How Do Presidential Transitions Impact Sustainability Outcomes?

On November 5, 2024, millions of Americans will head to the ballots, casting votes for the presidency, 468 congressional seats, and 11 governorships. Energy and environmental policy are at the forefront of the election cycle, with climate change being a key issue for both voters and candidates.

President Biden and former President Trump bring sharply different views on environmental regulation, American energy policy, and the global energy transition. Still, the potential impact of either administration’s policies on the sustainability landscape remains uncertain.

Jefferies’ Sustainability and Transition Team recently traveled to Washington, DC to discuss the 2024 election cycle with policymakers, sustainability leaders, and investors. Though uncertainty abounds in Washington — both about the outcome of the elections and their influence on the energy transition — a look at recent presidential transitions may offer clues into how these shifts influence issues like climate, energy transition, and human capital.

This summary distills our findings from the Obama/Trump and Trump/Biden presidential transitions in 2016 and 2020, respectively. For a more detailed analysis, including the impact of recent presidential transitions on trade and immigration policy, read the team’s full report.

Obama to Trump: Energy and Environmental Policy

During his first term, President Trump reversed over 100 EPA rules covering air pollution and emissions, drilling and extraction, clean infrastructure, and toxic substances and safety standards. While not inherently against renewable energy, his policies favored fossil fuel production.

Key policies included:

• Replacing Obama’s Clean Power Plan with the Affordable Clean Energy Plan to ease restrictions on greenhouse gas emissions from fossil fuel sources.
• Rescinding the 2015 Interior Department rule that lowered the risk of water contamination from oil and gas drilling.
• Easing EPA restrictions on toxic air pollution from oil refineries.

The real impact of these policies included:

• CO2 emissions per person were lower than those during the Obama administration on average (15.4t vs 17.2t).
• Annual clean energy capacity grew slower than the pace seen during the Obama administration on average (13% vs 19%).
• Oil production was higher than during the Obama administration (11 million vs. 7 million barrels per day), but oil/gas earnings were lower on average (0.7% vs. 1% of GDP).
• New onshore oil and gas leases were decreasing during the Obama administration but increased during the Trump administration until 2019.
• EPA budgets increased more during the Trump administration than the Obama administration, although there were some workforce cuts.
• Fossil fuel subsidies are lower compared to the Obama administration on average (0.05% vs. 0.07% of GDP).

Trump to Biden: Energy and Environmental Policy

Biden has shifted the direction of environmental policy, passing two infrastructure bills that invest hundreds of billions into developing clean energy until 2032. His administration overturned some of Trump’s executive orders on deregulation and created more regulations, including Multi-Pollutant Emissions Standards. For oil and gas policies, the administration raised royalty rates for the first time in 100 years to end bargain-basement fees and increased the amount of bonds for drilling by tenfold.

The real impact of these policies includes:

• CO2 emissions per person were lower compared to the Trump administration on average (15.4t vs 14.9t).
• Annual clean energy capacity grew at a similar rate compared to the Trump administration on average (13% for both).
• Oil production and oil and gas industry revenue were higher than the Trump administration, reaching their highest levels since the beginning of the Trump administration.
• New onshore oil and gas leases fell below the levels seen during both the Obama and Trump administration.
• EPA funding and workforce continued to increase from levels seen during the Trump administration.
• Fossil fuel subsidies are slightly higher compared to the Trump administration on average (0.053% vs. 0.05% of GDP).

The impact of the 2024 presidential election remains uncertain. If former President Trump wins the election, and we experience another transition, his ability to pass significant energy and climate policies will heavily depend on the outcomes of the Senate and House races. Recent presidents have been more successful in passing major legislation during periods of unified government rather than divided government.

Jefferies’ Sustainability and Transition Team will continue to closely track political and legislative developments influencing the global energy transition. Follow our team for regular insights on the presidential election and more.

Charged Up: Six Reasons Why Storage Will Power the Transition

The fragility of current grid infrastructure is now the biggest obstacle to a net-zero power system. Today’s grids, already strained by rising demand and extreme weather, are unprepared for projected electricity load growth over the next decade.

One key to addressing this challenge is better use of grid-scale storage — technologies that store energy and supply it back to the grid.

These technologies are crucial for scaling clean energy solutions like solar and wind, which, despite their effectiveness, aren’t always available. Solar power fades by evening, just as electricity demand peaks, and wind patterns are even less predictable. Energy storage fills these gaps, ensuring clean energy is available whenever needed.

Investments in storage technology are surging. U.S. battery storage capacity is expected to nearly double in 2024. California already has enough battery energy storage systems online to power 6.6 million homes during disruptions, and other states are following suit.

