Lance Uggla’s Roadmap: Insights for Today’s Entrepreneurs 

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.

Jefferies CEO Rich Handler sat down with Lance Uggla, co-founder of Markit and current CEO of BeyondNetZero, to glean insights for emerging entrepreneurs. Their discussions covered traits and priorities that lay the groundwork for success, the pros and cons of going public, climate-focused investing, and more.

Lessons from a Seasoned Entrepreneur

In 2003, Uggla founded Markit, a financial information and services company. The company grew to more than 4,000 employees and 21 global offices before merging with Information Handling Services (IHS) to form IHS Markit. The combined entity later joined S&P Global in a deal valued at approximately $44 billion.

In his conversation with Handler, Uggla retraced his evolution from budding entrepreneur to seasoned executive. The most important ability he honed along the way? Focus.

“Focus on two or three things and do them exceptionally well,” Uggla advised. “When you’re thirty, you’re filled with ideas, but it’s where you really focus that you achieve great results.”

Reflecting on the traits he values in modern entrepreneurs, Uggla underscored the importance of great character. “I love to meet an entrepreneur who shows integrity,” he said. “Enthusiasm, personal manners, and grace are a great foundation for success.”

Beyond personal traits, Uggla values entrepreneurs with a clear vision for profitability. A compelling product is key, but a solid financial model differentiates the best founders.

The Double-Edged Sword of IPOs

A decade after its founding, Markit filed for an initial public offering, making its debut in June 2014 at $24 a share.  

The move to public markets can be challenging, especially in the current IPO climate. Drawing on his own experience, Uggla offers important advice: find the right partners.

“Choose someone who wants to be with you for the journey, not just the event,” Uggla said. “It’s tempting to choose from the league tables, but you need a partner who really understands you and speaks your language.”

Whether in search of legal counsel or investment bankers, aligning with trustworthy, long-term partners was key to Uggla’s success.

On the experience of being publicly traded, Uggla recognizes the benefits and drawbacks.

“When you go public, you create a currency. You have a real valuation,” Uggla shared. “This opens up a lot of opportunities that aren’t available in private markets.” 

He cautioned founders, however, that this advantage brings the challenges of quarterly reporting, increased expenses, and regulatory scrutiny. These obligations can limit your agility, sometimes impeding the pace of business.

Building Ties with Investors, Public and Private

Uggla reiterated the importance of building ties with investors, be it in the private or public domain. He also emphasized the distinctive nature of these relationships.

Private equity investors, Uggla said, feel like partners. They understand your business deeply and participate actively in major decisions. Public investors still expect exceptional results, but they’re less connected to your strategy.

“When you go public, you become a grown up, and the way you communicate has to change,” Uggla advised. “It’s professional investors versus nonprofessional investors. Both deserve respect, but you have to learn how to bridge the gap.”  

Uggla’s Journey to Climate Investing

Uggla finished by highlighting his passion for climate investment, which originated with IHS Markit. Uggla had envisioned a specialized division named ‘Beyond Net Zero’ within IHS Markit, which would produce unique energy transition solutions, but the opportunity was shelved during the company’s sale.

The concept evolved into a fund with the same name, in collaboration with General Atlantic.

With new partners, including Lord John Browne, an energy industry veteran, Uggla raised a $3.5 billion fund. Today, BeyondNetZero is at the forefront of growth equity for climate-based investing.

From founding Markit to spearheading innovative climate investment strategies, Lance Uggla’s career is a testament to adaptability, focus, and strong partnerships. His insights offer valuable guidance to young entrepreneurs, underscoring the importance of character, collaboration, and adept communication in building successful ventures.

Jefferies’ Economist Mohit Kumar Sees Bull Market Potential in 2024

Jefferies sat down with Mohit Kumar, Chief Economist and Strategist for Europe, at the firm’s 14th annual Global Healthcare Conference in London. They discussed central bank policy, the potential for recession, the latest inflation and employment figures, the best asset classes for 2024, and more.

