Pros Puzzle Out Next Phases of M&A and Credit Markets
The top investment managers who populated The Global M&A Outlook and Credit Market Outlook panels at the Milken Institute Global Conference are keen interpreters of the macroenvironments in which they operate. Those environments have been friendly to their industries, but these pros get paid to worry.
The low-yield and low-growth economy of recent years has stoked demand for their services as investors hunt for incremental gains. There’s a “thirst for yield,” as Mark Attanasio of Crescent Capital put it.
“We were the beneficiary of very low interest rates around the world.... As we heard yesterday from Dr. [Jim Yong] Kim, you’ve got $78 trillion of liquidity in the world, and half of it is at zero or marginal interest rates or in cash.”
On the M&A side, our strategists pointed to numerous forces that spur the urge to merge. Globalization enables overseas market access with the right partner; technological change pressures firms to scale up and gather more knowhow; and slow growth has meant that “the only way to turbocharge earnings was to combine with somebody,” explained John Huwiler of Jefferies.
The future, however, is inevitably something to wrestle with, and the potential end of the Federal Reserve’s dovish monetary stance could jar the credit markets a bit. Higher rates could pressure liquidity, impair the value of some bonds, and perhaps less obviously, separate outperformers from the rest. “When you transition from [quantitative easing] to fiscal policy, that’s when there’s really winners and losers,” said Jim Zelter of Apollo Capital Management. “That’s when you’re going to see a credit cycle.”
That new fiscal policy from the new U.S. government appears to be stirring a mood of uncertainty, which can curb the pace of corporate mergers. The Trump administration’s pro-business tax and regulatory proposals could be a boon to the field. So far, though, we’ve witnessed much debate and little action, and some execs are playing a waiting game.
Greg Weinberger of Credit Suisse Securities lamented that this policy limbo is affecting the “doability” of deals, as well as their valuations. “There is a whole series of issues that go straight to the willingness of folks to take on risk and the likelihood that they can look silly announcing a deal or closing a deal, so we’re seeing a little bit of hesitation.”