In this piece, we highlight six key reasons why energy storage will be at the center of the global transition, beyond the obvious intermittent issues of wind and solar.

1. Underpinning Renewables: As intermittent power sources like wind and solar increase, energy storage becomes crucial. It shifts power from times of excess generation, like during high winds or abundant sunshine, to times when generation is low. This ensures a consistent power supply, making it possible to integrate a higher share of renewables into the grid.

2. Peaking Capacity: Energy storage systems shine during high-demand periods. There are times when electricity demand spikes, such as evenings between 5-9 PM or during the AC-heavy summer months. Energy storage can provide the extra power needed to keep up with these spikes, ensuring a stable and reliable supply.

3. Ancillary Services: A fundamental rule of grids is that electricity supply and demand must match at all times. Storage systems play a crucial role in stabilizing grids by balancing power supply and demand, often referred to as ancillary services and operating reserves. These can be divided into four main categories:

• Frequency Response: Storage can respond to very fast, short-lived, and unpredictable changes in grid frequency levels, helping to maintain stability.
• Ramping/Load Following: When demand spikes unexpectedly, storage can respond to these sudden increases, known as load following, ensuring that supply meets demand.
• Peak Shaving: Storage can reduce the need for peaking power plants (often gas or coal) during periods of high demand, thereby helping to lower overall emissions.
• Voltage Support: Storage systems can help regulate grid voltage levels by providing reactive power in areas where it is low.

4. Grid Reliability: Energy storage systems boost grid reliability by providing backup power during blackouts or grid failures. In events like natural disasters or equipment failures, storage ensures uninterrupted power, which is especially crucial for hospitals, schools, and data centers.

5. Black Starts: Large fossil fuel generators often need external power to start up. Traditionally, this power came from other generators on the grid. During a blackout, however, it must come from an external source. While diesel generators have been used for this, on-site storage systems are increasingly taking over, providing a cleaner, more reliable solution.

6. Industrial Applications: Certain storage options are essential for decarbonizing and reducing costs in various industrial settings. Thermal storage, for instance, can be used in industries requiring high-temperature heat by storing energy when electricity costs are low. Sectors like cement, glass manufacturing, and chemicals can greatly benefit from innovative storage solutions such as thermal storage.

For more information on grid-scale storage technology, read Jefferies’ full report. For more from Jefferies on the opportunities to improve grid transmission and the investment opportunities they present, read more content from our Sustainability and Transition Team.

Predictions for the AI Era: Startups, Incumbents, and the Future of Work

The AI era has arrived, but investors, company leaders and technologists are still learning to navigate it. One challenge is the tension between startups and incumbents. Companies small and large are battling over AI’s application layer: how to deliver viable AI products to end users and turn them into revenue-generating machines.

Startups typically lead the way with groundbreaking technologies, but it is often the incumbents, with their limitless capital and distribution networks, that scale these innovations and win the market.

Both startups and incumbents bring unique strengths to the race for AI dominance. The key question for investors and industry watchers is: Who will be the first to commercialize these capabilities and build a sustainable business model?

At the Jefferies Private Internet Conference, “In the Age of AI,” Sarah Tavel, General Partner at Benchmark, shared predictions on the struggle between incumbents and startups, AI’s impact on the labor force and more.

Startups vs. Incumbents: Who Will Commercialize AI?

The clash between young companies and established companies is playing out across the market.

Take Perplexity, a year-old startup whose AI-powered search engine aims to challenge Google’s dominance. Its innovative product aggregates information into a single, cohesive answer rather than just providing links.

In May 2024, Google launched “AI Overviews,” a feature that offers AI-generated summaries at the top of search results. Sound familiar?

“There’s an assumption that startups will struggle to make headway in AI … for big companies like Adobe, innovation is just an API integration away,” Tavel explained. “But for this new generation of startups, AI is native to their business, and that makes a difference. They have a real chance to disrupt the incumbents.”

Tavel refers to the first wave of tech startups as the “skeuomorphic era”—a time when software mimicked and supplemented human work. In this era, it was easy for incumbents to “wrap” software over their business. With AI, where new technologies are genuinely transformative, the playing field might be more level.

How AI Unlocks Opportunity in Underexplored Industries

A key distinction between the Internet era and the AI era is their relationship to human labor. During the Internet era, incumbents used software to boost human productivity, aiming to help people work better and faster. Now, Tavel says, AI delivers a self-contained work product.

“This new wave of companies is selling the work itself,” she shared. “They’re opening up markets historically unexplored by incumbents—pricing their technology not as a productivity tool but as a work product.”