Their conversation comes on the heels of October inflation data, where US headline inflation fell from 3.7% to 3.2%. The drop reduces the likelihood of an interest rate hike at the Federal Reserve’s year-end meeting. The United Kingdom also saw a sharp drop in annual inflation, from 6.7% to 4.6%.

We recently received October inflation data from the United States and United Kingdom. Where are we in the global battle against inflation?

I think we are still some distance from the central bank target of two percent, but we’re trending in the right direction. Inflation is moving lower. I think we will be below two percent by the end of next year in the US. For Europe and the UK, it might take slightly longer, but by the end of 2025 or early 2026, we could be below two percent as well.

What is important from markets and central banks’ point of view is that, in the medium term, inflation expectations are below two percent.

Should we expect a recession in 2024 in Europe?

Recession is a strong word. It means two quarters of negative GDP growth. In Europe, my best case is we see flat or zero growth over the next two quarters. Maybe we avoid recession; it’ll be very close. Even if we get a recession, I suspect it’ll be a mild one. A slow down rather than a proper recession.

Growth is slowing down. Inflation is slowing down. What does this mean for interest rates – have we seen the end of hikes?

I definitely think so. Thinking about the three main central banks – the Federal Reserve, European Central Bank (ECB), and the Bank of England – I believe all three are done with rate hikes.

Now, of course, these decisions are data dependent. If the data surprises, we could see more hikes, but the bar for another hike will be high. My view is that we see a slowdown going forward, which means there’s no need from the Fed, ECB, or Bank of England.

The next question is: when will they cut?

For the Fed, we have a presidential election cycle coming. The Fed wants to be neutral during an election cycle, so they will be very reluctant to cut rates unless we see a material slowdown. For ECB, you see the unwinding of quantitative easing (QE) policy and interest rates. My best guess is they will announce the end of Pandemic Emergency Purchase Programme (PEPP) investments next June and cut rates in the third quarter. For the Bank of England, again, it’s a summer or post-summer story.

All said, the direction of central banks is clear: rate hikes are done. Rate cuts are the next step.

Employment has shown resilience globally. What do you expect for jobs in the coming year?

The job picture has been very resilient overall, but if you look at the details, it’s sector specific. There’s been resilience in small and medium enterprises (SMEs), or companies with fewer than 100 employees. In the US, from pre-COVID to today, there’s been a 120% increase in SME new hires. In the UK, it’s close to 140%.

The obvious question, then, is why is the SME sector so strong? I’d offer three reasons.

First, the pandemic – during COVID, the government paid us money to stay home, and people formed new companies. New company formation and SME new hires went through the roof.

The second reason is excess cash. The SME sector is flush with cash. That means the Fed or ECB can hike rates, and the impact on companies’ balance sheets will be limited. The central banks’ transmission mechanism is not flowing through.

The third reason is end consumers, who also have excess cash. Our level of excess savings remains very high. Our expectation was that by Q3 2023, the lower-income cohort would run out of excess savings. Three weeks ago, we saw revisions to the national account data which showed excess savings as double our initial predictions.

The expectation that a slowdown would start in Q3, and that’s when the labor market would crack – I think this has all shifted forward by 3 to 6 months. I think the labor market will slow down, but it’s a late Q4 or early Q1 story. Jobs will remain strong for a bit longer.

When we see cracks in the labor market, I don’t expect a deep recession, meaning 8% unemployment. I expect unemployment to peak around five percent. This would be a mild recession or slowdown in the US and Europe, not a deep one.

Is there any market where you expect especially strong growth? A star of 2024?

A few markets. I’d first highlight the US tech market, which I think can continue to perform strongly – with the exception of maybe Q1, where we may see short-term growth concerns. Credit is another strong market. Clearly the investment grade market should do very well next year, compared to equities. Of course, you have to focus on total yield rather than just a spread basis, but I’m confident credit can continue to perform.

