ECM New Issue Market Is Open

The second quarter of 2023 was the most active U.S. ECM new issue market since the fourth quarter of 2021.  We have seen increased primary equity issuance across all sectors and secondary share transactions from financial sponsors/insiders. 

While Q2 activity was been driven by public companies, the IPO market is continuing to show signs of its gradual re-opening. Jefferies was an active bookrunner on five IPOs in June.  U.S. IPOs included CAVA Group, Savers Value Village and Fidelis Insurance as well as PT Amman Mineral and Noile-Immune Biotech.

Former Airbnb CFO Laurence Tosi Preaches Caution and Patience

Preaching a gospel of caution and patience, Laurence Tosi, the founder and Managing Partner of WestCap Group, describes the last few years as an era when early-stage companies gained distorted valuations, built too fast on unproven business models, and rushed into IPOs before they were ready. 

As a result, Tosi said, young companies should work their way through the current economic climate by concentrating on the basics: be sure their runways are long enough to reach profitability, invest in activities that yield short-term returns, make efficiency a core competency, and continue to innovate.

Speaking at the Jefferies 2023 Private Internet Conference, Tosi advised that some companies can still keep an eye out for opportunities to make acquisitions, especially in situations where competitors are in turmoil.   

“A lot of our businesses are leaders in their space and their competitors are in distress,” Tosi said. “Now’s the time to be aggressive.” 

Tosi is a renowned entrepreneur and investor, who served as chief financial officer at Blackstone and Airbnb. Tosi founded WestCap Group in the late 1990s and returned to the firm full-time in 2018. WestCap’s focus is on investing in companies that are in a middle-stage of development.     

Amid a record downturn in venture capital activities and regional banking failures – when many mid to late-stage companies are scaling back their operations – Tosi said early stage companies have the opportunity to do well if they pursue a path of disciplined, sustainable growth.   

“Over the last few years, most of the disruption we saw was distortions in valuation. Companies tried to build too fast on models that were unproven,” Tosi said. “Seed-stage companies were receiving the valuations of established, late-stage incumbents.”

Tosi underscored the importance of companies having a solid business model before pursuing a public offering. By shoring up operations and allocating resources to high-performing business lines, companies can sustain investor confidence post-IPO.

“Market opportunity isn’t enough,” Tosi stressed. “Companies have to be ready – with the capital, branding, and culture to continue growing post-IPO. We always preach patience.”

As a first step, companies should scale back their operational cadence to ensure sustainability. Short-term return activities should be the priority, he said, while long-haul investments should be pursued with caution.

As for later-stage companies, Tosi said: “We’re advising companies to take their margins and invest them back in growth. Make efficiency a core competency and continue to innovate. Then, you can start to think about taking share in our tough market.”

Tosi stressed that one of the most critical issues facing a company contemplating an IPO is timing.

“We always believe the good companies will go out early [in the cycle] to price the IPO effectively so it will perform well,” Tosi said. “If you go back and you look at 75% of the IPOs or thereabouts in 2018 and 2019, techs were trading above their IPO price. It’s probably about 15% of the ones that went later in the cycle like 2022. And that’ll be a better experience for investors because if they want to sell they will be selling into a rising stock price and not a declining one.”

“Airbnb went early in the cycle,” he added. “They were right. They hadn’t even fully recovered from COVID, but they were right to go early because they had a great business model, leadership team and they were ready.”

Rather than wait for the best market opportunity, he said, wait until the company is ready and the IPO compliments the business model.

“Either you need the capital, the branding, or the ability to keep your employees with public stock,” he said. “Wait for those good fundamental reasons.”

How American Investors Can Learn from Chinese Innovation

Scan the vast landscape of China, its milling crowds of 1.4 billion people, its tens of thousands of competitive entrepreneurs, its vibrant start-up community, and you might just see something extraordinary: what American commerce will look like in the years to come.

So says Connie Chan, a general partner at Andreessen Horowitz, who has spent the last decade studying commerce in China in search of developing business trends and tell-tale signs of what may take hold in the American marketplace. She spoke about the predictive power of Chinese consumer technology trends for America and the world at the recent Jefferies Private Internet Conference.

“For the last ten years, I’ve had the strong belief that in consumer mobile internet, China is a place to learn,” Chan said. “When something takes off in China, it’s likely to take off all over the world.”