Tavel cited voice acting as an example. This industry rarely attracted incumbents, as there are few opportunities for software to streamline human work. Now, startups have the chance to revolutionize this underinvested sector with AI, which can generate high-quality voice-overs.

According to Tavel, these opportunities are often the most lucrative.

AI Is Only Getting Better. Where Does That Leave Humans?

Tavel wrapped up by discussing AI’s impact on the labor market. Specifically, she addressed fears that AI might trigger a labor crisis by replacing human jobs.

“There are many examples of technology replacing human work, but it’s never permanent. Those workers are reskilled, and ultimately, we all move up Maslow’s hierarchy,” Tavel explained. “AI automating some human labor means we all move up the chain toward more creative endeavors.”

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As Tavel highlights, AI will bring unprecedented change, and the speed and scale of these transformations remain uncertain. However, there are clear opportunities for startups to lead and win. For investors, executives and workers, these technologies could usher in a more efficient, productive and creative future for all.

The Automotive Aftermarket Industry Is Highly Attractive for Private Equity Investors

Drive down any main street in America and you will see something that is increasingly catching the eyes of private equity investors: blocks of automotive service locations, including collision repair shops, tire stores, general repair centers, car washes, quick lubes and various other automotive parts and service businesses that make up the nation’s $390 billion automotive aftermarket industry.

Keeping cars running is mission critical for all households and businesses, as transporting people and goods is paramount no matter where we are in an economic cycle. This makes automotive aftermarket industry revenues and profits far more inelastic than other services-focused industries—a trait that private equity investors value. As demonstrated by publicly traded automotive aftermarket companies, the aftermarket has a long record of robust and steady cash flows, and the industry’s resilient nature has fostered tremendous investor confidence: From 2007 to 2023, these public companies more than tripled the returns of the S&P 500.

The demand for auto aftermarket services is on the rise thanks to several trends, including:

• More cars on the road: Between 2018 and 2023, the number of vehicles in operation in the United States grew by 2.2% to 285 million.

• Older cars on the road: Average vehicle age increased to 12.5 years in 2023 as consumers are holding on to their vehicles for longer. Supporting this, the number of vehicles aged 4–11—termed the aftermarket “sweet spot” because owners are more likely to use independent (i.e., non-dealership) repair and service providers after vehicles come off warranty—has increased by 20 million since 2018.

• More vehicle miles traveled: Miles traveled, tracked by the Department of Transportation, is a crucial measure of vehicle wear and tear. It has steadily increased over the past two decades, has rebounded to pre-pandemic levels after a brief lockdown-induced decline and continues to steadily grow at low-single-digit growth rates in 2024.

• High new and used car prices: While car prices are moderating in 2024, they remain well above pre-pandemic levels. This, coupled with higher interest rates on costly car loans, is keeping vehicle owners in their cars for longer and driving repairs to these vehicles versus vehicle replacement.

Beyond demand drivers, the automotive aftermarket sector is uniquely suited for consolidation plays that private equity investors often seek. According to the Auto Care Association, there are over 170,000 service channel outlets in America (excluding gas stations). Despite the sector’s overall size and consistent record of profitability, it is highly fragmented and dominated by individual- or family-owned businesses. In most cases, the largest companies in any given subsector have a small single-digit percentage share of that overall market. This creates an exceptionally compelling opportunity for private equity investors looking for long runways to grow platform businesses.

Private equity–backed automotive aftermarket platforms benefit greatly as they scale. Benefits include improved key performance indicator monitoring, labor management and operational execution through tech-enablement of systems; discounted purchasing on parts, tires and supplies; and professionalized management of regional and corporate support functions. This all results in a better experience for consumers as they receive vehicle service.

From 2020 to 2023, Jefferies estimated that there were nearly 240 M&A transactions where the buyer was a financial buyer such as a private equity investor. The high-water mark was nearly 80 financial buyer transactions in 2021.

Jefferies expects the momentum to continue in the back half of 2024 and into 2025 as ownership groups look to monetize on healthy levels of private equity interest. 2024 is already off to a strong start, with Summit Partners acquiring CollisionRight, TPG acquiring Classic Collision and KKR investing $850 million into Quick Quack Car Wash.

Private equity firms looking to build automotive aftermarket platforms are typically seeking companies with differentiated attributes, including:

• Attractive geographies with high densities of vehicles in operation and growing population trends

• Strong operating metrics

• Technology-enabled solutions for operations management and consumer-facing solutions

• Well-built infrastructures that can support significantly larger scales

• Proven management teams

Jack Walsh is a leader in Jefferies’ Automotive Aftermarket Investment Banking practice. With over ten years of experience, Jack specializes in capital raising and advisory for clients across the automotive aftermarket. Since 2015, the Jefferies Automotive Aftermarket Investment Banking practice has executed over 135 M&A, debt and equity transactions representing more than $105 billion in combined deal value. Jack can be reached at [email protected]

How Data Centers Are Shaping the Future of Energy Consumption

The following article is an overview of “Powering Data Centers,” a report from Jefferies’ Equity Research Team. For the full report, visit this link.

