Positioning Companies for the End Game: Spacs, Direct Listings, M&A & IPOS with Michal Katz, Head of Investment & Corporate Banking, Americas, Mizuho Americas. Bob Diamond, Founding Partner & Chief Executive Officer, Atlas Merchant Capital. Betsy Cohen, Chairman, FinTech Masala.
Moderated by Janet Levaux, Editor-in-Chief, ThinkAdvisor.
SPEAKERS
Michal Katz
Managing Director & Head of Investment and Corporate Banking
Mizuho Americas
Bob Diamond
Founding Partner & Chief Executive Officer
Atlas Merchant Capital
Betsy Cohen
Chairman
FinTech Masala
MODERATOR
Janet LeVaux
Editor-in-Chief
ThinkAdvisor
TIMESTAMPS
EPISODE TRANSCRIPT
Janet Levaux: (00:08)
Afternoon. I hope everybody had a good lunch with Paris Hilton. While Paris Hilton was taking pictures with the paparazzi, this team you see here was talking about how many SPACs they'd been managing to get going during the pandemic. So it's a different dynamic, and it's just great to be here with this amazing panel today. We'll talk about the focus of the end game, but we'll also be talking about what is going on in raising capital. Also, at the beginning of the game, across the spectrum of the financial landscape and the panel has, of course, a lot to say, based on their experience and also what's going on in the financial markets today.
Janet Levaux: (00:53)
To my immediate left is Michal Katz, head of investment and corporate banking at Mizuho Americas. Then we have Bob Diamond, founding partner and CEO of Merchant Capital. And then, of course, Betsy Cohen, the most experienced member of our team and chair of FinTech masala with many SPACs and other achievements behind her, of course. So to begin the discussion, we'll go ahead and turn to Michal first. What's the macro situation for deal-making in your mind today in capital raising, Michal.
Michal Katz: (01:31)
Thanks, Janet. So maybe starting on the macro side of things, the economic recoveries, and very solid footing. When you take a look at the balance sheet of the consumer and corporations, incredibly healthy consumers have been delivering during the pandemic saving money. We have low delinquency rates and a low household debt service burden. Similarly, for corporations sitting on troves of cash de-levering and we have been looking at the earnings over the last couple of quarters and seeing that 70% of corporations, even north of that have beat earnings. Also, interesting to see that so many corporations now are giving guidance. Again, this demonstrating confidence and where they believe their businesses are going.
Michal Katz: (02:21)
And banks similarly are incredibly well-capitalized, and none of us can forget the fact that this economy is very much supported by fiscal stimulus. And so you take all these factors together and look at where the equity markets are today near all highs, low volatility, really bringing together a certain degree of confidence among management teams, boards, and investors, to pursue deal-making activity. And that's exactly what we've been seeing across capital markets, as well as M&A.
Janet Levaux: (02:56)
Right. Bob, how about a little bit of the macro view on what we're seeing in raising capital today?
Bob Diamond: (03:04)
So when I think about that, I start with what does the financial services space looks like today prior to 2008? And prior to the financial crisis, banks for decades were becoming more global and more universal. And I think it's a stark contrast today and it's creating huge opportunities. So I want to paint the picture a little bit, but the conclusion is that the legacy banks, the larger national banks here in the US, UK, Europe, really across the piece are much more like utilities today than they had been previously. And if you think about that, it starts with the regulatory reaction to the financial crisis. The primary reaction was buffer upon buffer of capital. So make the banks safe, ensure no more systemic risk. I think the irony is that if you look at the large national banks here in the US and in the UK, in Europe, really again, across the piece, they're actually larger than prior to the crisis, but worryingly there's more concentration of risk.
Bob Diamond: (04:20)
There's more concentration of business. So while they are safe, they're much more like utilities. And we see it, we see they regulate more like utilities, they're managed more like utilities. They recruit staff more like utilities. And most importantly, the investors treat them more like utilities in terms of the returns. And what that's meant is that there's just a phenomenal opportunity for competition that is more agile, more mobile, more reactive, and that comes from specialist firms. It can be specialist lending firms or advisory firms. It could be specialists that are national or regional competing just in one area. And I think the strongest implication has been on technology.
Bob Diamond: (05:10)
And when you add all that up to what it means, number one, prior to 2008, about 95% of the market cap of financial services was the large national banks. Today it's just under 70%. And I think we're just beginning in terms of... We've seen for a while, Apple and PayPal, and others kind of steal the march on technology around consumer payments. But it's just at the early stages with the commercial banking activities of treasury transaction services, digital currencies, Bitcoin, Stablecoin, the impact of all that has been quite dramatic. So all in all, I think it makes for a fascinating investment environment because of that change.