One reason for China being ahead of the United States in consumer technology trends is the sheer scale of competition and the number of companies that get funded in China. Comparing it to The Hunger Games, Chan said that in a competitive ecosystem in the United States there might be a handful of entrants, while in China there might be more than 20. The result is the generation of more successful ideas and businesses.

Another reason, at least in terms of e-commerce, is that in China smart phones were adopted as a primary way of buying and selling things long before the United States, she said. Even today, consumers in the United States are far less likely than the Chinese to make large purchases on their phones.

The result is that China is not only the largest market in the world, but a testing ground for other nations.

Chan recounted the early days of mobile internet when Chinese apps largely imitated their Western counterparts. This pattern flipped in 2011, with the launch of WeChat.

WeChat offered features beyond basic messaging, like mobile payments and social media, which were missing in Western alternatives. This marked a turning point for Chinese innovation, showcasing the country’s ability to spearhead groundbreaking technologies.

Intense competition soon emerged among Chinese entrepreneurs, fueling an innovation surge in Chinese consumer technology.

Micromobility – the use of lightweight vehicles such as bicycles or scooters for transportation – is a major trend that took off in China before making its way to the U.S. She pointed to Lime, an American micromobility start-up.

“By the time Lime reached American streets, two Chinese companies, Ofo and Mobike, had already secured Series B funding,” Chan said.

In studying Chinese business technology trends, Chan said she separated those business ideas that were China-specific – that is, would appeal largely to a local market – from those that ideas that addressed more universal problems that exist in other markets.

“Find things that have a clear product market fit and then try and figure out if there’s anything that’s culturally specific to that region or if it’s something applicable to all humans,” Chan said. “And if so, then go find the Western team that can leverage those learnings. Teach it to the Western team so they can grow faster with this kind of head start. And that’s worked out for us in quite a number of cases.”  

While artificial intelligence is expected to be the focal point of tech market growth, other sectors remain ripe for disruption. Chan emphasized e-commerce, where Asian platforms like Tmall and Taobao are leading a shift from search-based to discovery-driven shopping.  

“When you use Amazon, you’re probably going straight to the search bar. You’re not browsing Amazon for fun. But when we shop in real life, we’re usually browsing and window shopping,” Chan said. “Shopping has not been translated on the internet yet, but there are companies like Whatnot and Insider that are embracing this idea of product discovery.”

Why Hedge Funds and Banks Are Forging New Alliances

Shannon Murphy, Managing Director and Head of Strategic Content at Jefferies, discusses the importance of bank and hedge fund partnerships in successfully maneuvering current market volatility. During periods of transition, institutions that can lean on adept and responsive partners are better positioned to seize opportunities in the face of adversity.

In the wake of the pandemic, the last 18 to 24 months have ushered in significant changes, compelling both banks and hedge funds to prepare for an uncertain future. Transparent and candid communication between the two parties is essential to both establish the terms of their partnership and preempt potential challenges to come.

Banks and hedge funds can learn a great deal from one another as they aim to build new core competencies in uncharted waters. As new pressure points arise, it is important that they rely on each other and communicate openly about their needs. Collaboration will help both parties prepare for the unexpected.

Increasingly, volatility stems from developments across various sectors, including those in which one may not be directly involved. Unlike previous crises, which unfolded over weeks or months, we now see repercussions materialize overnight. It is more important than ever that institutions seek out adept and responsive partners, as opportunities to contain volatility may disappear in mere days.

Transparency and partnership are the two critical factors, intertwined and indispensable. Transparency, alone, is insufficient. It is critical to understand the multifaceted requirements of an organization and leverage a firm’s full range of expertise to address every need.

Hedge funds are not a homogenous group. The alternatives industry is incredibly varied and mature, with a continuing trend of innovation. While hedge funds invest in various asset classes, strategies, regions, and new products, they also need other key elements to thrive through volatility. These include treasury management, financing, asset raising, and pipeline management.

In a full-service bank, these key elements are readily available, and clients are likely aware of whom to contact with specific issues. Whether it’s a question about a new product, trading strategy, risk management query, or front-to-back support, clients have fast access to the right expertise. Establishing comprehensive relationships that cater to these diverse needs is critical – and particularly in the 2020s, which differ significantly from prior decades.

