear” appears over 15 times! There are many facets of this rule, and funds clearly need to engage with counsel to properly understand it. But at a high level, managers of all shapes and sizes should be bracing for potentially heightened expectations around calculations, transparency and reporting. Many anticipate industry groups expect court challenges, which could delay it from going into effect. But this is an issue that’s being watched intensely across the industry, given the changes it would augur and new resources it would require.

Second – all eyes on counterparty management. After years of counterparty optimization, 2023 was the year of counterparty risk in the wake of the SVB and FTX collapses. Managers have been spending considerable time tire kicking the solidity of their counterparties, and in some cases, have instituted new due diligence policies and procedures to satisfy investors. While bank risks seem to have abated – at least for the time being – this year served as a reminder that ongoing diligence and engagement with counterparties is necessary, especially when there are material shifts in the broader global economy…like the strong move into quantitative tightening. 

Finally – the new launch landscape and what it takes to get a fund off the ground in mid 2020s. The environment is so different than it was a decade ago when we saw more than 1,000 funds launched each year from 2011 – 2014. Last year, there were only 432 new fund launches and more than 570 closures. What is accounting for this decline?

1) The strength and value proposition of going to a large multi-manager platform. These days you need to really need to want your name on the door to build technology, infrastructure and a team from scratch, all while asset raising and managing a portfolio.

2) The costs of launching are higher than ever before as management fees have declined. Some of this can be offset by the explosion in outsourcing solutions but startup capital for the runway needed to launch is considerable.

3) The volatility of markets (though it has come down), and the uncertainty around further Fed easing and other macro events has some thinking the future may offer a more welcoming environment for their strategies.  

The one silver lining? There are still billion dollar launches expected in 2024, and in the first half of this year – hedge funds welcomed $12 billion, with ~20% of that going to emerging managers. 

There are so many things out of managers’ control – the macro landscape, intraday volatility, and asset flows. But the regulatory environment, counterparty management and the new launch landscape are three things that can be effectively managed.

From Lost Decade to Golden Age: A New Paradigm for Japan Inc.

After three decades of darkness, the sun is rising for investors in Japan.

A confluence of factors – including the taming of deflation and a dramatic push for corporate reform by the Tokyo Stock Exchange (TSE) – has Japan poised to deliver some of the world’s best global investment returns through 2030.

The TSE’s ambitious reforms include a 2021 revision of its corporate governance code to emphasize the importance of corporate boards and their committees in enhancing shareholder value. And in early 2023, the TSE reforms expanded to require companies to show evidence they are taking action to improve shareholder returns, or else face delisting in 2025.

Although change in Japan can seem incremental by Western standards, once a new consensus has been formed, the resulting change in behavior can be both durable and dramatic. All the evidence is that such a consensus has now been formed and the changes underway should prove “irreversible,” according to Chris Wood, Global Head of Equity Strategy at Jefferies.

As Japan executes its ambitious internal reforms, it is also the one developed country where inflation is a net positive, since it is ending Japan’s decades-old deflation difficulties. “Japan finds itself getting a relative easing in monetary policy by doing nothing,” according to David Zervos, the Chief Market Strategist at Jefferies.

This has led to a relative devaluation of the yen that could finally take Japan out of the quagmire (of loan growth, high real rate, debt deflation) that it has been in for 30 years.

Global investors are already taking notice of the emerging opportunities in Japan. Although foreign direct investment has historically been small as a share of Japan’s economy, it is growing fast, reaching $47.5 billion in 2022. Berkshire Hathaway also recently announced it was increasing its stake in five Japanese trading houses by about 70%. It now owns an average of 8.5% of Mitsubishi Corp., Mitsui & Co., Itochu, Marubeni and Sumitomo Corp, and Berkshire founder Warren Buffet has said, “we’re not done” investing in Japan.

The opportunity for global investors is just beginning and there at least four consequential developments to expect in the years to come.