Janet Levaux: (05:55)
Thank you. And Betsy, could you speak a bit about what you see as the newest factors or dynamics driving change in capital raising and financial services? Be they technological or other types of disruption that you're seeing?
Betsy Cohen: (06:17)
I think that there's an opportunity and the recognition that the kind of disbursement that Bob was talking about, which is a result of a reaction to the risk is really an opportunity for the diversification of the services that we see occurring at this moment, I think it was an evolution which followed several trajectories. One was the acceptance of technology as a real thing. And secondly, the consumer and small business adoption, which was a curve that needed to be followed and increased before there could be a real marketplace. So I think that's what I would add to what Bob was saying.
Janet Levaux: (07:27)
And in terms of where we are today and what you might see as coming up next, could each of you speak a little bit to either the opportunities first or the risks that you're seeing? Betsy already outlined some of the growth opportunities there.
Betsy Cohen: (07:45)
Is there an opportunity? Yeah, there's continuing opportunity to both the one distributed platforms, both to create greater certainty around the execution of financial transactions, which themselves are dispersed and to gather, and I think one of the great trends today is the importance of the gathering of data and the figuring of that data and making it more useful and therefore more productive and more profitable.
Janet Levaux: (08:31)
Mm-hmm (affirmative). And Bob, could you speak to maybe opportunities within specific areas, such as LVOs, MNAs, SPACs, anything like that, that you're seeing?
Bob Diamond: (08:42)
There are risks and opportunities. They'll start with one risk that I think is interesting, we kind of face it day to day now. We have invested in a number of smaller broker-dealers that compete with the larger and that concentration that's happening. But if I look at the retail side, four US banks now have over 50% of the deposits in the United States just way too concentrated. And we're seeing that the regulators are just so comfortable with the size and with the large banks that they allow the sponsorship in FICC and CCP. And what that means is that the larger banks are able to net down what appears in the balance sheet, while taking on 100% of the risk.
Bob Diamond: (09:30)
And it's not obvious to investors, but to me, as an investor in financial services, it really makes it tough for the challengers and the non-large banks to compete in many of the broker-dealer areas. On the other hand, I see far more opportunity than risks. So I think that's one to point out. And I think for someone who's been with non-US financial institutions of Credit Suisse and Barclays for over 20 years, it's obvious to me, but not obvious to anyone, what a huge advantage it is to be in the US where the capital markets are so deep and so rich, and the ability to execute transactions and get new businesses running and the opportunity is for technology and financial services are so different here.
Bob Diamond: (10:18)
I was in London last week. And we're looking with a group of people from the UK at the potential for SPAC markets there, they're still fussing around with whether or not they want to be in SPACs or not. Where the US has gone up and down, right? We've had problems with SPACs. It's retracing, it's doing this, it's doing that, but we're seeing innovation at work. And we're seeing a really deep capital market. You get to the UK and you see this enormous uproar at these big and bad private equity firms from the US who are taking over their grocery store that's a national jewel and my reaction and American reaction to that would be well, if you really care about that company, maybe you can stop crucifying the public market CEO for the compensation that you've got. And this is counterintuitive for a second and sorry to go on so long, but the capital markets in the US creates such opportunity for investment and for growth.
Bob Diamond: (11:13)
And every time there's a hiccup, whether it was 2008 or with SPACs now, there's a correction in recovery as opposed to a freezing of the institutions, which you typically see more in Europe than in the UK. And I think that just creates a much different environment. On the other hand, let's just look at the legacy banks and take two extreme examples of JP Morgan, a very successful US bank, and Deutsche who has struggled, with all the positives for JP Morgan versus Deutsche, JP Morgan's trading close to two times book and Deutsche is at 30% of the book. And so I am also seeing some valuation discounts that have really worked into the system over time. So that was a bit scrambled, but I think there're both risks and opportunities here, Janet.
Janet Levaux: (12:01)
Mm-hmm (affirmative). Michal, would you like to weigh in?
Michal Katz: (12:04)
Yeah, I think in terms of opportunities, one of the common threads that I've seen in this conference, as well as the digital transformation that's appending, every industry and the financial sector is clearly not immune. And that's powered by blockchain, artificial intelligence, and other technology, which has over time really lowered the price of entry so to speak. I was looking the other day that the market cap of PayPal, which was very much on par with one of the largest US banks. So that really does support Bob's argument in terms of the disruption and our senior FinTech analysts that Mizuho said the other day, that he views investing in the square today to be akin to investing in JP Morgan back in 1871, just think about the magnitude of opportunity that exists through this digital transformation.
