Is AI Ready to Transform Healthcare? Leaders in Biotech and Provider Services Weigh In.

At last year’s Global Healthcare Conference, interest in AI was beginning to surge. This year, it’s reached a fever pitch.

A record one in four healthcare investment dollars is now going to companies leveraging AI. And AI is beginning to drive transaction activity in the sector, from IPOs like Tempus, an AI-enabled precision medicine leader, to M&A in medical devices, biotech, and beyond.

Still, separating the hype from near-term commercial opportunities remains a challenge for sponsors and corporates, especially in such a fast-moving space.

Jefferies Insights sat down with banking leaders in provider services and biotech to get their take on how AI is being integrated into healthcare—and where it’s still mostly noise.

Can AI Ease the Strain on Provider Services?

The provider services sector faces several challenges. Demand for healthcare is surging, but a growing labor shortage makes it harder for providers to keep up. At the same time, profit pools are shrinking amid ongoing inflation and rising labor costs.

Providers are under pressure to deliver care more efficiently—and many are turning to AI for support. A recent survey found that 75 percent of providers increased IT investments over the past year, focusing on technologies that can optimize operations and reduce clinical burden.

The question is, are AI-powered technologies ready to make an immediate impact?

Jefferies Insights posed this to Ashwin Pai, Managing Director in Healthcare Investment Banking. With nearly two decades of experience in provider services, Pai regularly supports transactions and fundraising for emerging technology leaders in the sector.

“There’s a lot of interest and activity in the provider services sector around AI,” Pai shared. “The opportunity set is broad, and many technologies are still in the early stages of testing and development. But in some areas, we’re already seeing AI tools applied to great effect.”

Providers are already piloting AI tools in clinical applications like documentation, where they’ve shown promise in easing administrative burdens on clinicians. There’s also hope that AI can support more electronic health record (EHR) functions, such as responding to patient inquiries and assisting with medical coding.

“Beyond admin, there’s incredible potential for AI in clinical decision-making,” Pai explained. “We’re already seeing AI-powered wearables introduced, giving providers much deeper insight into patients’ conditions and progress, even in remote settings. And that’s just the start—AI will soon be a key tool in medical imaging, predictive analytics, and a true clinical support partner for physicians.”

Pai also pointed to the potential of AI in areas like radiology, supporting physicians in analyzing medical imaging and making diagnoses. There is ongoing innovation around predictive AI to detect diseases like cancer and neurodegenerative disorders earlier than human diagnosis typically allows.

Transaction and fundraising activity around the integration of AI in provider services is gaining momentum, as more sponsors and strategic buyers hone in on opportunities. Pai highlighted Microsoft’s $1.5 billion investment in G42, a UAE-based AI company leading advancements in AI-powered diagnostics and digital health, as a key example.

What AI Can (and Can’t) Do for Biotech

Few sectors have sparked as much excitement around AI as biotech. The potential for AI to revolutionize drug discovery—streamlining a notoriously long and costly process—carries significant clinical and financial promise.

However, in these discussions, hype is often mistaken for near-term potential. That’s why Jefferies Insights spoke with Dr. Gil Bar-Nahum, EMEA Head of Biotechnology, who brings two decades of experience in biotechnology and holds a PhD in biochemistry from New York University.

“There’s no doubt that AI’s potential in biotech is exciting. Machine learning can help us better understand drug efficacy and optimize clinical trials—and that’s just the beginning,” Bar-Nahum shared. “But if you’re asking whether AI can make an impact on my five-year, $200 million clinical trial today? We haven’t seen it yet. So the hype has tempered a bit.”

The biggest hurdle for early-stage biotech companies is fundraising. Drug discovery costs hundreds of millions of dollars—and the field is inherently high risk. Clinical trials for new drugs have a historical success rate of just 7.9 percent. The time horizon for biotech investments is also uniquely long, with regulatory approval and commercialization taking years, even for successful breakthroughs.

This created a tough market in recent years, as biotech grappled with high interest rates. Earlier this year, equity capital markets began to reopen, fueled by pent-up demand and expectations of an easing cycle. Financing is beginning to trickle through again for development-stage biotech ventures.

“The biggest near-term opportunity for AI is making clinical trials more efficient,” Bar-Nahum explained. “Preclinical biotech companies burn through cash, and in a risk-off environment, that makes things tough. Where AI can cut costs and streamline operations, it can make a big impact in R&D—like streamlining clinical data and analyzing patient populations.”

Some of these opportunities are already being realized, such as a collaboration between Keio University, Mitsubishi Tanabe Pharma Corporation, and Boston-based Neuro Discovery Lab. Researchers are using machine learning in a knowledge graph approach, analyzing potential relationships between disease and biological function in large quantities of patient data. The team reports significant gains in efficiency.

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Opportunities to apply AI in healthcare are exciting and diverse, varying widely by sector. In some cases, there are near-term opportunities for AI-powered technologies to make healthcare more predictive, efficient, and impactful. In others, meaningful applications are still a long way off.

Still, one thing is clear: no matter their role, everyone in healthcare is thinking about it.

For more insights on AI’s near- and long-term potential in healthcare, follow Jefferies’ 2024 Global Healthcare Conference in London.

Healthcare’s Path Forward: The Key Trends Shaping 2025

Tommy Erdei is Joint Global Head and European Head of Healthcare Investment Banking at Jefferies. He joined the firm in 2009 as a Managing Director for Jefferies Healthcare Team and is based in London. Erdei spearheaded the organization of Jefferies’ annual Global Healthcare Conference and hosts the annual Healthcare Temperature Check.