If it feels like GPUs (Graphics Processing Units) are suddenly everywhere, it’s because they are. GPUs drive computation across a wide range of industries and applications, from big data analytics to machine learning.

Soaring GPU demand is rippling across the global economy, but no area has been more affected than data centers. They house the infrastructure to power, cool, and manage GPUs. Over the past two years, data center demand has skyrocketed, surging to over 30% annual growth in some key markets.

The pressing question is: Can supply keep up? Market constraints — including scarce raw materials, limited land, labor shortages, and construction bottlenecks — pose serious challenges. Most critically, power generation and grid capacity are lagging.

With demand outstripping supply, rents for wholesale data centers have jumped over 80% since late 2021, reversing years of decline. Rising build costs further strain the market.

This explosive growth in data centers, coupled with infrastructure and power constraints, presents both challenges and opportunities for a myriad of sectors, including utilities, energy, capital goods, infrastructure/construction, and more.

A new report led by Jefferies Utilities and Clean Energy team, with input from more than 20 Jefferies analysts around the world, explores the implications of this growth, the economic dynamics, and the strategic moves needed to sustain the sector’s expansion.

This article previews the following areas of the report:

• Data Center Power Consumption
• Renewable Energy and Power Purchase Agreements
• Regional Dynamics and Opportunities

Data Center Power Consumption

AI Data centers are large, energy intensive operations that often run 24 hours a day. Since 2016, their global power consumption has grown at an estimated 16% compound annual growth rate (CAGR). Jefferies projects this growth will continue through 2030, with US data center electricity consumption outpacing that of Europe and APAC (excluding China).

In the US, many regulated utilities, grid planning organizations, and industry consultants are forecasting resurgent energy demand growth over the decade. This growth could strain power generation and grid capacity. Ten years ago, 15% demand growth in the data center market meant about 250 megawatts. Today, the same growth equates to 2 gigawatts — eight times the demand — and growth was double that in 2022 and ‘23. 

In Europe, electricity demand has been flat for two decades, remaining at 2000 levels through 2023. It’s now poised for a rebound, expected to grow at 2-3% annually. Data centers will be a major driver, potentially accounting for 20% of this future growth.

Source: Jefferies Estimates, DC Hawk

Renewable Energy and Power Purchase Agreements

One beneficiary of the data center boom may be the global energy transition.

The growth in data centers is expected to help renewable power developers reduce risk by allowing them to form longer-term contracts at higher prices. Big tech companies are now major buyers of Power Purchase Agreements (PPAs) for renewable energy, with contracts spanning 10-15 years at fixed or variable prices. These firm revenue commitments enable developers to finance new renewable energy projects. As data center demand grows, so will these agreements. In 2023, the corporate PPA market hit a record high for the seventh consecutive year, with an increasing share going toward solar, wind, and other renewable sources.

Source: BNEF, Jefferies Analysis

Regional Dynamics and Opportunities

In the United States, resurgent electricity demand from data centers will require additional transmission and generation infrastructure investments in the US. Companies in these spaces are expected to benefit more than those focused on distribution. Independent power producers and nuclear plants will also profit from increased power demand, with nuclear power particularly valued for its stable, carbon-free electricity. Broadly, US utility capital expenditure can be split into three buckets: (1) Grid Hardening, or investments in grid reliability and resistance against adverse weather conditions; (2) Generation, including solar, nuclear, and peaker gas; and (3) Transmission & Distribution, or enhancing and expanding the system around power delivery.

Source: Long-Term Reliability Assessment 2023, FERC, Jefferies

In Europe, the highest data center capacity growth is expected in Germany, Ireland, Spain, Italy, and Norway, with projections exceeding 15% CAGR over the next decade. Norway and Spain, with their cheap baseload power, are attractive markets for incremental data center demand. Germany, Ireland, the Netherlands, and the UK, with their strong financial services, tech companies, and advanced internet and wiring infrastructure, are also prime candidates for this growth. The challenge is the age of European grid infrastructure: 40% of EU grids are over 40 years old. To address these vulnerabilities, European grid companies are significantly increasing their capital expenditure. This increase is driven by new power plant connections, grid resilience improvements, reinforcements, and maintenance. However, developing the necessary infrastructure could take years due to regulatory and permitting processes.