Emerging markets (EM) is another area that should perform. If the dollar weakens and the Fed starts talking about rate cuts, EM can do quite well. With EM, you always have to pick your countries, but as an overall asset class, it should perform quite well next year.

Broadly speaking, we’re going to see a fixed income market over the next year. Whether you’re looking at credit or sovereign, these are the asset classes you want to own next year.

Prime Services C-Suite Newsletter – November 2023

Preparing for Year-End with SEC Updates, Trade Agreements, and Insurance Trends

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

Industry Insights:

1. Increased Activity: SEC Stats and Priorities. The SEC has released their 2024 exam priorities and figures around enforcements in 2023 showing an uptick in overall activity. Clients are engaging their compliance and legal teams to assist in navigating various key line items, performing gap analyses, and thinking about which processes will need to change to be compliant with the new rules.
   • Exam Priorities. The SEC released their priorities which are primarily focused on new and recent rulings from the commission. Many new regulations have been finalized this year such as the Private Funds Advisory, Cyber Security, and Short Selling rules. Notably, ESG is no longer on the exam priority list despite the finalized Fund Naming rule.
   • Yearly Increase. Over the past three years, there has been a 20% increase in enforcement actions by the SEC. In contrast, the amount of fines generated has been less linear with $1.4 billion fewer fines generated in 2023 compared to the previous year and $1.2 billion more in fines this year than in 2021.
2. Trade Agreement Best Practices. Going into year-end, trade agreements may be top of mind for some COO and CFOs. Some key considerations may include:
   • Maintain levels of uniformity. When building trade agreements, infrastructure and operational considerations should be taken into account. This is especially important in the world of SMAs to maintain certain sets of uniformity from the trading standpoint.
   • Have a short and long term view. COO and CFOs should aim for an overall picture of what the business may need as it evolves across asset classes. Be prepared for any sudden changes in plans, and ability to diversify where it makes sense.
   • Build relationships across the firm and across asset classes. There is an importance in having these connections and viewing these relationship with the ability to shift and change.
   • Ask the right questions. There is a need to understand what’s in your documents, where items may be lacking and what is the rational around what you’re doing. Additionally, groups should ensure their legal counsel is also involved in the process.
   • Thanks to Lowenstein Sandler for providing their latest insights on the above.
3. Alternative Data: As funds continue to be consumers of alternative data, due diligence on vendors, keeping track of progress of the data, and understanding risks associated with these providers is top of mind. Groups are spending more time understanding needs around oversight and governance of these services as well as keeping inventories of who’s using it and how it is being used.
   • Building Projects and Gaining Support. Many groups are starting to think about how to remain competitive in terms of data and are beginning to implement new processes. It can be critical to the implementation of these projects that users can understand the complexity of data and have the ability to achieve standardization around the data.

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

Client Corner:

Insurance Trends. Given the increase in enforcement actions by the SEC and higher legal fees, many fund managers are opting for increased D&O and E&O insurance coverage. Despite this, Fieldstone insurance Group noted a decrease in pricing overall per million dollars of coverage in the hedge fund market. Interestingly, this is not seen in other parts of the alternatives industry such as insurance coverage for PE or VC funds. Additionally, cyber insurance coverage is still growing across the client base and service providers in the space with close to  half of funds purchasing coverage.

Spotlight on Content and Events:

Israel’s Economy and Financial Markets: Navigating Wartime.

Wednesday, November 29^th, 10:00–11:30am ET / 15:00–16:30 GMT / 17:00-18:30 IST

Join us as for a webinar hosted by the Israel Hedge Funds Association (IHFA) and Tel Aviv Stock Exchange (TASE) to highlight Israel’s Economy and Financials during Wartime.

Bank of Israel Governor will discuss the economy and role of the central bank, TASE CEO on the importance of the stock exchange and then Natti Ginor (JEF Head of Israel IB) will interview the CIO of Migdal (+$90 billion insurance and pension fund) and Co-Founder & Managing Partner of Sphera Funds (one of Israeli’s largest hedge fund managers).