Last year’s London Healthcare Conference came amid significant market and geopolitical uncertainty. Inflation was well above the Fed’s two percent target, and rate cuts were still ten months off.

Still, participants spoke of the sector’s resilience. Supply chain pressures were easing, capital markets reopening, and sponsors and corporates were positioning for a rebound in dealmaking. 

Now, as third-quarter data shows growth in transactions, the quiet confidence of last year’s conference appears to be paying off. A fresh rate-cut cycle and record dry powder are paving the way for more dealmaking, while innovations in AI and GLP-1s continue to excite investors.

Ahead of this year’s conference, Jefferies Insights caught up with Tommy Erdei, Joint Global of Healthcare Investment Banking, for his outlook on the healthcare sector and the months ahead.

Healthcare’s Momentum Builds

Even in a tough macro environment, healthcare proved uniquely resilient. Private equity activity has remained steady, relative to other sectors. There are robust pipelines of innovation. And industry leaders are sitting on large cash reserves, supporting strategic M&A.

“Healthcare is a defensive sector,” Erdei shared. “The ups and downs are much narrower than you see in other sectors such as technology or consumer sectors, for example. In broad strokes, things are typically good or great in healthcare.”

Now, the outlook for the sector is moving from resilient to strong, Erdei explained, as some of its key challenges begin to abate.

First, bid-ask spreads are narrowing. For two years, buyers dealt with significantly higher capital costs, while sellers clung to old valuation expectations. Now, as rate cuts begin, sellers adapt to the new normal, and their companies continue to grow into the valuation expectations from a year or two ago, both parties are increasingly aligned. This will spur growth in transaction activity, especially of PE-owned companies.

Second, equity capital markets (ECM) are gradually opening up—particularly in sectors like biotech—allowing more companies to raise capital.

“Healthcare is a broad sector, but in key areas, equity markets have been really active in 2024. There’s been a lot of buzz around M&A by large-cap pharmaceuticals of biotech/pipeline focused companies, particularly earlier in the year. This is always good to supporting funding of earlier-stage Biotech companies, as those investors look forward to a large payday from such takeovers as their product pipeline matures. And so we’ve seen the equity capital market for biotech open back up nicely, after a challenging couple years for fundraising,” Erdei said.

The biotech IPO market slowed significantly in 2022 and 2023 but has seen a gradual reopening in 2024: 7 Biotech IPOs have priced over the past two months, the most active two-month stretch since 2021. In total, there have been 17 IPOs in 2024 compared to 11 and 10 in 2022 and 2023 respectively.

Meanwhile, the follow-on market has seen near record activity in 2024 buoyed by an active M&A backdrop and strong data readouts igniting investor interest and returns. The 2024 market is the 2^nd most active year ever for biotech follow-on issuance by proceeds raised.

“In healthcare, all these forces are connected,” Erdei explained. “With more M&A deals, financing will find their way to to new and exciting biotech pipeline opportunities, via IPOs, follow on offerings or from VC private investments. And with more capital, trying to find opportunities in the biotech sector, we will see further strength for biotech companies raising capital.”

GLP-1 and AI: Key Themes in Healthcare Innovation

Last year’s conference was dominated by talk about GLP-1 drugs as semaglutide treatments showed remarkable effectiveness in also addressing obesity in addition to its traditional market of diabetes. As the two major commercialized innovators, Novo and Eli Lilly, drove very strong growth , companies across the supply chain positioned themselves to capitalize on the growth opportunities.

Analysts project that early leaders Novo Nordisk and Eli Lilly will maintain a two-thirds share of the semaglutide market through 2031, thanks to their first-mover advantage. However, up to $70 billion of the GLP-1 market is still up for grabs, according to a recent report by Morningstar and PitchBook.

“GLP-1s were new at last year’s conference, but excitement remains high as results continue to exceed expectations,” Erdei shared. “The market isn’t limited to the peptide space—it impacts companies across the supply chain. There’s a race in several subsectors to seize this opportunity.”

This year, excitement also extended to artificial intelligence. A record $11.4 billion in venture capital is expected to flow into healthcare AI in 2024, as companies and investors explore potential applications of these technologies.

“Healthcare is such a broad sector, and AI opportunities vary across categories,” Erdei added. “AI in drug discovery and pharmaceutical supply chains is a big focus this year. There’s also growing interest in AI’s potential to optimize provider services workflows—logistics, electronic health records, diagnostics.”

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As the effects of a rate-cutting cycle and more stable equity markets begin to ripple through healthcare, the sector is poised for stronger deal activity, innovation, and investment. However, this isn’t a rebound from a downturn—healthcare showed resilience throughout the recent storm.

For deeper insights into the market, and more from Tommy Erdei and the Jefferies team, check out the 2024 Healthcare Temperature Check and follow coverage of this year’s Global Healthcare Conference.

Where’s The PE Action in Healthcare?

By the Jefferies Editorial Team

Michael Dodds is a Managing Director and Global Head of Healthcare Sponsor Coverage at Jefferies. He joined the firm in 2005 and has nearly two decades of investment and merchant banking experience in the sector.