Source: Rystad Energy, Jefferies Cap Goods Team Estimates

In India, the data center market is rapidly expanding, spurred by the Reserve Bank of India’s directives to localize payment data. The country’s data center capacity is projected to grow at over 50% CAGR. This growth necessitates a significant rise in power generation and T&D investments, expected to increase 2.2 times to $280 billion by 2030. This expansion positions India as a major hub for data centers, driving both economic growth and substantial capital expenditure in the sector.

In China, data center power consumption is projected to reach nearly 8% of total power usage by 2030. AI development – particularly generative AI and large language models – are driving rapid growth. Concurrently, China’s grid infrastructure is set to expand significantly. The country is investing in digitalization and distribution to support renewable energy growth.

As the AI era roars on, GPUs and data centers will remain key drivers of global economies. The demand growth brings significant challenges but also vast opportunities. For a more in-depth look at how data center and electricity demand growth will impact global markets, sectors, and governments, read the full report from Jefferies’ Equity Research Team here.

Why Differentiation Is Defining the U.S. Consumer Sector

Consumer spending—and the psychology behind it—is a perpetual puzzle for investors. Before the Jefferies Consumer Conference, we spoke with Jim Walsh, Vice Chairman and Global Head of Consumer, Retail & REGAL Investment Banking, who has over 30 years of experience in the consumer sector. He shared his thoughts on how U.S. consumers are doing and companies’ opportunities and challenges in the current environment.

Q: What is the most important trend in today’s U.S. consumer market?

JW: In the U.S. consumer market, a critical factor that can set a business apart is a truly unique, high-growth, high-volume offering with an attractive value proposition for consumers. If you can effectively communicate this distinctiveness, you will likely attract a diverse range of buyers.

For others, deals will be harder.

Q: A key economic storyline of the last couple of years in the United States has been consumer resilience in the face of inflation. Is that still the case

JW: The consumer probably isn’t feeling as good as you’d think. Marginal consumer spending on luxury items such as restaurants has seen a pullback. Government dollars flowed strongly to the consumer for several years, and now those dollars have been shut off. But where a company has a unique proposition to the consumer—Dutch Bros, Wingstop or Texas Roadhouse, for example—you see a great following across many demographics. For companies with positive traffic within retail and consumer, the valuations are going up dramatically because they’re outpacing the marketplace. So, I would say you have to show consumers something they want to have at a manageable price point. Then they will come in.

Q: If I am a consumer business wanting to fuel my next stage of growth, where should I be looking?  

JW: If you are a differentiated consumer business, the public markets are wide open to you now. If you can demonstrate something like 10% unit growth and positive same-store sales primarily driven through traffic, you can definitely get a premium in public markets. Cava’s 2023 IPO, which was one of the most successful of the year, was a great example. These kinds of companies are getting a better premium in public markets because investors can look to the future and have a discounted cash flow analysis that says, “Hey, we could pay for this today, but given these trends, we can look out three or four or five years and see great results.”  
If you are a smaller-cap company that is just starting to show significant growth, you might find more willing buyers on the private side, where there is also a fair amount of capital to invest.  

Q: If I am the leader of a company that does not meet those desirable growth metrics, what options are available to me to help fund the next stage of my growth? 

If you can’t go to public markets and there is a gap in what you can do on the private side, you might want to think about preferred capital. Basically, every private equity program is looking for preferred capital opportunities, even if they don’t focus specifically on the consumer sector. That’s where there is a lot of liquidity.  

And then you have a lot of companies that are not firing on all cylinders. Those are the ones that strategics are looking at where they see the ability to cut costs and get scale from synergies and technology. We’re seeing a fair amount of activity in cases like that.  

Q: You have been in the consumer banking field for several decades. Aside from technology and the way it is incorporated into everything, what is it that has changed most about the way businesses grow and get capital? 

JW: It’s just a far more crowded environment to bring something new and attractive to the consumer. Thirty years ago, there wasn’t as much differentiation available to the consumer, which created a wider opening for an innovator to develop a unique product or business model. That’s harder to do today, and that’s why we haven’t had many companies go public in the last few years. They are just not differentiated enough in the marketplace, and consumers have plenty of options that allow them to be selective in what they shop for or where they go to eat.  

Now, there are examples where talented entrepreneurs introduce something totally new, like what Marc Lore has done with the food delivery service Wonder. But, on balance, there is just a higher bar for companies to clear to show that they have an offering that is truly differentiated. 