REGISTER HERE

Interesting Service Provider Reads: Highlighting Topical Content from Industry Leaders

Apex – Regulatory and compliance updates for Cayman Islands Q3 2023

BlueFlame – Client Debrief: A Chaotic Weekend for OpenAI and What it Means for Announcements from DevDay 2023

Seward & Kissel – FTC Imposes New Data Breach Notification Requirements

Sidley – 2023 Fiscal Year in Review: SEC Enforcement Actions Against Investment Advisers to Private Funds, Registered Funds, and Retail Clients

Jefferies Prime Services Contacts:

DISCLAIMER

THIS MESSAGE CONTAINS INSUFFICIENT INFORMATION TO MAKE AN INVESTMENT DECISION.

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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The Global Tech Landscape: Uncovering New Investment Opportunities

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.

Jefferies sat down with Bernard De Backer, Partner in StepStone Group’s private equity division, to hear his perspective on tech sector performance, regional disparities in the global economic recovery, untapped investment opportunities in Europe, and more.

Tech Exposure: Is Concern Warranted? 

Investors have worried about their tech exposure amid nearly two years of sector volatility. Tech shares fell over 30% in 2022, outpacing the broader market’s decline, and these challenges bled into private markets. By Q2 2023, year-over-year tech valuations were down 14% in Series A rounds, 9% in Series C rounds, and 33% in Series D rounds and above.

Today, a strong earnings quarter and resilient economy may suggest a tech sector rebound. As we approach 2024, should investors still be concerned about their exposure?

De Backer, advising clients from sovereign wealth funds to foundations, is cautiously optimistic. Tech forms nearly a third of his clients’ exposure, a proportion he believes may grow.

“Medium to long-term, I expect our clients to remain supportive of tech investing. Their exposure may rise even further,” De Backer shared. “Tech and software investments remain very compelling.”

Acknowledging valuation challenges, he underscored the resilience of private markets, highlighting companies with solid financial models like software as a service (SaaS). These businesses fared much better than their growth-oriented and public market counterparts. As markets rebound, De Backer expects private tech companies with reliable models to lead the charge.

The Global Recovery: Europe’s Untapped Potential

De Backer discussed regional disparities in the global recovery, with the U.S. leading the way. The U.S. reported 4.9% GDP growth in Q3 2023, more than double the second quarter’s pace. The country’s GDP recovery and labor markets continue to outpace other advanced economies.

“I think the U.S. is five or six months ahead of Europe in their tightening cycle,” De Backer said. “The U.S. was coming off a very robust market, and it created enduring tailwinds and financing. It remains the world’s most active market.”

October inflation data boosted the United States’ economic momentum, as headline inflation fell from 3.7% to 3.2%. The drop reduces the likelihood of an interest rate hike at the Fed’s year-end meeting. Similarly, in the United Kingdom, a sharp drop in annual inflation from 6.7% to 4.6% reduced pressure on the Bank of England to continue aggressive measures.

Despite its tepid recovery, De Backer still sees untapped opportunities in broader Europe. StepStone aims to capitalize on several key advantages in the region:

• Europe boasts a larger pool of software engineers than the U.S. With lower median salaries, they represent a cost-effective talent base for tech entrepreneurs. This is a driving factor in Europe’s growth as a hub for new startups. The region is now home to over 150 ‘unicorns’.

• Europe has fewer specialized tech investors than the U.S., leading to lower overall market capitalization. This creates opportunities for valuation arbitrage that seasoned investors like StepStone Group can seize.

• There’s room for consolidation in Europe’s tech market. Unlike the U.S., many European tech niches and platforms are still independent. There’s great potential for strategic M&A to drive growth and returns.

Secondary Markets and GP-Led Transactions

The conversation closed on the topic of secondary markets. As IPOs and dealmaking remain subdued, secondary markets have stayed active, especially for GP-led transactions.