Healthcare has been a hotbed of private equity activity for the past decade, accounting for over 20 percent of global buyouts in 2021. However, like many sectors, dealmaking slowed in recent years amid rising interest rates and inflation. Sponsor-led healthcare transactions dipped in 2022 and 2023.

Now, with a new easing cycle underway, there’s uncertainty around what’s next for healthcare PE. At last year’s Global Healthcare Conference, participants predicted an uptick in the sector’s M&A—but driven more by strategic buyers than sponsors.

Fresh third-quarter data point to a healthy market. Healthcare transaction value rose year over year, with deals from TowerBrook, CD&R, and The Carlyle Group headlining the quarter.

Jefferies Insights sat down with Michael Dodds, Managing Director in Healthcare Investment Banking, to discuss private equity activity in healthcare this year—and where it could be headed next.

Healthcare Transactions in ‘24: A Slow but Steady Path Forward

September’s 50-basis-point cut was welcome news to investors—but compared to the near-zero rates of recent years, borrowing costs are still high. The target range for the federal funds rate remains between 4.75 and 5 percent.

The macro environment is improving, and there’s a growing appetite for capital deployment and dealmaking, but the floodgates won’t open all at once.

“There is more stability in the market today, but rates are still high, and leverage multiples have shifted from a few years ago. Most sponsors expect the current deal environment to hold steady through year’s end,” Dodds shared.

Third-quarter activity reflects this prediction. Healthcare M&A rose in Q3, but just 6 percent—a positive but modest sign of recovery. Dodds explained that it will take time for valuations to align and leverage multiples to catch up with new rate cuts.

“Bid-ask spreads are narrowing, but there are still some challenges around dealmaking. Over the next six months, we’ll see buyers gain confidence and sellers adjust their expectations as everyone continues to get comfortable with the new environment,” Dodds said.

Dodds also emphasized the importance of a well-run process in times of uncertainty. Strong multiples will depend heavily on bankers’ ability to drive competition and optimize deal structures. For the Jefferies team, this has been a key focus, Dodds said, as deals no longer come as easily as they once did. Having experienced M&A bankers and expertise in the sector are vital.

How Sector Dynamics Are Shaping Healthcare M&A

Healthcare’s rebound won’t unfold evenly, as challenges and opportunities vary across subsectors. Dodds pointed to medical technology, life sciences, and pharmaceutical services as areas where he expects sponsor-led transaction volume to remain strong.  Plus, PE is also looking into specific pockets within healthcare services, like infusion, home health, hospice and pharmacy, where activity is high and a strategic or IPO exit is likely.

Notable deals from the quarter include TowerBrook and CD&R’s acquisition of R1 RCM, a technology-driven revenue cycle management company, for $8.3 billion. The Carlyle Group also led a $3.6 billion acquisition of Vantive Kidney Care, bringing the firm’s total investments in medtech and diagnostics to $40 billion in enterprise value.

Biopharma remains the most active healthcare subsector year to date, with 42 transactions. However, many of these are strategic-led deals, such as Eli Lilly’s Q3 acquisition of Morphic for $3.2 billion.

What’s Holding Back IPOs in Healthcare?

The IPO market divided opinions at last year’s Global Healthcare Conference. About half of participants anticipated a rebound in 2024, while the other half expected it to stay sluggish. Healthcare go-public activity has slowed in recent years, reflecting a tough capital markets environment for new listings.

Dodds expects private equity to stay cautious about IPOs—except for the largest funds, where taking companies public may be the only feasible path to liquidity.

“Generally, sponsors have a bias against IPOs. They take a long time to monetize, so they’re a big drag on funds’ IRR,” he explained. “However, we expect the IPO market to become a more popular exit path for healthcare private equity firms, especially as the companies they own become larger and public markets continue to improve. We’re seeing evidence of this already.”

Dodds expresses cautious optimism about the near-term outlook for the healthcare sector. As the economic climate stabilizes and the Fed continues lowering rates, sponsor-led deal activity is expected to pick up.

For the Jefferies team, a focus on a strong advisory and transaction process has been crucial in managing the downturn—and will continue to be as markets recover. With over 130 healthcare bankers worldwide, the firm remains one of the leading advisors in global healthcare M&A, equity transactions, and financing.

Where Climate Tech Stands in 2024: Trends, Challenges, and Opportunities

More governments, corporations, and investors are recognizing the threat of climate change, and record capital is flowing into mitigation and adaptation efforts.

This capital brings a big appetite for innovation. Investors see climate tech as a space where companiescan increamentally but fudmentally evolve several systems of today.

Funding into climate tech companies has slowed in recent months, some hurdles were macroeconomic,. Others were sector-specific, as scaling asset-heavy climate tech proved capital intensive.

. While the sector’s funding fell 34% in 2023, its compound annual growth rate remains postive (albeit down YoY).

In its mid-2024 review, Jefferies’ Sustainability and Transition Team analyzed the state of climate tech, exploring current opportunities and where the sector is headed next.

Funding & Deployment in Climate Tech: Key Developments From the First Half of 2024

• Investment in private climate tech companies slowed in H1 ‘24, down 20% year-over-year.

Growth-stage funding slowed the most, dropping 33%, while overall deal activity fell 26%. However, significant deals are still happening, with average round sizes for Seed, Series A, and B showing year-over-year growth. Cumulative funding remains positive, up 8%, but quarter-over-quarter growth has slowed to 2%. The average time between Series A and B raises continues to extend, now about two years.