1. Japan will be one of the best equity markets through 2030: The next 12-18 months will likely generate superior returns as the TSE’s March 2025 deadline for corporate improvement approaches.
2. More regulatory reforms to come: TSE says it will remain “relentless” in pushing for reforms and we predict that more than 80% of companies will respond to the TSE’s asks.
3. Consolidation will accelerate domestic and cross-border: Initially, expect more domestic consolidation (largely friendly M&A) with more cross-border partnerships and joint ventures over time.  
4. Japan Inc.’s new religion is Return on Equity. With prudent guidelines from TSE, Japan Inc. will reallocate capital toward assets that generate returns greater than the cost of capital.

In this moment of tremendous uncertainty, it is always possible that cyclical headwinds from a global recession could offset some of Japan’s structural gains.

But these are truly dramatic times in Japan’s capital markets, and reforms are already far enough along to suggest that this is a generational opportunity to invest in Japan, Inc.

To learn more about why Jefferies believe investors should look to Japan, we invite you to read our recent equity research report, “From Lost Decade to Golden Age: A New Paradigm for Japan Inc.”

The Age of the Strategic Financial Officer

Buffeted by technological change and lightning-fast shifts in the business environment, the office of the CFO is undergoing one of its most fundamental transformations since it was invented more than a century ago.

No longer just confined to an operational role managing financial issues, the CFO’s office is fast becoming a hub for strategic thinking, requiring skills that range from investor relations and human resources to deep analytics and data visualization.

This opens up immense opportunities for companies selling software to CFO offices that are increasingly moving beyond Excel spreadsheets and toward more sophisticated planning and analysis tools.  

These are some of the conclusions I heard from the stage at Jefferies’ recent Annual Office of the CFO Summit. I had the chance to moderate a panel of leading venture capital investors and former public company CFOs, as they discussed how and why the CFO office is changing and what this means for investors and companies helping to spur this transformation.    

“The finance function today is often much more than an organization that measures financial performance,” said Ajay Vashee, the former CFO at Dropbox and a general partner at the venture capital fund IVP. “It is a business analytics hub with the responsibility for understanding what is working and what is not and taking action around that.”

Panel members pointed to a number of factors driving this transformation, including the speed of technological change and the rise of activist investors.

According to S&P Global, investor activism campaigns reached an all-time high with 850 campaigns launched in the first quarter of 2023. That followed a busy year that saw the highest level of activist activity on record – 762 campaigns in the first quarter of 2022. 

“Activists are a factor for any public company,” said Jeff Epstein, a former CFO at Oracle and currently an operating partner at Bessemer Venture Partners. “The leadership team could decide what they want to do for the long term. But if they don’t get it right, they might not be around for the long term.”

New technologies are also needed to manage the growing range of responsibilities and the sophistication of the CFO office.

“I see small and medium-sized businesses, companies with 100 to 500 employees,” said Rajeev Dham, a partner at Sapphire Ventures, “and they are adopting great software that is applicable to them because they understand how critical this software is to run their businesses, versus just relying on Excel spreadsheets.”

Anything that can help simplify or centralize is appealing to CFOs. But according to Epstein, “the Holy Grail of products for an office of the CFO” are those that can, “actually enable revenue growth as opposed to just lowering costs.”

Panel members see a long-term and stable opportunity to drive transformation in CFO offices, which will likely continue investing in new technologies in up or down cycles. Companies still need to close their books at the end of each month, quarter and year, so CFO offices are less vulnerable to cutbacks on software purchases than say, the marketing department, whose spend will vary depending on business conditions.  

But, when possible, CFOs want to acquire and implement product platforms that help with multiple functions.

“People realize that to truly scale a platform you need to do more than one thing with that platform,” said Roy Luo, a partner at the venture capital firm ICONIQ Growth. “A lot of folks have tried organically – and I think it is possible at scale – but for the past 10 to 20 years, it has been done a lot through M&A. That’s worked out well for a lot of folks.”

The panelists said that the biggest unmet needs and market opportunities include analysis and planning tools as well as billing software. They also advised vendors to be clear on whether they are selling to enterprise organizations or small businesses, because the sales process and the customer needs of the two are very different.

Most important, perhaps, is to have a product whose value add is apparent and does not require the explanation of a salesperson to be clear to potential customers.

“You want to have a product that the average salesperson can sell,” Epstein said. “Often it is the CEO who goes out and sells it. Often the CEO is a great salesperson. But the product has to be good as well.”

