Investec wants to be a stable hand for clients

There are few better places that can explain where capital markets are going than Investec’s annual CEO conference, which took place in London in November. It places the top CEOs of both global listed and unlisted firms in the same room as institutional investors. 

The event also gives people like Investec’s head of investment banking, Jonathan Arrowsmith, insight into whether deals will pick up in 2024. The past year was certainly not an easy one for corporates or markets, but Mr Arrowsmith sees light at the end of the tunnel. 

“Equity stories are becoming clearer, more focused and less reactive, and that resonates strongly with institutions looking for those businesses that have clear growth strategies,” Mr Arrowsmith says. “I think you’ve got cautious optimism out there.”  

The sense of a brighter outlook comes from the direction of interest rates that Investec estimates will start falling in May 2024. The parts of the UK economy that stand to benefit from the decline in interest rates varies, however.  

According to Mr Arrowsmith, the technology sector looks encouraging, while the consumer and retail sectors are likely to be weak. Robust areas of growth within tech might include healthcare and biotech firms that have performed well over one-, three- and five-year horizons. 

Additionally, certain services sectors within the UK that are fragmented might undergo consolidation that, in turn, could create opportunities from a merger and acquisition (M&A) perspective.  

These factors should provide some comfort for those who worry about the future of the City of London with its lack of big listings. Rarely a week goes by without a politician or commentator lamenting the lack of big-ticket initial public offerings (IPOs).  

Mr Arrowsmith is certainly a believer in the City’s future and points out the pessimism about it will shift in time. 

“We feel pretty confident that London is a strong and stable market with some great companies in it,” he says. “We anticipate that the UK market will rebalance in terms of pricing and in terms of its attractiveness, and there’ll be some great new companies that come on to it over the next one to three years.”

Markets turning

More broadly, Mr Arrowsmith anticipates a degree of M&A activity, some IPO issuance in 2024 and 2025, a bit of primary issuance and a rebound in secondary issuance. When this will happen is a matter of debate, but there are signs to look out for. 

“The first thing we need to see is fund managers in slightly better health from a liquidity perspective to support the IPO market,” he explains. “So right now, you’ve had months of consecutive outflows from UK fund managers. That’s where the global asset managers that sit behind them suck liquidity out of those UK fund managers. And we anticipate that will reverse.” 

When that happens, the inflows will start to come back into UK fund managers as global asset managers put more capital to work in the UK market. This should be reinforced by money that comes back out of corporations through share buybacks, dividends and firms that are taken private as well.

Mr Arrowsmith adds that Investec looks carefully at all the different underlying factors to figure out when the IPO window will open again. 

“We have a strong pipeline of IPO candidates that we’re talking to already who are keen to IPO because they feel the public markets are the right place for them to take their business. 

“And if you get one or two or three out the door, they work well and they’ve been sensibly constructed, that could be the catalyst for actually opening the IPO market,” he continues. 

Investec proof 

Mr Arrowsmith argues that Investec’s offering is well positioned to capitalise on these changes as it works in public and private markets. 

And it can help firms that list with its equity research and corporate broking capability. All of this means that for a mid-market investment bank, Investec can pivot from one market that is bearish to another that is bullish. 

That ability is useful as it pays to be flexible when the world has been so uncertain with the Covid-19 pandemic, war in Ukraine and the energy crunch. 

He says: “What we’re seeing is a lot of change in the market — limited IPO activity and equity capital market issuance means it’s very difficult to sustain the same quantity and size of teams that banks have been able to support previously. 

“At Investec we’re seeking to remain relatively stable in a period of market change and that’s not only in terms of other banks resizing their capability but independence. So Numis was bought by Deutsche Bank. While we are not sure how that will play out, what we’re seeking to do is be a consistent proposition in the mid-market that clients can rely on.”

Private equity M&A

One area that Investec is heavily involved in is private equity (PE). M&A activity in this sector has reduced due to the high cost and low availability of debt. Mr Arrowsmith sees increasing innovation from PE firms to exit assets through an IPO or continuation vehicles, where businesses are recapitalised with new money from secondary investors.  

He also sees innovation in the way PE gets into certain sectors by taking minority stakes in businesses, letting them grow and then buying the remainder out. This should enable the founders and the owners of those businesses to get the full price for their companies over time. 

Investec has a strong interest in continuation vehicles on the PE side that have grown in prominence over the past decade. Mr Arrowsmith explains that they used to be the preserve of the US large-cap firms, and then moved into US mid-cap firms. 

Continuation vehicles came to Europe and evolved in the same way. Over time, Investec found itself in more situations where the bank was asked to provide capital in this segment. It recently appointed Stefano Manna to head its General Partners (GP) Advisory team that brings the advisory and capital for continuation vehicles under one roof. 

“We’ve always been a leading supplier of capital into those continuation vehicles,” he explains. “So we tend to put capital into the continuation vehicle levels to support the new cap structure of the assets that go into the continuation vehicle. 

“The area that we didn’t have, that we’ve just developed, is called GP Advisory. It provides advice to the funds about how you construct the capital for that new continuation vehicle, and also aims to ensure the pricing of that is right.” 

Election influences 

Many bankers will closely watch the US and UK elections in 2024. Companies that are vulnerable to political changes might drive some of the timing of deal activity. That could bring forward activity to get deals done before the elections and a pause during them. 

“Anyone that’s providing outsourcing and consultancy services, or a defence business, will be acutely sensitive to the political landscape. If you’re a tech business servicing the private sector and people want your services irrespective of the politics, it doesn't matter,” Mr Arrowsmith says. 

Whatever happens, he believes that Investec is able to respond in the right way, given its full suite of services. 

“In the mid-market, very few are able to provide capital debt and advice to private companies that then flow into PE, where we are providing capital and advice. And then if they decide that they want to float, then clearly we can provide that advice and access to those equity capital markets. 

“So it’s unusual — it speaks to the breadth of our capabilities in the mid-market, where we can provide that sort of full lifecycle or suite of services and capital to companies.”

There is also the resilience that has come from weathering various crises since 2020. 

“It now feels like you get a big event every year. You don’t necessarily think too much about it, but there is just an instinctive natural development to become more resilient. You walk in every day hoping for the best, but anticipate that if something bad happens, you’ll be able to deal with it.

“When you have a comprehensive investment banking proposition, then being adaptable can actually help the edge we have.”