• All sectors saw a downward trend in funding in H1 ‘24, down 24% year-over-year on average.

Among all sectors, energy companies saw the most funding, totaling $3.2 billion. Within energy, hydrogen attracted $907 million, and energy storage saw $620 million—three times higher than in H1 2023. Carbon-related sectors, including removals, CCS, and carbon markets, lagged behind with $0.5 billion. While deal count in energy remained flat, other sectors saw declines. The industry sector saw a 29% increase in average deal size year-over-year, and the built environment sector saw an 11% rise.

• Bankruptcies, IPOs, SPACs, & Acquisitions

In the first half of 2024, nine climate tech companies filed for bankruptcy, including Ambri, Arrival, Running Tide, Universal Hydrogen, and Fisker. Most cited a failure to secure demand or scale manufacturing as the main reasons. Notable IPOs and SPACs during this period included NANO Nuclear, Oklo (both in nuclear), and Sunergy (residential solar and storage). There were also 22 acquisitions, with standout deals like Talos (acquired by TotalEnergies), Aker CCS (acquired by SLB) in the CCS space, and Heliox EV charging (acquired by Siemens).

• Investors in H1 ‘24

Lowercarbon, SOSV, and Breakthrough are among the most active early-stage climate investors. For late-stage investments, Breakthrough, Temasek, and Energy Impact lead the pack, while Temasek, Goldman, and CPPIB are the most active in growth-stage funding.

• 2023 was a record for AUM raised across private climate tech funds. 2024 looks set to top that.

With over $45 billion raised year-to-date from funds announcing a final close, 2024 is on track to surpass 2023’s total. A significant portion of this—$41 billion—has yet to be deployed and isn’t reflected in the $11 billion raised in the first half of 2024. The types of investors raising climate tech funds are also becoming more diverse, with growth equity, PE, and infrastructure firms joining traditional VCs.

• Climate tech is shifting toward deployment and scale, drawing infrastructure and private equity backers with substantial capital raises.

Infrastructure-like returns and large ticket sizes for projects are drawing in a new wave of investors. Of the $45.5 billion in final closes announced year-to-date, 80% comes from just 10 major players, including Brookfield, Energy Capital Partners, KKR, EQT, and TPG.

What to Expect During the Second Half of 2024

Jefferies’ Sustainability Team is tracking trends across all areas of private climate tech funding, but heading into the second half of the year, two stand out:

First, the role of asset owners should be a key focus for investors.

Sovereign wealth funds, pensions, and insurers are becoming more active in climate tech. With their capacity to deploy large sums over longer time horizons, announcements like the UAE’s $30 billion Alterra fund could accelerate the deployment and scaling of climate tech infrastructure.

Second, deployment rates in H2 ‘24 could be an indicator of the health of investable companies and projects.

With a significant amount of capital still to be deployed, the key question for climate tech moving forward is how to align investor risk appetite with project- or company-level risks. The total available financing no longer seems to be a limiting factor. With relatively little capital deployed compared to what’s been raised, an acceleration in deployment could indicate a shift in risk perception for certain sectors like hydrogen, CCS, and nuclear.

For a full analysis of the state of climate tech in 2024, see Jefferies’ Sustainability and Transition team’s full report on the market.

Prime Services C-Suite Newsletter – October 2024

Regulatory Initiatives, Liquidity Trends, and AI in Relationships

Industry Insights:

Our newsletter, Jack-of-all-Reads, shares the latest and greatest insights in a brief read on a monthly basis. Please let us know of any comments or questions – we welcome and appreciate your continued partnership.

Industry Insights:

1. Progressively Unique Fee Structures. The team has noticed managers become increasingly flexible to cater to investors’ needs by creating unique share classes. For example, managers have been more likely to include multiple fee ranges based on an allocator’s ticket size, choosing to input this information directly into their prospectus rather than through side letters to provide additional transparency to all investors.
   • Commonly seen trends include:
     • Managers presenting a menu of options, most typically with sliding scale structures and liquidity restrictions based on ticket sizes.
     • Monthly and quarterly redemptions are still the most common liquidity windows, however, additional gates and lock ups are often included as well. Longer lock ups are regularly associated with allocators’ paying lower fees or opting into periodic distributions.
     • Hurdles are becoming a more common occurrence. A recent study by Seward & Kissel noted that hurdles are used for over 20% of all established managers and 40% of emerging managers.
2. Cybersecurity: Regulatory and Compliance Trends. With cybersecurity regulations changing rapidly, which requires managers’ best practices to evolve in tandem, a fund’s annual exercise should no longer be a generic program. The SEC has been discussing cybersecurity for almost a decade, and now this is also a European regulator focus. The EU’s DORA regulation is expected to demand a more proactive approach in the governance of the organization which may include increased employee training, in depth testing of technology systems, and assessments of infrastructure to ensure compliance.
   • 3rd Party and Operational Resilience. Funds must understand which of their service providers are material vendors to their business. Business continuity and operational resilience plans should show that managers have thought about these groups, processes, and how they would handle diminished access to them.
     • What if your service providers go bankrupt? How will you respond?
     • What if a key person leaves your business that has sensitive, proprietary IT knowledge?
     • What if the operational platform needed to run day to day tasks in your business falls?
   • Account Takeover Risk. While ransomware and phishing tend to be in the headlines, the theft of credentials and the recycling of credentials make account takeovers a more common occurrence. Some of the most fundamental requirements from all of the regulators include:
     • Who has access to the platform?
     • When they access the platform?
     • How do you prevent others from gaining access?
   • Understanding Regulators: Different regulators require different reporting, archiving, and levels of communication around cybersecurity.
     • Annual Reporting and Archiving. Regulators have different expectations of how long you are going to need to archive certain communications and data. Some may also need to be easily available for a certain period of time.
     • Incident Communications. Understanding when to communicate a breach or data loss can be difficult as regulators may expect different timelines and forms. Managers should ensure they are adequately prepared to respond to these nuances in timelines and procedures depending on the regions they operate in.
3. Non-Competes. On August 20th, a United States District Court in Dallas, Texas ruled that the Federal Trade Commission (FTC) cannot enforce its ban on noncompete agreements, which was set to be implemented on September 4th.  The court ruled that the FTC lacked the authority to enact the ban.
   • State Specific. The lawsuit against the FTC’s noncompete rule, brought by the US Chamber of Commerce and a Texas based tax firm, is the most advanced of three that challenges the FTC’s ban, with a court in Florida issuing a limited initial ruling against the ban, and a Pennsylvania court declining to do so.
   • Commonalities. With an estimated 20% of American workers subject to noncompete agreements, the US Chamber of Commerce has argued in its case that banning such agreements would put most workers and businesses at a competitive disadvantage and that in issuing the ban the FTC has gone beyond its legal authority. A spokesperson for the FTC has said they are considering an appeal.
4. ESG Taskforce Updates. In March 2021, the Securities and Exchange Commission (SEC) established a Climate and ESG Task Force in its Division of Enforcement tasked with the responsibility of identifying ESG-related misconduct, which could include gaps or misstatements related to a companies’ disclosure of climate-related risks to their businesses and products. In September 2024, it was reported that the SEC disbanded this taskforce, pointing to the continued headwinds faced by the SEC as they try to adequately enforce rules on climate disclosures, human capital, and board diversity efforts.
   • Exam Trends: SEC’s ESG Priorities. Prior to its disbandment, the SEC also removed ESG from its annual Examination Priorities Report. Despite this dissolvement, the SEC has continued to pursue action on a number of its proposed ESG-related rules.
   • ESG Priorities Globally. Concerns about ESG-related disclosures still remain top of mind globally, with the European Union recently implementing its “Greenwashing Directive,” which prevents businesses from making environmental claims that are uncorroborated, and UK’s Financial Conduct Authority (FCA) enforcing its Anti-Greenwashing Rule, which requires companies to ensure that all ESG related claims about their products are “fair, clear, and not misleading.”

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

Client Corner:

People Centric Marketing. In a world of growing AUM, large teams of analysts, proprietary algorithms, and AI utilization streamlining the investment process, do people still count in the alternatives industry? The September 16^th edition of the Prequin First Close Newsletter, which sampled responses from various senior members of large investment firms, says, yes, the industry is very much still people centric. LPs still seem to value having conversations with GPs early on in their relationship building process about terms, alignment, and governance. They also appreciate a manager’s humble admittance of fault when an inevitable error occurs. Additionally,  the article shows that LPs believe the industry is in another cycle of manager transitions, with the largest firms consolidating and working through succession plans, while also dealing with top performers spinning out to launch their own shops. As a result, some LPs say they are having to pay greater attention to manager ownership and investment team dynamics – the human factors – when performing diligence on their investments. 

Spotlight on Content and Events:

Our View on How Corporates Evolve on ESG/Sustainability. The Jefferies Sustainability & Transition Strategy team will be hosting a webinar on How Corporates Evolve on ESG/Sustainability on Tuesday October 29^th at 11am ET. This conversation will be hosted by Aniket Shah, Global Head of Sustainability & Transition Strategy and Luke Sussams, EMEA Head of Sustainability & Transition Strategy. The key challenges to be discussed include:

• Align Sustainability Strategy with Business Strategy: What are the 1-2 issues that are financially material to the business?
• How to Write a Sustainability Report: The average length of 2023 sustainability reports increased by 6%, up to 82 pages; lengths ranged from 11 pages to 262 pages. But are these reports helpful for institutional investors?
• Corporate Venture Capital and M&A Strategy related to Sustainability: How companies allocate capital to commercialize sustainability strategy
• To register for this call, please click the following link.

Mid-Year Review: A Record-Breaking 1H of 2024 for the Secondary Market | Jefferies Insights and Thought Leadership. In July, Jefferies’ Private Capital Advisory team released its mid-year review of the secondary market, consolidating discussions, surveys, and research from the market’s biggest and most influential limited partners, general partners, and secondary buyers.

This report follows Jefferies’ H2 2023 secondary market review, which predicted near-record secondary volume, higher LP pricing, and a sustained capital overhang for fiscal year 2024. The latest findings show the first half of the year largely met these expectations.

Here, Jefferies Insights shares high-level takeaways from the Private Capital Advisory team.

Interesting Service Provider Reads: Highlighting Topical Content from Industry Leaders

Akin Gump –AML and KYC Obligations (Finally) Imposed on Private Fund Managers

Citco – 2024 Q2 Hedge Fund Report – Quarterly Review

EisnerAmper – What To Do When Your Organization Is Growing Faster Than Your IT Function

RQC – The Alternative Investor

Seward & Kissel – The 2023 Established Manager Hedge Fund Study

Jefferies Prime Services Contacts:

DISCLAIMER

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

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.

