Investment banks and venture capital firms are off to the races (again) in early 2022. The data being reported for the first week in January is quite impressive, in the amount of private money raised and the volume of corporate debt issued publicly. The dynamism of the U.S. capital markets is on full display. But beyond the dazzling numbers, there’s good reason to discern, as best as one can, the meaning of the activity, and how it might modulate the mergers and acquisitions (M&A) market for the next 12 to 18 months.
The Financial Times published a piece on Tuesday covering corporate debt issuance for publicly traded firms for the week of January 1 – 7. Pulling data from Refinitiv, the FT showed that corporate debt floated in U.S. markets, from both domestic and foreign companies, exceed $60 billion, the highest volume going back to 2003. The next closest year being 2021.
For the same week (January 1-7), Pitchbook reported that U.S. venture firms raised $12.8 billion, roughly 10% of the entire amount raised in 2021. This included an eye-popping $9 billion for Andreessen Horowitz, split between three funds, and $2.3 billion for Ribbit Capital, split between two funds.
Though one weeks’ data is insufficient to extrapolate a meaningful trend for the entirety of 2022, it is indicative. The data suggests that at the same time capital continues to flow into the private markets, publicly traded companies are stockpiling cash, and in both cases, against the backdrop of a series of 2022 interest rate hikes from the Federal Reserve.
The data also suggests that in regard to 2022 mergers and acquisitions activity, we’re looking at some macro-economic crosscurrents. The private markets are signaling increased demand for investment. The public markets are telegraphing stockpiling and/ or refunding, but in either case, a response to a higher interest rate environment and more expensive capital. Whereas the magnitude of funds raised in the private market indicates high demand, and thus, a greater likelihood that M&A valuations will remain elevated, the apparent rush to access cheaper capital in the public markets suggests corporations may be more circumspect with their investments, and less likely to pay comparable premiums for acquisitions.
A closer look…
Regarding the private markets, both venture and private equity – it’s not just about the amount of capital raised, it’s who raised it. Both Ribbit Capital and Andreessen Horowitz (a16z) are heavy-weight software and fintech investors. So, the capital raised in combination with the likely sectors it will be deployed to, support the assumption that investor demand will remain high for software and financial technology assets, and this should flow-through to continuing investment, M&A activity, and valuation support.
Regarding the public markets and corporate debt floatation, teasing-out the intention for this wave of debt issuance is a bit more challenging. Surely with interest rate hikes imminent, there’s a good chance that much of the issuance is for refunding more expensive debt prior to the Fed initiating its upward cycle. But there’s also stockpiling going on, where corporate treasurers, in conjunction with their C-level counterparts, are preparing to ensure there’s sufficient cash on-hand to support growth initiatives, whether organic or inorganic. The recent volatility in equities is also likely driving debt issuance, as many companies pull-back on equity issuance, including IPOs and follow-ons. The markets are simply getting too treacherous for stock issues at the moment.
Software and fintech investment bank take…
Week one of 2022 has revealed some interesting crosscurrents for M&A activity and valuations.
The data indicates that demand is high for mergers and acquisitions, but we’re likely to witness greater volatility in asset valuations, as continued high demand butts its head against greater scrutiny from investors and companies having to deploy more expensive capital.
Whether advising on transactions or underwriting new issues, investment banks ought to have another banner year. Rising interest rates roil markets and instability usually accrues to the benefit of financial intermediaries. The only hiccup I foresee is if the Fed gets antsy and unexpectedly accelerates its quantitative tightening, which may induce a mild, panic-like reaction and retard capital deployment.
Higher asset valuations look more likely to come from the private markets. At least for now, venture and private equity firms seem to be the vehicle of choice for institutional money (especially pension funds), and the sheer volume of capital committed to existing and new funds bodes well for a highly competitive, seller-friendly market dynamic.
Verticals of interest continue to be financial technology and software. There’s a strong correlation between the funds with target verticals in these sectors and the funds who’ve raised the largest amounts of capital.
It will be interesting to see if second quarter filings from bulge-bracket investment banks, Goldman and Morgan Stanley in particular, show declining investment banking revenues. This would indicate a weakening M&A environment for the rest of the year.
‘M&A Crosscurrents’ Software & Fintech Investment Bank