Michal Katz: (13:00)
And it's not just financial services, it's hitting every sector. Tesla is at 700 billion market cap, the next five largest auto manufacturers. Airbnb just debuted with a hundred billion market cap, I think that's larger than Hyatt Hilton and Marriott combined. And so those are some of the things that I'm watching for in terms of opportunities to participate in the disruption. In terms of the challenges, I will tell you, I am paying very close attention to what's happening in terms of regulation, as it relates to deal activity. We are definitely seeing and hearing rhetoric that federal agencies should be using their enforcement powers to protect competition against industries that have been consolidating. And as the impact is longer in M&A review periods potentially, more expensive remedies, or even transactions that get abandoned and we just saw that with a 30 billion transaction between Aon and Willis Towers Watson, which decided to walk away from because of an impasse with the DOJ and it's not the only one there have been other transactions. So I would say these are some of the challenges or say things that I'm looking for in the landscape.
Janet Levaux: (14:24)
Well, you brought up the issue of regulation. Would either any of you like to mention or describe the fallout from the situation with China and the limitations that have been imposed on Chinese firms coming public here? Is it something that we could see from other places, or is it important in terms of technology and other capital flow movement that might be of concern to you or are you expecting it? Betsy, could you weigh in on it at all? Or Bob? You know, the rule of the Chinese regulators effectively telling their firms that they can't couple up with the US.
Betsy Cohen: (15:09)
Yeah. I think we have to really separate out the depth of the capital markets from the rate of growth in the non-US markets. And I think it's very different if you take a look at Africa that Bob knows as well. There is an opportunity because this is the first generation of the adoption of smartphones and other connectivity that provides you with opportunities for growth that are potentially outsize to the depth of the capital markets within the US. So I may be looking at it in terms of a future opportunity, as opposed to the current situation. I think that there continues to be an education gap, but as adoption continues, that will in fact become potentially a less relevant issue.
Janet Levaux: (16:36)
Mm-hmm (affirmative). Bob, would you like to weigh in?
Bob Diamond: (16:41)
I think there are a number of situations where effective thoughtful regulation can be a real positive. And I think we've had many situations in the past, and hopefully now. I think looking at SPACs is an opportunity. I think SPACs are definitely here to stay. I think SPACs are evolving as probably they should. I think strong sponsors, we think of ourselves as a strong sponsor, and I know Betsy does as well, support strong regulation so that we don't have bad behavior. But we think the evolution includes that more and more of the market is going to support those with real sector expertise, rather than just raising money with a single name celebrity. I think it will really favor people with a platform of investment that has been in funds and other areas before not just starting from scratch.
Bob Diamond: (17:34)
And I think they're going to look at the track record, but I think there'll be fewer SPACs. I think we had a bit of a very, very healthy issuance in the first quarter of this year that will probably slow down. And I think strong platforms with strong sector equities and a good track record are going to welcome some regulation around transparency here and I think it going to be positive. I think in the digital space where I know there's a lot of controversies today and over the last few weeks about regulation and in some of the things that are happening, our interest has been in Stablecoin. We recently announced the merger of our first SPAC Concord acquisition corp with Circle and circle is Stablecoin.
Bob Diamond: (18:24)
Stablecoin means people have to believe in each USD is worth a dollar today, tomorrow, and every day. So we've announced that we're going to apply to be a regulated bank. We've changed our investments to be just cash and treasuries. And we recognize what the regulators are saying, which is if we're going to have a private-sector digital alternative. It has to be so regulated and so sound for it to be appropriate. And I think if you turn that on its head, and if there was no attention being paid by the regulators, we probably would not have effective digital currencies. And the benefit of driving costs down for a lot of our transactions is what we're looking for. So I guess what I'm saying is I think effective regulation in both of those areas would be welcomed.
Janet Levaux: (19:19)
Mm-hmm (affirmative). Michal, would you like to add anything there?
Michal Katz: (19:23)
With respect to which one?
Janet Levaux: (19:24)
Either the rule of risk from regulation, or we could also turn to other risks such as high valuations and then go from there.
Michal Katz: (19:34)
Yeah, look, we talked about the geopolitical. We talked about the regulatory environment. I think valuation is an interesting one. You know, we've basically had a market that is near to old-time highs, and we have not seen a pullback in the market of 5% or so in over 300 days. And so the question is, is our valuation stretched? And I'll make a couple of observations around that. We talked earlier on about corporate earnings very much, not just meeting expectations, but being on solid footing. And if that continues to sustain itself, you're going to see the E and PE holding still. But I also think that when you look at the markets broadly, it probably merits a double-clicking across sectors because the performance has not been even across sectors. We've all seen energy being hard hit in March of last year. And that sector had recovered with recovering the price of oil.