Prime Services C-Suite Newsletter – May 2024

Jumping into Summer Themes – Non Competes, Shadow Trading, T+1, and Operational Due Diligence

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. FTC’s Non-Compete Ruling. On April 23^rd, the Federal Trade Commission (FTC) announced a rule banning non-competes nationwide with an effective date of August 22, 2024. The rule retroactively voids virtually all existing non-compete clauses in employment agreements, with few exceptions. Additionally, it will ban any new non-competes, regardless of the employee’s salary or status, moving forward. While legal challenges regarding this ruling occur between the FTC and various business groups, managers can still take steps to prepare:
   • What should fund managers do? The ruling requires employers to provide “clear and conspicuous notice” to their employees impacted. This notice must be received by the effective date.
     • Work with counsel to figure out which employees are affected, which are exempt, and how they are going to provide the proper notices required by the ruling.
     • Implement alternative protection methods in their employee contracts that do not violate the FTC’s ban.
2. T+1: Understanding the Expected. The SECs acceleration of the settlement cycle from T+2 to T+1 had an effective date  of May 28^th in the US and May 27^th in Canada, Mexico, and Peru. This rule will enforce completion of allocations, affirmations, and confirmations of trades sent or received within one day of the trade. Service providers have been adjusting their processes to be compliant with the new timeline.
   • What is Changing? Most prime brokers are set to begin sending notifications to clients to inform them that the trade will need to be allocated and confirmed within the allotted time frame. The cut off for afterhours trading will be at 8pm EST on the day of the trade. Managers are ensuring there are systems in place to manage this and decrease the likelihood of mishaps.
   • Being Prepared. Managers should be checking in with their OMS providers and fund admins to ensure all systems are in place and sent to their counterparties on time. Some groups are utilizing vendors such as NYFIX or CTM to assist in these processes. If unaware, reach out to your counterparties for list of action items including steps such as:
     • Make arrangements with your counterparties, prime brokers, and custodians to affirm transactions on trade date.
     • Explore electronic industry trade processing solutions.
     • Update FX liquidity, trading, and settlement arrangements.
3. ODD: Ins and Outs of Current Practices. As we enter new stages of technology and investing, ODD teams are navigating new processes. Through our conversations with ODD professionals as well as the SBAI’s 2024 Operational Due Diligence Survey there are various ways in which the function has evolved.
   • New Assets. As investment teams look to diversify, ODD professionals are working on understanding new asset classes. They’re assessing different types of managers and funds for the first time and having to learn unfamiliar parts of the industry.
   • More Technology. Firms without robust dedicated teams in house are more likely to rely on data tools as well as be early adopters of software and technology. As the majority of ODD professionals feel that they do not have enough time to perform tasks, the movement towards AI is expected to have great implications towards these groups.
   • Counterparties. As managers continue to outsource back office functions, it can provide additional hurdles for those performing ODD to get quality information and full transparency.
   • Onsite. According to the SABI survey, the majority of ODD reviews are still done onsite. Most allocators are performing a full ODD review with new manager relationships, however, a small group are taking a risk based approach.
4. Insider Trading: Shadow Trading Ruling. The SEC won their first shadow trading case on April 5^th after an 8 day long trial. Shadow trading is defined as occurring when an investor invests in one company after hearing material nonpublic information about another company which can affect the performance of the related companies stock.
   • Implications for Managers. The ruling confirmed that this type of trading is a considered an insider trading activity encompassed under an expansion of the existing insider trading rules. Given concerns, there is additional focus on having proper compliance controls and technologies in place.
   • How to Stay Protected. Many groups are specifically looking into technology to monitor expert network calls and some are even revamping their compliance policies.

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

Client Corner:

Increased Software Interest: Analytics and Data. We’ve recently observed an uptick in clients asking about various software and technological solutions to supplement key aspects of the reporting and data aggregation process. As the technological revolution continues, many are looking for ways to stay ahead, and do more with less resources. There has been an increase in emerging managers leveraging these tools as well. Our team has been doing research around the key players in the space, feel free to reach out to Ariel Deljanin to discuss further.

Spotlight on Content and Events:

Pitching 101: Reviewing Industry Best Practices.

As managers focus their attention on the capital raising process, they must begin to evaluate how they want to present and pitch themselves as well as their business. This piece describes the common outlines, frequently asked questions from inventors, and the do’s and don’ts of presenting. 

Contact your Jefferies representative to learn more.

From the Desk of BCS: 2024 H1 Insights. Although many themes from the 2023 Trends Pack are continuing to impact decision makers today, the Jefferies Capital Intelligence team is compiling insights around current key trends impacting the hedge fund industry. Through engaging with clients, the ODD community, and attending conferences, this piece has a focus on combining long-term industry data with current insights to identify emerging trends. Some top of mind topics include managing counterparty and LP relationships, the war on talent, regulatory environment, and capital raising. Stay tuned for the H1 2024 iteration of From the Desk of BCS.