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Clients First-Always ^SM Jefferies.com

Strategic Focus … and Spending … Continues Growing in the Office of the CFO

A talk with Evan Osheroff, Managing Director, Software Investment Banking

Many companies depend on the CFO’s office as a hub for strategic thinking. It is responsible for diverse functions ranging from budgeting and forecasting to cash flow management to deep data analytics to oversight of travel and human resources. Much of what CFOs do is mission-critical for their business, and they are hungry for solutions that drive better efficiency and profitability.

The growing array of companies serving the Office of the CFO will gather at Jefferies’ Fourth Annual Office of the CFO Summit on September 24th in San Francisco. Leaders from 75 companies, nearly 175 investors, and hundreds of other participants will discuss the most important trends, opportunities, and challenges for companies operating in this space in 2024 and beyond.

In preparation for the Summit, we sat down with Evan Osheroff, Managing Director, Software Investment Banking at Jefferies, to explore what is happening in the CFO office today and its implications for software companies and investors.  

Q: What’s the most notable trend in how CFOs allocate their resources?

EO: More and more purchasing is being consolidated under the CFO. For example, HR does not buy most HR software. Although HR may be looking at and using it, the CFO is purchasing, assessing, and paying for HR software. And that is just one example of the trend. Companies must focus more on profitability and where they are spending. Procurement processes are becoming more complex and critical to performance, necessitating more involvement from the CFO.

Q: We are in the early innings of artificial intelligence adaptation, but how is it impacting the office of the CFO?

EO: AI is on the roadmap of every single company. And they talk about it in two ways:

The first is taking all your data and making decisions faster and more effectively in real time. That’s the idea of having all your data and running AI on top of it. Second is a textual (really generative) conversation interface that allows you to ask questions about your data. You ask, “What happens if I hire five more salespeople in this territory? How does that impact our annual plan?” and it spits out an answer. This used to take weeks, teams of people, and a ton of iteration, and now it happens almost instantaneously.

But it is still incredibly early. CFOs right now believe that AI is a nice feature but not core to the business. We are just not there yet. Eventually, AI will drive more value and create more extensive capabilities. AI will augment this space. But we are a long way from AI transforming it.

Q: What kind of transactions are getting done in your corner of the software market?  

EO: M&A has picked up materially in the last twelve months. There are several reasons why.

Companies that are already platforms are filling in the last holes in their armor. We are seeing deals of that kind, both big and small. Another reason is that this space is increasingly seen as mission-critical. Most private equity firms have invested in enterprise software, and many have put money to work or are focused on the Office of the CFO. This will be evident if you see the attendees at our upcoming conference. So, expect PE to continue to be a significant driver of M&A in this space.

Q: Are you seeing more strategic or private equity deals?

EO: Private equity has been the lead dealmakers, although we expect strategic activity to pick up.  

It’s also important to note the strategics buying a lot of these assets are owned by private equity. These “sponsor-backed strategics” will play a growing role in dealmaking in the months ahead.

For example, a number of public companies were recently acquired by private equity at deal values ranging from $2 to $10 billion. We expect a handful more of these in the coming year.  Once those businesses are private, they will have the backing to execute on an M&A and operational strategy that may have been difficult or impossible to implement as a public company.  

Q: What is happening in the IPO market, and where do you see it heading?

EO: Generally speaking, across tech, there is massive pent-up demand. Tens of companies in this space that have crossed the $100 million threshold will want to go public. As the markets open, we expect many of these to start thinking more seriously about an IPO. 

Q: Is there any subsector that you are especially excited about?

Financial Planning & Analysis (FP&A) is one of the most critical technologies because that is where companies build their financial forecast, budgeting, planning, and forecasting. That’s where we are seeing a lot of innovation. That’s where we can talk about generational leaps and bounds in progress. A few years ago, FP&A software solutions could add value by letting a CFO move their data out of Excel spreadsheets onto a platform, enabling more collaboration and basic analytics. Now, you see solutions that can sort and make sense of data on a massive scale and layer in predictive analytics that can enhance decision-making and inform strategy. So, the speed of improvement is significant and accelerating.

Can Startups Outsmart Big Tech in the AI Race?

Technology revolutions like the internet and mobile computing always reshape the business landscape — but in different ways.

The internet birthed new market leaders such as Google, Amazon, and Netflix. Mobile tech, on the other hand, extended the dominance of incumbents like Apple, whose resources and distribution networks couldn’t be matched.

Now, the AI revolution is here. Generative AI platforms like ChatGPT are the fastest-growing consumer applications in history. Over 72% of organizations globally use AI in at least one business function. And tech giants like Amazon and Microsoft are pouring in record capital to get ahead.

The big question is, who will reap the rewards of this latest revolution – startups or incumbents?

This was a hot topic at Jefferies 2024 Private Internet Conference, “In the Age of AI,” where tech leaders and investors debated the future of these game-changing technologies.

Startups vs. Incumbents: Competing to Shape the Future

Gaurav Kittur, Global Co-Head of Internet Investment Banking at Jefferies, spoke to current tensions in the race to develop and commercialize AI.

“You have a tremendous amount of big tech capital going into companies like OpenAI and Anthropic. These [companies] will only get stronger, as their models and infrastructure layers build out,” Kittur explained. “You also have AI-first application businesses challenging the status quo. Their products are bringing innovation to massive industries like nursing, executive assistance, graphic design, and so on.”