Michal Katz: (20:41)
But when you take a look at the long-term valuation of the sector, it is still trading at a discount to that. Similarly, in consumers, we've had a run-up in discretionary, but consumer staples are not as richly valued and I can go on and on, and whether it be in healthcare were obviously been a beneficiary, if you can, during the pandemic, but we have seen a pullback in life sciences biotech, and it is trading at a discount to the healthcare index. What I would say is that when you think about long-term secular trends and we are in this multi-year digital transformation, those trends are here to stay. And the market opportunity around many sectors, as well as companies are quite significant and in many of them was the very early innings. And so you've got to think about valuations and that time horizon.
Michal Katz: (21:39)
Interestingly, our head of retail in Japan made a very astute observation when it comes to thematic investing in they said, it is time, not timing that matters. So if you think about the broader opportunity and you're willing to wait out the time, there's going to be an incredible opportunity. So yeah, we do for some sort of a correction. I'm not the first one to go on record that says that, likely so, but the question is whether we're in a solid economic environment where the corporations are doing well, what are the opportunities that we all have been talking about? I don't really see valuation to be the primary risk factor so to speak. But I will say that it does create a challenge for M&A activity, right?
Michal Katz: (22:30)
To the extent you've had a run-up in the valuation of a target, it does make the acquirer think about, first of all, the industrial logic always has to be there, but the synergies need to make sense. And then you obviously have investors who are the owners of that performer company that you need to think about. So valuation does become a factor, as you were thinking about deal-making activity.
Janet Levaux: (22:58)
Mm-hmm (affirmative). Have there been any recent transactions or examples of an LBO or a SPAC that is new to the market that you could point to as either particularly interesting or something that might point to where we could see more of this?
Betsy Cohen: (23:17)
Well, I think that a SPAC is really multi-dimensional, almost like a Rubik's cube and some of the parts are not complimentary. Some of the parts are really not in conflict, but certainly the intention. And there will be new responses. If a component, for example, if pipe investors are not seeing in the market place, the opportunity to over the advantage of the optionality that investment has, I'll say traditionally over the last seven to eight years provided them the structure will have to be changed and the valuations will have to be changed in order to be responsive to that if one wants to continue to have a format in which the capital raise is in excess of the trust value. And that is in fact a healthy thing and you begin to see it in terms of structures being created, which include current return in addition to future return, such as convertibles and discounts and all the rest of it.
Betsy Cohen: (25:03)
But it's all a matter of finding the comfort zone for investment for each of the parties, whether it be the company that is taking the pathway to the public market or the additional pipe investor, they're really not at loggerheads, but they're trying to find within an area which has not been tested as long as the IPO, and which may not have the level of investor confidence yet that is present in other markets, they're testing out ways to accommodate and to return an appropriate return to the various parties in the transaction. It's a fluid, we can be saying that it's a fluid element and that there's certainly sector rotation and other elements that are generally accepted in the marketplace that come into play. But you'll see people reaching out for the solution to this conundrum.
Bob Diamond: (26:35)
To pick up. As usual, Betsy hit the nail on the head. And I think there's a bit of confusion because I can't tell you how often someone says to me the pipe market is a mess. And I was looking at it like there is so much money to be put to work for good companies at the right valuation. And one of the things I really like about our experience with SPACs is when you've identified the right company, and you have a valuation if you can't execute a pipe with large sophisticated investors who love the pipe opportunity, because they get to look at a specific opportunity where a sponsor that they trust, who's already looked at it. They can meet with management, they can make their own decision. They don't have to say yes, if the valuation's right, they can put some serious money to work at that level.
Bob Diamond: (27:25)
And I think that's a check on the valuation that's coming out, right? If you can't get a number of large sophisticated investors to join the pipe, then your valuation is not going to happen and in the factor or whatever the phrase allergy is, it won't happen. Another thing I'd say about the importance of SPACs is we recently had a transaction where there was a very large asset management processing firm that we had a large investment in our fund. We're a minority investment, but the board hired two bulge bracket firms to do an IPO. The two bulge bracket firms said, okay, we're going to start the IPO process and during that, they interviewed six SPACs to see if that would be including our own.
Bob Diamond: (28:11)
And ultimately it was an outright sale to a large private equity firm, and one of the sovereigns who was in. So you had all these opportunities and that was a tremendous price discovery. And they ended up getting a higher price than they had anticipated from the beginning. So I think, again, it comes back to my comment on the depth of the capital markets. And is there a hiccup in SPACs? Sure, there's a bit too much issuance. That doesn't mean we close it down. Let's continue to have that market evolve and be a part of this big, deep capital market in the US which is of benefit.