Interesting Service Provider Reads: Highlighting Topical Content from Industry Leaders

Akin Gump – SEC Announces First Off-Channel Communications Enforcement Action Against a Standalone Private Fund Manager and “Round 2” of Marketing Rule Enforcement Actions — Focus on Hypothetical Performance

Lowenstein – ‘Shadow Trading’ is Insider Trading: Jury Establishes Liability in Historic Shadow Trading Case

RQC Group – SEC Issues Risk Alert Providing Initial Observations Regarding Marketing Rule Compliance

Seward & Kissel –2023 New Manager Hedge Fund Study

Jefferies Prime Services Contacts:

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The Return of the Strategic Buyer in Tech M&A

Technology capital markets have been in a transaction winter since the end of 2021, with many buyers and sellers frozen in place and substantially reduced transaction volume. That deep freeze appears to be ending and the field of prospective buyers is expanding.

For the first time in several years, private equity firms and other financial players may not be the lead protagonists in technology M&A. Strategic buyers have reawakened, which creates expanded opportunities for sellers to achieve optimized value, particularly if they prepare thoroughly and target the market correctly.

The relative quiet of strategic acquirors has been much discussed, particularly since their cash balances have grown steadily since the end of the Global Financial Crisis. Higher interest rates also gave strategic acquirors a pronounced cost of capital advantage relative to other types of buyers. At the same time, valuation multiples declined for many otherwise healthy and attractive technology companies.

This should have led to an uptick in strategic acquiror activity as they looked to deepen and extend capabilities and capitalize on high-value strategic themes. At a minimum, one would have expected more large consolidations as incumbent strategics joined forces, usually by exchanging their stock.

Despite these catalysts, strategic acquirors remained generally dormant for almost two years, due at least in part to enduring wide “bid / ask spreads” born of the extraordinary valuations seen in the runup to and immediate aftermath of the COVID outbreak. Boards of directors – cautious by nature – still regarded most potential acquisitions as too expensive. With respect to issuing stock consideration, they were unwilling to commit to the dilution that would have resulted from issuing shares at challenged valuation levels, even though the valuations of target companies were often even more depressed.  

Then, in late 2023, the ice broke. Deals involving strategic buyers started to flow, driven by growing equity values, restored investor enthusiasm for growth and extension, the onslaught of AI adoption, and companies’ willingness to test an evolving regulatory environment.

Last September, Cisco announced its intent to acquire the cybersecurity and analytics company Splunk in a $28 billion cash deal. Among other ambitions detailed in its announcement, Cisco argued that the combination would empower it to use generative AI to simplify complex tools so that more non-technical people can use them.  

In January, Hewlett Packard Enterprise (HPE) announced its all-cash $14 billion acquisition of the networking gear maker Juniper. It was a classic tech infrastructure consolidation that HPE said would accelerate AI-driven innovation. A few days later, the chip design software maker Synopsys said it would buy Ansys in a $35 billion cash-and-stock deal, snapping up the maker of software used in creating products from airplanes to tennis rackets.

On February 15th, the Japanese chipmaker Renesas Electronics said it would buy the California electronics design firm Altium for $5.9 billion in cash, as Renesas is looking to offer digital device design to customers.

These headline-grabbing transaction announcements should signal to prospective acquirors of all stripes that strategic-led Tech M&A is back.

According to Standard & Poor’s, the total value of all M&A deals in the first quarter of 2024 was the highest since the second quarter of 2022, when interest rates were still low and digitization was driving dealmaking. In the first three months of this year, strategic buyers spent more than $107 billion on acquisitions. By contrast, the ratio of financial firm deals to all deals has declined from 38% in the first quarter of 2021 to 26% in the first three months of 2024.

The expanding field of buyers has immediate implications for how a potential seller should position itself to find a partner, including:

• Temper your growth goals and emphasize your current – or very near-term path – to profitability. For over a decade, there has been a strong—some would say excessive – emphasis on growth at all costs. While forward growth expectations remain the most correlated performance metric to valuation outcomes, margins and profits matter again.
• Emphasize the underlying economics of the sales motion and the embedded efficiency opportunity that accompanies scale. 

• Understand how investors value your potential strategic acquirers and fit your narrative accordingly to develop internal business unit champions who are willing and prepared to spell out the value proposition to their decision-makers.

• Know who you are and what kind of company you will be once you mature. Buyers don’t want to have to figure out your story. Do it for them.

Jefferies expects continued growth in strategic buyer M&A as the first companies entering the capital markets report successful outcomes. However, the increase may be gradual as strategic buyers seek clarity on the evolving valuation, regulatory, and interest rate environments.