“Secondary markets are attractive. If you look at the ratio of money raised to opportunities, it’s a very strong ratio,” De Backer said. “A big opportunity set for investors.

De Backer emphasized the appeal of diversified LP positions, rather than investing too much in concentrated GP vehicles. Still, under the right circumstances, transactions with general partners remain attractive.

“We look for strong assets combined with a very strong GP. That combination is critical.”

Bernard De Backer’s insights offer tempered optimism, undergirded by resilient private markets and unrealized growth in Europe. As developed economies rebound, challenges are expected, but investors focused on sustainable business models and under-penetrated markets will find exciting new avenues for growth.

Tough Antitrust Enforcement is Here to Stay: What it Means for Tech M&A Dealmaking

Federal antitrust regulators today are far more aggressive in reviewing and challenging M&A transactions than at any time in recent memory.

What does this mean for private equity firms and the prospects for tech M&A deals in the months and years ahead?

Jefferies recently put this question to two antitrust experts – Jamillia Ferris and Jeffrey Peck – at our Private Technology Conference in Miami, and they agreed firms need to consider the potential for antitrust challenges early in the planning of any major deal.

Between September 2021 and September 2022, the U.S. Federal Trade Commission and the Department of Justice filed complaints against a record 13 transactions – compared to an average of six per year over the previous five years. The Biden Administration also reported that antitrust investigations in that time period resulted in 26 other mergers being abandoned.

This stepped up enforcement is being driven by the administration’s more expansive vision for what antitrust enforcement can achieve. In previous decades, federal antitrust regulators mostly hewed to a “consumer welfare” theory that allowed most mergers to go through so long as consumers were still getting low prices. But the FTC, led by Lina Khan, and the DOJ’s Antitrust Enforcement Division, led by Jonathan Kanter, increasingly see antitrust enforcement as a means to enhance market competition broadly defined, including  economic inequality and wage disparities

In July, the Biden administration also announced new and tougher guidelines against tech and other mergers, after losing a number of high-profile cases in the courts.

Washington’s more forceful antitrust position has discouraged some companies from pursuing mergers and acquisitions they would’ve previously leapt at, as dealmaking has gotten costlier, more time consuming and riskier.  

But there are still plenty of accretive M&A deals to be found in the technology sector so long as firms are mindful of several considerations that Jefferies’ Private Technology conference panelists shared from the stage.

• Avoid being on the wrong end of a Wall Street Journal story. Develop detailed messaging and an advocacy and communications plan to tell a complete story to the stakeholders who matter most. This might include members of Congress, Hill staffers, federal regulators, communities, customers, and others who will be impacted by a deal.  As panelist Jeffrey Peck underscored at the conference, “strategic advocacy – mounting not only a legal effort but also developing and executing the key elements of what is, in effect, a political campaign – is a necessary ingredient for success in today’s environment.”

• Understand the antitrust landmines before you sign a deal so that you have adequately calibrated risk and are prepared for any investigation.  As panelist Jamillia Ferris explained, there is a lot of work your antitrust team can do upfront, before you sign a deal, to be in the driver’s seat if an antitrust investigation is actually opened.

• Know what your customers will say. If an agency opens an investigation, it will ask your customers what they think of the deal. Your communications strategy should make a priority of helping customers understand why this deal is good for them – like providing lower prices, more choices, and better choices.  

• Know what your competitors will say about your proposed deal and assume they will attack it. Competitors are increasingly approaching agencies with complaints and criticisms because they know that now, unlike in the past, officials are likely to listen. Be prepared to counter your competitors’ arguments.  

• Define your market. Critics of Amazon’s market power often say that the company is responsible for almost half of all ecommerce sales in the U.S. But Amazon takes great pains to say it isn’t just an ecommerce company and is only responsible for one percent of world retail sales. Both numbers are true. Providing this kind of context about the market you operate in can often make or break an argument with antitrust regulators or with a judge, but it needs to be reflected in your business documents.

