Jefferies recently sat down with Philip Noblet, Head of UK and Ireland Investment Banking at Jefferies. They discussed new inflation data and its potential impact on dealmaking. They also touched on next steps for private equity firms sitting on dry powder, and how investment banks can support corporate and sponsor partners through challenging times.
Their conversation came on the heels of October inflation data, where UK headline inflation fell sharply from 6.7% to 4.6%, the lowest in two years. This follows the Bank of England leaving its benchmark interest rate unchanged at 5.25% in early November. The central bank ended a run of 14 straight hikes in September, as policymakers keep their eye on a 2% target.
We just saw positive news on inflation in the UK. What do you think this means for interest rates and deal flow in 2024?
Whether you are a corporation or a private equity sponsor, you crave stability. And we’ve been through a period without stability, especially due to interest rate hikes. It’s made everyone very data dependent, and it’s hard to deal under these circumstances.
When stability returns – even at rates no one likes – everything level sets. Folks can make a plan.
On the private equity side, we have seen a quantum of funds raised over the last five years, and that capital hasn’t yet been deployed. All these players are coming back to the market, looking for opportunities. Many of these opportunities, albeit on the smaller side, have been in the UK public market.
On the corporate side, it’s all about CEO confidence. Whether you’re in the US or the UK, you need to feel confident in your own business, share price, and prospects.
We’re trying to provide folks with that confidence, supporting them with insightful ideas, bringing them thoughts from our equity division. We’re helping them understand what investors are thinking, and how investors will support public companies’ growth journeys, be it through acquisitions, disposals, or private equity sponsors.
I think we’re seeing stability return, albeit at higher rates, and that’s bringing signs of life to our pipeline for 2024.
When stability returns, but rates remain high, is private equity open to dealmaking?
I believe private equity will still do deals.
A partner said to me the other day, “if I’m borrowing money at 10 or 11 percent, what’s my rate of return?” The answer is 25 percent. Everything just goes up. It just makes the job more difficult. You have to incent management teams. You have to spend more time with the businesses. Private equity firms are really digging in, and they’re looking to acquire companies that can do the same.
Also, there is increased pressure to deploy capital. Investors aren’t paid to sit and twiddle their thumbs; they need to deploy their powder. There are a lot of bright folks in private equity, looking for opportunities, and we’re starting to see the industry gain momentum.
Do you think the return of deals will be driven by any sectors, in particular?
I think healthcare and tech is where it starts. These sectors have really held up through a really difficult 2022 and ‘23. I think deals in these sectors will continue to accelerate and become bigger – but we also need to question what ‘big’ means.
We were doing deals in 2021 for $10 billion. That’s a difficult deal to pull together today. But can we get to single-digit billion-dollar deals? Yes, and I think that primarily takes place through mergers.
Folks will use their shares, which they feel are undervalued, to buy other shares that appear undervalued. Taken together, these new valuations will be worth more than the sum of their parts. I think these single-digit billion-dollar deals will come back in the private equity world, as financing returns.
Our leveraged finance team is very confident about where the market’s going. We’ve seen some real positivity in the American and European leveraged finance markets, the private credit markets, and when you pair that with growing stability and confidence, it should inevitably lead to better deal flow and deals of larger size.
Investors are struggling to deploy capital. They’re struggling with liquidity events. How can investment banks like Jefferies be more creative? What are the strategies for helping sponsors unlock capital in the current environment?
One of the things we do well as a firm is put ourselves in the client’s shoes. We think, ‘what do the clients really want here?’
Sometimes, that means pushing them to explore. Sometimes they need to be brave, and that’s a lot easier when you have a thoughtful, insightful partner. Someone sitting across the table that has done it dozens of times before.
Jefferies made a wise decision in hiring one of the best continuation vehicle teams. You see many sponsors with high-quality portfolio companies that aren’t just willing to sell at a good price but put them into continuation vehicles. We’re at the forefront of that movement.
Fundamentally, though, it’s all about how you provide ideas to clients. In the end, a senior team bringing thoughtful ideas instills confidence in the client. And when the client knows advice is in their best interest, they’ll respond to it and take action.
Finally, IPOs have faced challenges in the US, even as activity returns. What do you see for the IPO market in the UK?
The reticence to invest in existing public companies is very high in the UK. To bring a public company to the UK, especially one in their growth stage, is challenging. We’ve seen share prices collapse, through no fault of the company. There just hasn’t been support and confidence from investors in public markets.
So, I suspect very little IPO activity in the UK. But that doesn’t mean we won’t go after them, when the opportunity is right.
When we connect with potential IPO candidates, we look at everything. How has private capital helped them? When is the right time to come to the public market? We give them real-time feedback, encouraging them to look at all their options, and ensuring they are in the best position.