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:

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.

The information and any opinions contained herein are as of the date of this material and the Firm does not undertake any obligation to update them. All market prices, data and other information are not warranted as to the completeness or accuracy and are subject to change without notice. In preparing this material, the Firm has relied on information provided by third parties and has not independently verified such information. Past performance is not indicative of future results, and no representation or warranty, express or implied, is made regarding future performance. The Firm is not a registered investment adviser and is not providing investment advice through this material. This material does not take into account individual client circumstances, objectives, or needs and is not intended as a recommendation to particular clients. Securities, financial instruments, products or strategies mentioned in this material may not be suitable for all investors. Jefferies is not acting as a representative, agent, promoter, marketer, endorser, underwriter or placement agent for any investment adviser or offering discussed in this material. Jefferies does not in any way endorse, approve, support or recommend any investment discussed or presented in this material and through these materials is not acting as an agent, promoter, marketer, solicitor or underwriter for any such product or investment. Jefferies does not provide tax advice. As such, any information contained in Equity Sales and Trading department communications relating to tax matters were neither written nor intended by Jefferies to be used for tax reporting purposes. Recipients should seek tax advice based on their particular circumstances from an independent tax advisor. In reaching a determination as to the appropriateness of any proposed transaction or strategy, clients should undertake a thorough independent review of the legal, regulatory, credit, accounting and economic consequences of such transaction in relation to their particular circumstances and make their own independent decisions.

© 2023 Jefferies LLC

Clients First-Always ^SM Jefferies.com

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.