• Use both hard power and soft power. In antitrust battles, clashes are not just between lawyers in regulatory filings and official proceedings. Battles are also fought through the soft power of publicity, discussion, and the influence of public opinion. Keep in mind that in addition to reading official documents, regulators follow the news and talk to a wide range of people, including members of Congress.   

The federal government’s more assertive antitrust posture is likely to persist well into the future.  

Activist groups on both the left and right have increasingly been pushing for Washington to counter business consolidation and public trust in big business has been declining for years. If Republicans win back the White House next November, their antitrust priorities would almost certainly be different from those of the Biden administration. But the generally permissive antitrust posture that had persisted in Washington since the Reagan administration is unlikely to return anytime soon and dealmakers need to be prepared.

Dealmaking in the Current Rate Environment: Insights from Centerbridge’s Ben Langworthy

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’ Raphael Bejarano, Co-Head of Global Investment Banking, sat down with Ben Langworthy, Co-Head of Europe and Senior Managing Director at Centerbridge Partners. Centerbridge is a global alternative investment manager, focusing on the complementary relationship between private equity, private credit, and real estate. 

Their conversation covered the current state of dealmaking, investment strategies for a high interest rate environment, global economic resilience, and more. 

The Dealmaking Lull: Is the Worst Behind Us? 

The US dealmaking environment was subdued in the first half of 2023, as rising interest rates, strict lending conditions, and economic uncertainty continued to suppress activity. PitchBook data shows a 30% decline in private equity deal value and a 31% decrease in deal count over the period. Private equity exits also decreased by over 40%. 

Bejarano and Langworthy’s conversation began with the question on everyone’s minds: Have we hit rock bottom? 

“In recent months, we’ve seen a strong comeback in financing markets. Banks in Europe and the US endured this stress test well, and lending is rebounding,” Langworthy said, expressing optimism for future cycles.

“In private equity, after so much deal activity in 2020 and 2021, there’s now a clear demand for exits.” 

Centerbridge, which focuses on creative deal-making within themes in its sectors, has capitalized on this revival, moving quickly to close four private equity transactions in recent months spanning the financial services, healthcare, and software industries. Langworthy believes that – for best-in-class businesses that are rates winners, resilient through cycles, and seeking fresh funding – capital from private equity will continue to be available.

Understanding Economic Resilience

After US economic output contracted in consecutive quarters last year, many believed the long-awaited downturn had arrived. A year later, economic momentum persists, but predictions about the future of the global economy vary. 

Upon being asked how he views this surprising degree of economic resilience, Langworthy shared a nuanced perspective.

“It’s important to bifurcate,” he said. “We’re seeing a very strong labor market and, correspondingly, a very strong and resilient consumer. That said, there are clear signs of a slowdown in industrial manufacturing.” 

Langworthy believes this ‘split economy’ remains stronger than most expected. Economic resilience creates compelling new opportunities for firms like Centerbridge, who invested cautiously during the pandemic. 

Investment Strategies for the Current Environment

Centerbridge’s strategy through the pandemic was to avoid companies too dependent on low-cost capital. In 2020 and 2021, VC-backed companies raised record funds at near-zero interest. Two years later, as that powder runs dry, many companies seek new investors. 

For Langworthy, the key to enduring high-interest rates and inflation is prioritizing profitability and solid unit economics. Where speculative technology companies may struggle in the current environment, businesses with a sound financial model will emerge as winners. 

Discussing the financial sector, a key industry for Centerbridge, Langworthy cited the market’s overreaction to fears of rising delinquency. He recognizes the advantages of high interest rates for financial institutions. Centerbridge is especially focused on lending technology, where they see burgeoning opportunity as major banks pull back. 

The global financial landscape remains opaque, as a resilient economy confronts high interest rates and geopolitical turmoil. As investors grapple with these challenges and opportunities, focusing on fundamentals remains a reliable strategy for success. Langworthy’s insights offer a crucial blueprint to private investors aiming to chart a steady path through today’s ever-shifting financial markets. 

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:

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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.