Evan Osheroff is a member of the Jefferies Global TMT Investment Banking team, based in San Francisco, with a primary focus on Enterprise Software.  Evan has more than 15 years of experience advising Software companies.  He spends most of his time on M&A strategy and helping companies position themselves for capital raises in the private and public markets.

Graying of America Explains Labor Market Tightness; Recession Likely On Tap for Early ‘24

US Economist Tom Simons identified several factors driving this sustained period of elevated inflation, including wage pressure stemming from competition in a tight labor market, as well as a prolonged period of weak productivity. In addition to workers shifting to new roles and dealing with new challenges in a short-staffed environment, the US also saw a massive decline in the number of older workers in the labor force, and consequently, their experience. There were 739,000 fewer people over 65 participating in the labor force as of August than there were before the pandemic. If you assume these 739,000 people over 65 had an average of 40 years of work experience, that represents 30 million years of experience exiting the US labor market. This is making it harder to help newcomers get on their feet quickly and hit the ground running in their new roles. As the job switching slows and workers gain experience in their new roles, Tom expects productivity will ultimately rebound and unit labor costs will fall. Regardless, Tom still forecasts a recession begins early in ’24, due to the lags from tighter Fed policy. 

Chief Market Strategist David Zervos says that economic sentiment has significantly bolstered risk asset prices, but warns that those feeling encouraged by the brighter economic outlook should also be factoring in the Fed reaction function. David is skeptical the Fed will be able to quickly declare victory over inflation and expects that a solid economic outlook should translate to a more restrictive Fed, for a longer duration. As a result, he still favors high yield over stocks, which he thinks could pull back into the end of the year.

Global Head of Equity Strategy Christopher Wood noted that while the current rate hike cycle appears to be approaching its conclusion, oil prices remain the most significant spoiler for the Fed, due to its potential to disrupt inflation expectations. Nonetheless, he expects that the 10-year Treasury yield is likely to fall in the intermediate term as the delayed impact of monetary tightening should arrive in the form of an economic downturn in the coming quarters. Longer term, he believes that the debt servicing costs of running America’s huge fiscal deficits should make Treasuries including the 10-year more vulnerable. On China, while he thinks the challenges facing the Chinese economy remain formidable, Christopher maintains that the data is not quite as bad as the sentiment. 

Pass the Guac, Do You Mind If We Double Dip This Chip?

It is common for highly levered sponsor-backed companies with liquidity needs and/or upcoming maturities to engage in liability management exercises, which often includes creating a new priming tranche of secured debt (an “Uptier”) or transferring assets out of the secured collateral package (a “Drop Down”).

In recent months, a new liability management transaction structure, (the “Double Dip”), has emerged and quickly gained traction as a more “creditor friendly” alternative to the traditional tools in the liability management playbook.

A Double Dip transaction is structured to use available secured debt capacity to provide a single new money loan with two separate secured claims against the credit group’s assets. The Double Dip loan receives claims from both a guarantee (the 1^st dip) and an inter-company loan (the 2^nd dip). As an example, lenders who provide a $100 million new money loan in a Double Dip transaction could have $200 million in total secured claims in a potential future restructuring. While lender recovery will be limited to the amount owed on the loan, the additional claims provide significant credit enhancement for lenders, particularly in distressed situations where there is a risk of below par recovery.

A Double Dip provides many benefits for companies, sponsors and creditors over the traditional liability management tools:

• Allows company to raise new capital which might not otherwise be available.
• Lower cost of capital than would be available for pari secured debt.
• Not required to be implemented in a non-pro rata fashion.
• In contrast to an Uptier, the new loan does not prime existing secured creditors; instead secured liens are diluted equally by the pari secured claims from the new loan.
• In contrast to a Drop Down, no assets are transferred away from the existing secured creditors’ collateral package.

A company’s ability to implement a Double Dip largely depends on a company having sufficient secured debt capacity and flexibility on how pari debt capacity can be used. Sponsor-backed companies that have employed Double Dips as part of liability management transactions since May ’23 include At Home Group, Sabre, Trinseo, and Wheel Pros. While there is precedent for Double Dip claims being asserted in bankruptcy court (including in General Motors, Lehman, LatAm Airlines, Delta and others) per CreditSights, the recent wave of intentionally structured Double Dips has not yet been tested in bankruptcy court. In the meantime, companies, sponsors and creditors should incorporate the Double Dip structure into their liability management playbooks.