To date, 44% of the capital invested in generative AI is controlled by tech giants: Microsoft, AWS, Anthropic, GitHub, OpenAI, and Alphabet. They have a natural advantage in this space, as AI models are notoriously expensive to build and train.

Incumbents can afford to spend billions on Nvidia’s graphics processing units, as Microsoft, Alphabet, and Meta — Nvidia’s biggest customers — are currently doing. AI models are also only as good as their training data, and big tech companies have the best and most extensive data stores.

That said, AI-native startups have their own advantages. These companies thrive on speed and disruption, a contrast to incumbents’ resource and distribution strengths.

Take Perplexity, for example. This buzzy startup’s AI-powered search engine is challenging Google’s dominance in search. Their product completely reframes how users think about search – a level of disruption that entrenched incumbents rarely achieve.

Another complicating factor is open-source AI. Generative AI models like LLAMA II, Falcon, Stable Diffusion, and Mistral 7B provide datasets, prebuilt algorithms, and interfaces that any developer can use to power their AI applications.

While these models are owned by incumbents like Meta, they speed up innovation and time to market for new developers and researchers. The long-term impact of open-source AI, and who will ultimately benefit, remains to be seen.

What Comes Next in the AI Gold Rush?

Though AI products are growing and attracting capital at record rates, it’s still too early to declare a winner – startups or incumbents. At this stage, companies with an innovative idea and the team to execute it have immense opportunities ahead, regardless of their size.

For now, one thing is certain: everyone from venture capitalists to large public companies will continue pouring money into AI, preferring to overinvest and risk failure than miss the boat entirely.

How this capital plays out may shape the business and technology landscape for decades to come.

For more coverage of AI, tech investing, and more, visit Jefferies Insights.

What Will Drive India’s Growth for the Next 20 Years?

A Conversation with Jefferies India Country Head Aashish Agarwal

Many foreign investors think they know India. However, according to Aashish Agarwal, the Jefferies country head, India’s economy has undergone profound changes that are often not discussed or understood.

That’s why Agarwal is so excited to welcome attendees to the Jefferies India Forum in New Delhi on September 17-19, the largest foreign institutional investor conference India has ever seen. More than 250 investors and representatives of many of India’s most prominent corporations will attend, along with founders of large conglomerates, interesting start-ups, government ministers, regulators, and national security experts.

In preparation for the Jefferies India Forum, we sat down with Aashish to learn more about the local investment climate and some common perceptions and misconceptions of the world’s most populous nation.  

Q: How would you describe India’s growth story?

AA: India is the fifth largest equity market in the world, with an estimated equity market cap of more than $5 trillion. We expect to see a $10 trillion equity market cap by 2030. India’s economy is also the fifth largest globally and is expected to become the third largest by 2028. The International Monetary Fund predicts 6.3% growth over the next four years. Furthermore, 175 million individuals will join the working-age population over the next 20 years.

Q: What part of India’s growth story isn’t well known?  

AA: The first thing is diversity. India is the most diversified market globally after the U.S.

A single industry or a few large companies dominate most emerging markets. For example, you can’t think of South Korea without thinking of Samsung. You can’t think of Latin America without thinking of commodities. India is a large and well-diversified mix of every subsector you can think of.

Secondly, a large part of India’s domestic savings is beginning to be channeled into equity markets. This leads to a virtuous cycle of wealth creation and superior equity market returns.  

The percentage of household savings invested in equity markets has been growing steadily, which has been the key factor driving equity markets. Even today, it’s only 6% of household assets and has room to grow. That creates a wealth effect, driving consumption, more savings, and more economic activity.

The third thing is that the mindset of India’s companies has turned global. They no longer aim to become the best company in their region or the best company in the nation. They think on a global level.   

Q:  What would you say to anybody concerned about the valuations of Indian public equities?

AA: Yes, valuations are on the higher side in some sectors, but there are a lot of misconceptions about valuations. The clear reason for higher multiples is the visibility of India’s growth and the lack of it elsewhere in the world. There’s visibility on India’s GDP growing by 6.5% – 7% over the next decade. Corporate EPS is currently growing by 13-15%. On a PEG basis, India trades at 1.5x, which is in line with several other large global markets.

Secondly, the emergence of domestic retail investors has made the market stable. India’s market beta vs MSCI ACWI has decreased from 1x to 0.7x over the last ten years. Thus, India now offers great diversification for global investors, justifying the premium valuations.

Thirdly, investors are finding India expensive because they are examining the same companies they have examined for the past decade. Foreign institutional investors have traditionally invested in the financial sector, consumer staples, discretionary and tech services.

Different sectors will drive India’s growth over the next 20 years. These sectors will include infrastructure, hard assets, hospitals, hotels, airports, ports, manufacturing and so on. They are not necessarily expensive because their growth is still ahead of them.

Q: Will India be able to build enough high-quality infrastructure to unlock all this economic potential?

AA: India is about to embark on one of the most significant infrastructure initiatives in its history. It is very broad-based. One of our private companies is setting up a solar power plant five times the size of the city of Paris. Over the last 10 years, the number of airports in India has doubled to 150. Similarly, roads and railways have grown by 60-70%.

And it’s not just the hard physical assets. India has also developed cutting-edge public digital infrastructure, which has enabled several new-age companies to be established and scale up rapidly.