Janet Levaux: (28:46)
Mm-hmm (affirmative).
Michal Katz: (28:48)
Yeah. To pick up on Bob's comments is that there's never been a more, I would say, robust time to consider capital raise, then viewing into the public markets or considering M&A but I think the question is also what is the profile of the asset? What are the strategic and financing objectives of the company and where they are in their life cycle? And so if you are a company that has this brand name recognition or where you don't need primary capital direct listing may be a great opportunity or if you're looking for a SPAC, as we just talked about. A lot of opportunities, there's a new concept of SPAC offs, where companies are baking off SPACs one against each other. And then if you are a company that actually could benefit from being part of a broader platform, utilizing the resources, the brand name, the infrastructure for sales and marketing that a larger firm can have then M&A is the right option for you.
Michal Katz: (29:51)
So I really do think that need to think about what exactly are you trying to accomplish. But your question earlier about unique transactions when we talk about the M&A market, and we're kind of approaching record M&A volumes globally, I think we are north of 3 trillion of M&A volume, which I would say on an annualized basis, maybe even looking to surpass the record that we still back in 2007, and that's not just acquisitions and ad-on and scaling up. I think an interesting aspect of M&A is actually structured M&A, and we've seen corporations looking and evaluating their portfolio, whether independently or through pressure by investors, like how many that we have in the room here, and the questioning remained what is core and what is not core? And there is participation in these structured M&A's, and I mean divestitures, spins, reverse mores, what have you, and there's participation by both corporations as well as sponsors.
Michal Katz: (31:01)
So I'll give you an example of one that we have worked on. We worked with Apollo on the acquisition of Verizon media. That's the Yahoo AOL assets that Apollo acquired for $5 billion. And what's unique about that situation is that Verizon retained a 10% stake in the company, allowing them to participate in the upside of the company through new ownership, while at the same time, focusing on 5g rollout, and reliability of voice, data, and network, which are areas they have articulated to investors that they are going to be focusing on. But then another one on the corporate side, we sold AerCap acquiring assets out of GE capital aviation services, a $30 billion transaction, where there has been pressure on GE to focus on its industrial business so to speak. And this combination enabled GE to actually retain 47% of that combined entity.
Michal Katz: (32:07)
So I find these structured M&A transactions really interesting because they certainly allow for monetization of some of the assets while at the same time, allowing corporations to then take the proceeds and apply them to investments in areas of their core business, as well as capital return strategies, whether it be dividends, debt repayment, share buybacks, et cetera.
Janet Levaux: (32:33)
So we have about two minutes left. I wondered if I could do a quick question with each of the panelists. What do you watch the most right now because it interests you? Be it a particular financing type or company bank or industry sector. Could you tell the audience what you're really watching? Betsy, let's start with you.
Betsy Cohen: (32:58)
What are we watching in terms of the development of the SPAC market? Is that what you're suggesting? I think that what we see is that the market is emerging into a much more differentiated market that not every sponsor is being equal, but that there's the ability of investors and companies to be able to distinguish among sponsors who we think really represent the investors, unlike in an IPO, in terms of the larger banks, which are trying to get a deal to the market. That the opportunity for that kind of distinguishing among the players has emerged is really one of the trends that will stick.
Janet Levaux: (34:08)
Okay. Bob, real quick.
Bob Diamond: (34:09)
So I'm going to go back to the circle. We just announced our SPAC conquered one, announced a merger with Circle and this whole space of Stablecoins, digital currency, blockchain internet. We've seen a lot of development in the retail side of technology and banking with PayPal and Stripe and so much on the consumer or retail side. On the commercial side to do a large transaction, billions and billions of dollars from the UK to the US required a middleman, required a bank or a credit card company, or someone to stand in the middle, that's two or three points. And it happens Monday to Friday, nine to five at their discretion. Now, instantaneous, any sizes secure because of blockchain and because of the digital currency addition now driving the costs close to zero. So the ability to compete with that soft underbelly of the commercial banks in treasury and transaction services gets me very, very excited.
Janet Levaux: (35:17)
Michal?
Michal Katz: (35:20)
I know that we've run out of time here. I'll say, in addition to the digital transformation, I think ESG and particularly around sustainability, there's a lot of investment going into energy transition. So that's not just in the power utilities, energy sectors, it really is across every industry, industrials, real estate, sustainable development, and what have you. So that would be the second one.
Janet Levaux: (35:45)
Right. Thank you all very much for sharing your insights and experience.
Bob Diamond: (35:49)
Thank you, Janet.