At present, the most efficient way for investment banks to collaborate with hedge fund partners is through a comprehensive, holistic approach. This involves exploring new strategies, products, and asset classes, as well as navigating periods of high and low deal flow. However, banks can add value across the entire industry by providing financial solutions and optimizing treasury management for hedge funds. By offering a full range of services, banks can substantially impact various aspects of hedge fund operations. This end-to-end servicing is vital in establishing and maintaining successful partnerships.

Our focus is on two key insights: first, forming partnerships that can withstand periods of volatility, and second, fostering new relationships that enable continuous mutual learning. The best method for avoiding stagnation and complacency is embracing new ideas. Whether it’s navigating the dot com bubble burst, the Global Financial Crisis in 2008, or dealing with the fastest-moving interest rate environment since the 1970s, progress is key to weathering turbulent times.

Today, many of our discussions either come from clients we haven’t heard from in some time, or from new clients seeking fresh insights. In this digital age, information is readily available at our fingertips – but data without context is meaningless. It fails to illustrate its significance to a specific investment process or risk management procedure. During periods of transition, it is crucial to collaborate with the right partners and obtain their insights. When crises are being measured in minutes and hours, you need to know the first phone call you make is the right one.

The Capital Playbook 2023

Raising Assets in an Era of Rebalancing

Across the globe, allocators are reassessing and rebalancing their portfolios. Regardless of fund size, the desire to develop relationships and raise assets requires a renewed approach to branding, marketing and investor relations. Hedge funds that can effectively express their value proposition in this new regime are likely to develop new partnerships and strengthen their pre-existing relationships. The Capital Playbook 2023 provides key insights for marketing and investor relations strategy, talent, travel, and customized products.

JEF-The-Capital-Playbook-2023Download

What’s Driving the Automotive Aftermarket?

The automotive aftermarket sector has always had a reputation for being resilient during challenging economic circumstances.

This past year was no different. Many aftermarket segments outperformed benchmark indexes and by the end of 2022, the overall sector had doubled the performance of the S&P 500 over the past 15 years. Meanwhile, this long fragmented sector once again spurred a healthy flow of transactions, with 352 M&A deals in 2022 – down from 2021 record highs but still well above 2019 and 2020 levels.

As the inflation and supply shocks of the last few years abates, it’s an opportune time to look at what comes next, which is what Jefferies did when we recently gathered over 100 companies and 200 investors for our 2023 Automotive Aftermarket Private and Public Company Investors Conference. We heard so many reasons to suggest this sector is entering what one of our assembled CEOs called a “golden age.” It’s a sentiment shared by frontline workers turning wrenches all the way up to the C-Suite because of record demand occurring now and strong tailwinds that will blow for years to come. 

It starts with the simple fact that there are more vehicles on the road that need more repairs and servicing. Amid sky high prices for both new and used autos, consumers are increasingly choosing to maintain and repair their existing cars and trucks rather than buy new ones. That explains why the average car on U.S. roads today is 12.2 years old. Meanwhile, there are now 117 million passenger vehicles that are between 4-11 years old, which aftermarket companies consider the “sweet spot” for the most value-added repairs.

But it’s not just the growing demand that is creating opportunity in this segment. It’s also the seismic changes sweeping every corner of the aftermarket, which will create so many openings for smart operators and sophisticated investors to identify and unlock value. Here are just a few trends that are creating the most excitement across the aftermarket sector.

  • Big Data is Even Bigger Than You Think: “In the 1970s and 80s, a car was a car. Today, it’s a smart phone with four tires and a steering wheel.” That was the view of one aftermarket company CEO, while another said, “There used to be dozens of diagnostic codes on a car. Now, there are tens of thousands.” 

    The growing sophistication of vehicles are by necessity turning many repairs from Do-It Yourself to Do-It-For-Me. “Try changing your own wiper blades on a new BMW”, one CEO challenged the audience. 

    Technology is also increasingly changing service models which is shifting everything from how products are stocked, to how consumers make appointments for new tires, to how collision operators need to recalibrate the dozens of sensors on today’s vehicles, while also spurring monthly memberships for unlimited car washes. 
  • Companies Need to Create or Get Access to Scale: There are over 300,000 auto service & retail provider locations in the U.S., with only a handful of players maintaining over 1% of location share, making it one of the most fragmented sectors in the U.S. economy. 

