From the Desk

While the S&P 500 Index equity benchmark surges ahead to all-time highs, initial public offerings (IPOs) have been stalled over the last several years. The combination of the U.S. Federal Reserve’s aggressive rate hikes and recession fears forced many private companies to pause their IPO plans. But a big part of that is also higher private valuation expectations that are currently at odds with the public market.

Before the Fed started hiking rates, there had been a multi-year increase in venture capital (VC) investing. That investing accelerated during the COVID-19 era as interest in technology companies in particular hit new highs. As VC investors funded new startups and did follow-on investing in previously sponsored companies, valuations kept increasing. And while big public technology companies took a material hit to their stock prices in 2022, which many have just recently fully recovered from, a comparable reset was slower to happen in VC-funded companies.

As a result, many private companies are in no rush to test the public markets. They still have access to private funding and are happy to grow market share and incubate for longer. However, expectations for an IPO rebound this year keep growing.

Source: Bloomberg, PitchBook, S&P Global Market Intelligence, 2024.

After a relatively benign earnings season, the one area of notable weakness we have seen is in multinational consumer-focused companies exposed to China. Whether in premium coffee drinks, electric vehicles, high end technology devices or luxury fashion and cosmetics, sales results in China were nearly uniformly worse than overall numbers for a variety of global companies. With Chinese equities starting to rebound, is there any reason to think the consumer there will follow? We are not optimistic.

The problems facing the Chinese consumer are far more serious and intractable. The main issue is that the reckoning in the housing market is still mostly incomplete, given that there are administrative controls on new home prices. Because the market has been unable to find a bottom, pessimism about many households' most important asset is likely to be sustained. Moreover, fewer Chinese households own equities than in places like the U.S., so any stock rally will not enhance their propensity to spend.

Additionally, many types of discretionary spending are not as entrenched as in the U.S., so an infusion of American-style stimulus checks is unlikely to provide the same economic boost as we would expect in the West. We see little scope for an entrepreneur-led market recovery either, as the lack of a western-style bankruptcy regime means that many who fell into debt due to pandemic lockdowns have been unable to recover properly even if they were willing to start again. Instead, we see some potential upside in industrial or export manufacturing in China as the strong greenback makes exporters more competitive. Additionally, it is possible that these companies benefit from a future return to China's standard playbook of stimulating the industrial sectors to restore economic prosperity.

Sources: Bloomberg, J.P. Morgan, New York Times, 2024.

For many years it was largely insurance companies that invested in the investment grade (IG) private credit asset class. Not anymore: IG private credit deals have increasingly and routinely attracted new investors among certain asset managers, family offices and pension funds. A deal source recently mentioned that five years ago it would typically go to 50 investors for a large syndicated deal. Now, the deal source tells us it typically goes to over 80 investors.

What does this mean for investors? In addition to pressure on spreads, it means investor demand is resulting in oversubscriptions and, sometimes, in fractional allocations. It also means that investors with a robust origination strategy, supported by extensive expertise and with the ability to identify and participate in deals from niche sectors and bespoke transactions, can be positioned to find better relative value.

Source: Private Placement Monitor, 2024.