It is part of the trend of people in India thinking on a global scale. Yet most foreign investors are underinvested in infrastructure and new-age stocks. Once investors fully understand what is happening in these sectors, it will become clear that many of these stocks do not appear expensive, given their growth outlook. Our upcoming India investor forum showcases all these changes, and we have also planned several field trips around our forum so that the investors can touch and feel all these new changes.

Q: What about India’s IPO market?

AA: I believe 2025 will be a breakout year for IPOs. Recently, you have seen a lot of small companies getting listed. Over the next 12 months, you will likely see IPOs of $50 billion-plus and $100 billion-plus companies.

India also has one of the largest unicorn markets in the world. We have about 110 unicorns collectively valued at $350 billion. These companies are reaching a size where they will come out with IPOs in the next few years. A lot of multinational companies are looking to list their Indian businesses as well.

Q: What are the opportunities for private capital in India?

AA:  There has been a big mindset shift on family-owned businesses. It used to be that when you set up a company in India, you were thinking that the next four to six generations of your family would run the same business.  The next generation is now willing to explore options, including a capital infusion or even an exit to allow the business to attain greater scale and attract the right talent and access to capital. This is a big change.  

This opens up a plethora of opportunities for private capital to explore private and public markets.

Industrials: A Value Play on Transitions, Transformations and Other Megatrends

A Conversation with Peter Scheman, Global Co-Head of Jefferies Industrials

The industrial sector is vast and varied. It includes makers of valves, auto parts, and rocket engines, as well as companies providing services to homeowners, businesses, municipalities, and the automotive and aerospace value chains.

The Jefferies Industrials Conference will explore this enormous landscape in New York City on September 4-5. Over 1,400 leading executives, institutional investors, private equity investors, and VCs will meet to address near- and long-term investment opportunities and discuss the trends driving industrial sectors in the U.S. and internationally.

Before the conference, we sat down with Peter Scheman, the global co-head of Jefferies Industrials, to discuss his take on the sector and what the Jefferies Industrials team is preparing for in Fall 2024 and beyond. 

Q: What are the most critical macro trends shaping the industrial sector?

PS: There are several of them. Of course, interest rates are key, especially if your business touches the consumer. Then there is the adjustment of supply chains and reshoring, which have been issues for manufacturing since COVID. The elections are coming up, and there are the megatrends of climate change, the energy transition, and technological disruption, with all they imply.

Q: What are you seeing in terms of supply chains and reshoring?

PS: The supply chain issue cuts across many subsectors. After COVID, there was a general consensus—among American policymakers and business leaders—that America had to bring home critical things we were doing abroad. We needed more sustainable or reliable supply chains. This is a trend that’s going to stick.

We have already seen a dramatic rise in the construction of manufacturing facilities in the U.S. to $115 billion in 2022, a 40% increase from 2021. Manufacturing spending in July 2023 was 74% higher than in the same month in 2022.  

Recent federal legislation—like the infrastructure bill, the CHIPS Act, and the Inflation Reduction Act—will also be an accelerant, and much of the spending and utilization of tax credits will occur in the years to come. Only about one-fifth of the federal funds allocated to infrastructure, energy, and climate projects through these bills have been spent. But there are enough durable, structural tailwinds propelling investments in this sector that even if the tax credits disappeared, I don’t think it would be catastrophic.

Q: What do you see for deal activity in the year ahead?

PS: We are seeing a big rebound in M&A, and it should continue to be more pronounced in all industries and subsectors in 2025. All the dozen or so industrials subsectors—whether it’s the auto aftermarket, packaging, aerospace, defense, transportation, metals, building products or anything else—are on different paths right now. However, the consistent thing is that M&A has been rebounding across all of them.

Corporate America stood up earlier this year and said, “You know we can look further into the future.” And across many sectors, we have seen a lot more strategic deals. In particular, we have seen a lot of activity around building products and building product distribution.

We expect private equity to be more active in buying and selling companies in the next year, too. But I’d say there is optimism across the board for 2025. Assuming we don’t have bad policy developments and geopolitics remain relatively stable, I think we are approaching a multiyear uptick in M&A activity.

Q: Do you think people will delay or wait to do deals until after the election?

PS: Historically, presidential elections have led to short delays in M&A deals, and the fourth quarter of an election year is generally a down quarter. An extreme example was when former President Trump was elected in 2016 and promised to lower corporate taxes. That killed the M&A deal market for longer than the fourth quarter because everybody was waiting for the tax cuts. This year, we may have an air pocket from October to December as people try to sort out the tax and regulatory implications of this election.

Q: Relative to other sectors, what makes industrials a sector that is attractive to invest in, especially for private capital?

PS: First, industrials can be a lower-multiple way of playing megatrends because some industrials are heavily exposed to and driven by these megatrends. Take electrification. Someone could invest in companies that own or develop power plants or in cheaper companies that make electrical cables.

Second, many industrials are economically sensitive, so you could use them to take advantage of a long expansion if you think we are in the early innings of one.

Third, much deal activity in industrials involves relatively small- to mid-sized companies, so they are approachable by a wide range of private equity and corporate players. There is a significant opportunity to deploy technology for efficiency and customer acquisition across the board in industrials.  

Finally, industrial companies are often easier to understand than companies in, say, technology or healthcare that require investors to have a strong background and a high level of specialization. If someone is not a specialist, industrials may be an area where they can more easily or quickly get their head around a business and feel more comfortable investing.