    This can create a powerful advantage for well-capitalized aftermarket businesses – or PE-built platforms – with the resources to acquire businesses and invest in technology, analytics and diagnostic tools they can deploy at scale. 
  • The Power of Customization, Variation, and Enthusiasm: When your car breaks down, you have to fix it. But the aftermarket is about more than routine maintenance. A growing share of the automotive aftermarket is driven by customers’ desire for more customization and variation in the vehicles they drive. Whether its driven by passion or a functional need like a truck bed cover to secure cargo, the market is underpinned by one of the most reliable and loyal customer bases anywhere. One powersports company CEO and enthusiast panel participant noted how new consumers coming into the market over the past three years will drive the aftermarket sales of the future for years to come. 

    If you talk to almost any leader in this industry, you’ll hear agreement that these trends are durable and will continue to unfold alongside the slow but steady adoption of more electric vehicles in the years ahead. The automotive aftermarket sector is poised to grow in new and exciting ways, even as it continues to play its longstanding role as a reliable and defensive play for investors and operators alike.

Jonathan Carey is a Managing Director and Global Joint Head of the Automotive Aftermarket Group at Jefferies.  Jonathan has been in investment banking for 25+ years and joined Jefferies with his aftermarket team in 2015. Jonathan has managed transactions spanning the entire aftermarket channel including suppliers, distributors, multi-unit retailers, technology players and service providers in every industry sub-sector. Jonathan is a regular speaker at industry events and has served as an active committee member in the industry trade association. Jonathan received an MBA from The Wharton School at The University of Pennsylvania and a BA from The George Washington University.

ESG: How the Market Rewards Progress and Quality Data

  • Financial sponsors’ effort to overhaul environmental, social, and governance (ESG) reporting is transforming the industry’s data, and the market is taking notice.
  • Improved reporting frameworks are creating new opportunities to capitalize on ESG assessments, for top-rated companies and historic underperformers alike.

Intangible ESG

2022 was a challenging year for the ESG community. As the influence of ESG ratings grew, so did public scrutiny, with many criticizing the industry’s data as inconsistent and ill-defined.

Across the political spectrum, there is growing consensus around the need to focus on financial materiality in investment decision-making, but some skepticism that ESG assessments are substantive enough to be a core focus.

Some of this criticism was well founded. ESG ratings – like many financial assessments – were frustratingly subjective. Different methodologies engendered variable results. As recently as 2021, despite the sector’s growing influence, no standardized framework for measuring and reporting ESG data existed.

New Reporting Frameworks

Leading LPs and GPs in the financial sponsors space have confronted this challenge head-on. In 2021, CalPERS and Carlyle led an effort to create a mechanism for comparative reporting, benefiting stakeholders across markets. This project, known as the ESG Data Convergence Initiative (EDCI), is uniting private companies around a meaningful, standardized set of ESG metrics.

Participating companies report data across six categories, using a globally accepted and objective submission template. The EDCI ensures this data’s viability for a large network of financial sponsors and investment managers. Today, more than 275 leading financial sponsors, representing more than $25T in global assets, are committed to the EDCI.

Financial Sponsors like Carlyle and CalPERS are pushing their portfolio companies to obtain and report this data, but they are far from alone. In the private equity (PE) community, over 80 of the top-100 PE firms have a partner dedicated to ESG on their investment committee. Whether firms are selling sponsor to sponsor, working with family offices, or taking a business public, ESG plays an important role in enhancing the value of portfolio companies.

Similar efforts are underway in public markets. The EU recently introduced mandatory disclosure requirements for all large and listed companies on their risks and opportunities arising from social and environmental issues, and on the impacts of their activities on people and the environment.

While the SEC does not yet require extensive ESG disclosure, it is expected to follow the EU’s lead and already mandates climate disclosures encompassing emissions from upstream and downstream activities.

A ‘Transition’ Mindset Emerges

For years, ESG evaluations lacked nuance. With fragile data, companies were viewed as ‘green or brown’: strong on ESG or weak on ESG, there was no middle ground. As the quality of ESG reporting improves, so has the quality of ESG analysis. Today, financial sponsors and investment managers have adopted a mindset that values ‘transition.’ Companies are not judged on their history, but on their commitment to progress.

The market is patient, but it wants to see data, analytics, and intentionality. Even historic underperformers can represent great investment opportunities, if they can showcase their efforts to track meaningful metrics and make improvements. Markets are rewarding companies that advance ESG strategies, something priced in and reflected in their multiples.