Actionable Ideas: Roll Up Strategies in a Subdued M&A Environment

With a mix of economic and market headwinds prevailing against M&A activity in 2022 and 2023, financial sponsors’ exits have been expectedly muted. As such, many sponsors have resorted to fundamental buy and build strategies to create value over a longer time period. While the roll-up strategy is a time-tested approach for many sponsors, the low interest rate environment that prevailed from 2008 until early 2022 was an accelerant for it. 

Sponsors are active across a range of sectors where they can find an acquisition platform to make attractive strategic add-on investments, ranging from broadly defined physician/dentist/veterinarian practices, and ancillary support services, to HVAC service providers and insurance brokerage and wealth management companies. Despite the increasing interest rate environment, sponsors can still create significant value by leveraging a platform’s infrastructure, coupled with entry/exit multiple arbitrage for add-on acquisitions. Platforms that have seen differentiated success on exit include those that enjoy organic growth coupled with a robust inorganic expansion strategy. While rising interest rates have had some negative impact on the economics of add-on acquisitions, the strategy is still appealing thanks to the potential of economies of scale to enhance margins and the ability to create regional powerhouses in fragmented, but large industry sectors. In addition, we have observed an increase in financial sponsors bringing in partners for substantial strategic minority stakes to both help fuel continued growth through acquisition and to set a valuation benchmark. Recent examples of successful and ongoing strategic roll ups include: 

• Goldman Sachs Asset Management’s investment of over $1.0 billion (through both equity and subordinated debt) in World Insurance Associates (“World”), an insurance brokerage firm, previously owned by Charlesbank Capital Partners. Charlesbank first invested in World in 2020 and since then is rumored to have completed over 100 add-on acquisitions. Goldman and Charlesbank will partner as co-lead equity investors in World with Goldman’s investment slated to support a continued acquisition strategy as well as organic growth expansion. 

• In April 2019, LGP acquired The Wrench Group, a leading provider of essential home maintenance and repair services, specializing in HVAC, plumbing, electrical, and water quality services. Under LGP’s ownership, Wrench completed 14 acquisitions, which led to substantial multiple expansion and an over 3.5x increase in EBITDA. In late 2022, TSG Consumer Partners and Oak Hill Capital made a significant minority investment in Wrench with the intention of continuing the external expansion strategy.  
• In 2019, Ares Management and OMERS Private Equity sold National Veterinary Associates (“NAV”) to JAB Investors. At the time, NAV was one of the largest veterinarian and pet care services globally with over 670 companion animal veterinarian hospitals and 70 pet resorts across 43 states. Under JAB’s ownership, NAV has executed three material acquisitions and over 100 bolt-on acquisitions resulting in a nearly 3x increase in EBITDA.   

Convertible Debt: Low-Cost Debt Capital in a High Interest Rate Environment

The convertible debt new issue market in 2023 has been frequented by companies seeking a lower cash interest alternative to what is being offered in the high yield and investment grade debt markets. Historically, convertible debt has been a common financing tool for high-growth businesses because it offers an attractive cost of capital relative to debt or equity, no financial covenants and an investor base supportive of general corporate purpose use of proceeds. About two-thirds of convertible transactions annually from 2020 to 2022 used proceeds for general corporate purposes or for M&A financing.

This trend has shifted in 2023 due to the high interest rate environment, with over two-thirds of issuers accessing the convertible market to refinance an upcoming debt maturity. To put the interest savings into perspective, the average coupon across the 40 refinancing transactions this year was 3%, which is significantly lower than the yield on Treasuries. This refinancing trend is being driven by a wider breadth of sectors and has also led to a significant increase in investment grade issuance. This year, the industrial, energy and real estate sectors account for 45% of issuance and investment grade has comprised 40% of total, whereas in 2021, the technology sector represented 52% of issuance volume and investment grade issuance comprised 6% of total. The upshot is that companies evaluating a refinancing or raising capital for general corporate purposes should consider convertible debt, given the expectations that interest rates will remain elevated, combined with a stable equity market backdrop and a broad community of convertible-dedicated investors looking for new investment opportunities.