Another factor looming large for the back half of 2024 is the U.S. presidential election, which historically does not meaningfully influence dealmaking outside of the largest transactions. However, President Biden and former President Trump present starkly different perspectives on regulation and the Federal Reserve, and some dealmakers may put the brakes on transactions until after the votes are counted.

Despite these uncertainties, the strategic buyer appears to be out of hibernation, which bodes well for sellers better positioned to optimize exit valuations against a more comprehensive set of strategic and financial acquirors.

What’s Driving the Canadian Economy?

The International Monetary Fund expects Canada to be the world’s third fastest growing economy in 2024, and that growth is coming from a more diverse mix of industries than ever before.

Canada is on the rise, which is why Jefferies recently announced the establishment of a full-service investment banking and capital markets presence in the country. It’s a place where we see immense opportunity to help our clients grow, scale and acquire world-class assets.

To better understand Canada’s growth story, we asked John Manley – the new Chairman of Jefferies Canada and a former Deputy Prime Minister with a decorated career in law, business and public service – to share his thoughts.

What’s the state of the Canadian economy today?

It’s been four years since the start of the COVID pandemic and I think we’re still in the post-pandemic phase. We have a lot of parallels with the U.S. where both fiscal and monetary policy were more expansive and accommodative for longer than needed.

I previously chaired a large Canadian bank and saw our deposits going through the roof early in the pandemic because there was simply more income being replaced in the economy by the government than there was lost to the pandemic at a time when supply was disrupted. Inflation was inevitable.

Like the U.S., the Canadian central bank raised rates to tamp down inflation and now they are also on the cusp of cutting rates later this year. Even though the Bank of Canada said the economy has stalled since mid-2023, fiscal policy is still very supportive, and there are plenty of forces aligning to spur growth in the years ahead.

What do you see as the primary drivers of Canadian growth in the months and years ahead?

Historically, the Canadian economy has been more akin to Australia than the U.S. because we have such a strong base in natural resources. Energy and financial services alone account for almost half the value of the Toronto Stock Exchange (TSX). But on a relative basis, the share of energy and financial services is shrinking. Materials and industrials are expanding. Technology has almost doubled its presence in the TSX, and the third most valuable company in all of Canada is Shopify, an ecommerce retailer.

So the economy is becoming more diversified and many of our leading companies are in a position to both sell more into the U.S. and to attract more capital from all over the world. That said, I still believe that Canada’s “family business” is the extraction and processing of our immense natural resources. Demand for energy and minerals, as well as the output from our agricultural, forestry and fishery industries are strong and growing.

What are the most important strengths of the Canadian economy?

It starts with the most important asset of any country or company: The people. Canada has a highly educated populace and in fact we have the second highest share of people in the world with a post-secondary education behind only South Korea. We have one of the fastest growing populations in the world and much of that growth is fueled by immigrants, who now make up almost a quarter of the country. Canada brings in almost as many immigrants as the U.S. annually even though our population is only about one tenth the size. So we have a dynamic population that is also very entrepreneurial, and the low barriers to starting a business means that we have a very high rate of new business formation.

And then there is the family business of providing the food, fuels and minerals the world needs: We’re the 5^th largest exporter of agri-food and seafood, 4^th largest of metallurgical coal and of crude oil, and the 6^th largest exporter of gas.

Where are the untapped opportunities in Canada?

For all of Canada’s strengths, we only have 40 million people so companies can only get so big selling to our domestic market. I think one of Jefferies’ biggest value adds for our clients will be helping them make more inroads into the U.S. and global markets.

Our openness to immigrants has been a significant strength but we’ve also been overly reliant on workforce growth as a driver of our economy because Canada has lagged U.S. productivity growth for an extended period of time. But I do think there are several developments on the horizon that could enhance our productivity. One example is the completion of the Trans Mountain Extension Pipeline which will expand our ability to transport oil from Alberta from the Port of Vancouver. Economically speaking, that’s been all money going in with no GDP growth to show for it. But once the extension comes online, that could increase GDP by as much as 0.5% and simultaneously improve the productivity measure. In addition, as Canada’s technology sector continues to expand and artificial intelligence enables more efficiencies for all of our companies, that should also spur productivity.

What has you most excited about Jefferies’ opportunity in Canada?

Canada has everything the world needs. We have energy, water, agricultural and mineral resources, and so much else. We have an educated population and high standard of living that supports a vibrant consumer market. So this is a growing and diverse economy and whatever the sector, Jefferies has someone with expertise who can help our clients find opportunities in them.

All we lack is scale, which access to US markets can help provide. Enabling our clients to benefit from their proximity to that massive neighboring market is at the top of my list of objectives for Jefferies Canada in the short term.