In the coming years, companies should develop inclusive, analytical frameworks for understanding sustainability, human capital, and corporate culture. Those that fail to demonstrate a commitment to ESG risk significant consequences from their investors, their employees, and the SEC.

Ignoring ESG Invites Risks

The EDCI’s database of meaningful, performance-based assessments is gaining traction amongst LPs and GPs. As these metrics continue to gain wide spread adoption, companies who do not engage with this process may struggle to raise capital and attract top talent.

Jefferies delivers customized ESG guidance to clients, offering unique access to public and private sector ESG thought leaders for investors and corporate boards. The firm’s specialized expertise, followed by actionable and timely strategic insights, can ensure your company capitalizes on the market’s swiftly evolving assessment of ESG.

How HCM Tech Companies Are Shaping the Battle for Talent

Talent is the most important strategic asset for any company and even amid layoffs and a cooling labor market, many C-Suite leaders are still consumed with a vexing question:

Where do I find talent and how do I keep it?

The answers are not getting easier, especially as businesses are faced with shrinking recruiting budgets and forced to do more with less.

But this challenge represents a compelling opportunity for the 35 companies and 45 investors that recently assembled at Jefferies’ HCM Tech Summit in New York.

As I listened to the panels and joined in some of the hundreds of 1×1 meetings we hosted, it became clear that the most value creation, the most growth and most accretive transactions in HCM tech are likely to occur at the intersection of a few key trends fueling the sector in 2023 and beyond.

  • Upskilling and Reskilling: In the U.S., there are still almost ten million job openings, 1.7 for every unemployed worker. The skills shortage is even more acute among frontline worker positions, where there are three openings for every non-college person in the U.S.

This means upskilling and reskilling will be the preferred route for many companies to address their talent shortages in the months and perhaps years ahead. Some of Jefferies’ HCM clients enable their customers to identify and address skill gaps in real time across their entire global workforce. Others provide content, training modules or learning tools that close these gaps, bringing enterprise-grade technology and content to companies that otherwise lack the budget, bandwidth or know-how to develop on their own. We are increasingly seeing immersive and engaging training experiences rooted in the deep science of how people learn. It’s often easier to remember what you experience than to remember what you read or hear, which is why virtual, augmented and extended reality – often enhanced by AI – is quickly becoming such an integral component of the on-the-job learner’s experience.

  • Retention: We’ve all read about the post-COVID “Great Resignation” and the costs are adding up: It can cost anywhere from 50-200% of an employee’s salary to replace them. That’s why we are seeing such a proliferation of software companies with tools that can help promote employees’ health and wellness; measure, achieve, and sustain workplace equity; solicit, process and respond to employee feedback; and accommodate more flexible work arrangements.
  • Generative AI: At many companies, HR teams are overwhelmed by an escalating number of responsibilities and business challenges. At our HCM Tech Summit, one of Jefferies’ HR professionals lamented it felt like a full-time job just responding to the “pray and spray” marketing appeals from different HCM software vendors. Generative AI tools have the potential to streamline and automate talent workflows, especially when it comes to:
  • Identifying potential biases in job descriptions or applicant screening processes or analyzing large datasets to make the hiring process more inclusive.
  • Offering guidance on HR policies and assisting with routine inquiries.
  • Generating compliant and effective job requisitions, postings and candidate engagement.

We are still in the early innings of the AI revolution in HCM software, but we already see many compelling use case and product prototypes emerging across our client base. Much more to come here, and soon!

  • Global Employment: As the war for talent intensifies and multinationals face a global talent shortage of over 85 million workers by 2030, companies are increasingly looking to find skills beyond the borders of their original domicile. A new generation of global employer of record (EoR) businesses enable their clients to compliantly hire and retain workers virtually anywhere in the world. But that’s just the beginning. Soon, EORs will more beyond HCM and transform into comprehensive systems of record and transaction enablers for their global customers.

Given companies’ urgent needs to find and retain talent, it is not surprising that most HCM leaders Jefferies’ has spoken with expect to increase their spending on innovation and to buy where it is prohibitively expensive, or time consuming, to build.

In a rapidly changing world, time to market is critical, and every vendor, whether an incumbent or a high-growth startup, will also look to augment their go-to-market and product through acquisitions. As a result, we expect continued consolidation and capital raising activity in our space. Finding and keeping good people has rarely been this challenging or more important. That means the opportunity set for innovative HCM tech companies has never been this promising.