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Speaker 1: Welcome to the Bloomberg Penil Podcast. I'm Paul swing you.

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Speaker 1: Along with my co host Lisa Brahma Wicks. Each day

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Speaker 1: we bring you the most noteworthy and useful interviews for

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Speaker 1: you and your money. Whether at the grocery store or

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Speaker 1: the trading floor. Find a Bloomberg Penil podcast on Apple

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Speaker 1: podcast or wherever you listen to podcasts, as well as

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Speaker 1: at Bloomberg dot com. Well, the U S and China

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Speaker 1: continue to make gradual progress on a Phase one trade deal,

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Speaker 1: although we have not yet seen anything on paper. To

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Speaker 1: get the latest, we welcome and Stevenson Yang, co founder

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Speaker 1: and research director of JA Capitol Research, also a Bloomberg

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Speaker 1: opinion contributor based in DC and Hong Kong, and thanks

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Speaker 1: so much for joining us. What do you from your perspective,

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Speaker 1: what is the latest on the China US trade negotiation? Hi? Um,

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Speaker 1: you know, to be honest, it's nonsense. So we have

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Speaker 1: we have almost two years of back and forth market

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Speaker 1: gyrations and you know, high expectations in order to get

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Speaker 1: back to the state of quo anti like, what's special

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Speaker 1: about this? All right? Well, okay, this is an argument

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Speaker 1: that people say we're going back to levels that said

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Speaker 1: the forty billion dollars to fifty billion dollars of extra

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Speaker 1: uh goods, and that China is supposed to import from

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Speaker 1: the United States. There is a question of how feasible

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Speaker 1: that is given the structure currently of their economy and

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Speaker 1: the different trade routes. What's your sense of that. Do

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Speaker 1: you think that that seems very doable at this point? Yeah,

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Speaker 1: this reminds me of you know, for many years, the

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Speaker 1: Chinese Trade Ministry has been has been running these um

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Speaker 1: these buying missions to the US where they'll send a

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Speaker 1: whole lot of you know, soe presidents on a delegation

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Speaker 1: with the Ministry of Commerce and they'll say they'll sign

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Speaker 1: all these agreements and China is going to buy all

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Speaker 1: this stuff, and John's gonna invest all this money. It

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Speaker 1: never actually happens, it's it's for the headline effects. So

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Speaker 1: what China is going to do is they're going to

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Speaker 1: kind of um slice away at at the commitments by uh,

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Speaker 1: you know, re renaming Hong Kong imports as as mainland

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Speaker 1: imports and then uh, you know, signing a deal that

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Speaker 1: they don't actually implement, you know, stuff like that. So

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Speaker 1: what's happened is that the all the structural demands for

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Speaker 1: for Chinese economic change have just disappeared because the US

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Speaker 1: realized that they're they're not realistic. In the US really

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Speaker 1: has sort of, you know, caved in order to get

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Speaker 1: a deal, and instead the US says, okay, just buy

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Speaker 1: more stuff please, and China says, yeah, we might do that.

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Speaker 1: So and does this call into question the value of

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Speaker 1: kind of this bilateral type of negotiation as opposed to

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Speaker 1: you know what probably was more the norm of a

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Speaker 1: multilateral maybe the transpecific partnership. From your perspective, all the

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Speaker 1: history that you have with China and China trade, what

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Speaker 1: do you think is the best way to proceed with China? Yeah, yeah, Look,

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Speaker 1: it's totally understandable why there's great frustration with China. But

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Speaker 1: but the fact is that the real problem has been

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Speaker 1: lack of use of the of the dispute resolution mechanisms

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Speaker 1: that exist in the w t O, lack of accession

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Speaker 1: to the t p P and so forth. There's a

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Speaker 1: lot of stuff that we could be doing in demands

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Speaker 1: we could be making of China that we have not made,

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Speaker 1: and we've hobbled the w t O. And yes, I

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Speaker 1: agree the bilateral mechanisms are just not very satisfactory going forward.

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Speaker 1: What are you looking forward to determine whether the Phase

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Speaker 1: one deal is moving ahead as expected in terms of

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Speaker 1: Phase one A, Phase one B, Phase one C that

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Speaker 1: actually effectuates the existing tariffs being rolled back. Well, it's

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Speaker 1: it seems to me that the only real demand because

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Speaker 1: all the concessions on on you know, stuff like intellectual

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Speaker 1: property have already been baked into into Chinese um you know,

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Speaker 1: new laws and resolutions and the currency thing kind of

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Speaker 1: that was that became unimp written about ten years ago.

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Speaker 1: Um So, so the only significant issue here is whether

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Speaker 1: China will actually make the purchases that it says it will.

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Speaker 1: And most of those purchases are focused on soybeans and

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Speaker 1: corn ethanol, right so, and that's very important obviously to

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Speaker 1: Trump because they're they're they're base constituencies that rely on

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Speaker 1: selling those commodities. So it's kind it becomes a question

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Speaker 1: of well, China, does China really want to boost the

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Speaker 1: Trump chances of reelection? Um there have been signs that

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Speaker 1: it did for a long time. Now it's not so clear.

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Speaker 1: So as we look back on this process, or not

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Speaker 1: even done the process yet, because yet We've not even

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Speaker 1: seen anything on paper, but assume the Phase one deal

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Speaker 1: turns out the way it's been reported. Looking back, well,

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Speaker 1: this will this outcome, this Phase one deal will be

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Speaker 1: worth two years of all this uncertainty in the global markets. Yeah,

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Speaker 1: totally not did did there need to be a reset

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Speaker 1: of the US China relationship, Absolutely, But I think that

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Speaker 1: a lot of that reset is about uh no longer

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Speaker 1: um capitulating to unreasonable Chinese you know, actually bullying over

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Speaker 1: things like you know, the name that we called Taiwan

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Speaker 1: and whether Leotill boy gets a Nobel Prize and stuff

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Speaker 1: like that. Um, so we need to stop being cowed

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Speaker 1: by that sort of thing. But this, you know, weaving

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Speaker 1: back and forth on tariff levels is really just not

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Speaker 1: a good thing for either economy. And Stevenson Yang thank

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Speaker 1: you so much for being with us. And Stevenson Yang

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Speaker 1: is co founder and research director at Jay Capital Research,

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Speaker 1: as well as a Bloomberg opinion contributor. There are a

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Speaker 1: number of ways to sort of size and scope the

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Speaker 1: fang stocks, or as I call them earlier fanmag which

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Speaker 1: is Facebook, Amazon, Netflix, Microsoft, Apple, and Google. Um well,

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Speaker 1: I mean that's sort of the sort of guts of

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Speaker 1: the of the tech sector. I think you just is

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Speaker 1: that yours and I remember discussing it with some colleagues.

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Speaker 1: I don't want to take full credit about this, but

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Speaker 1: I think that it's important to to look at the

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Speaker 1: performance of the fanmag socks aside from the rest of

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Speaker 1: the SMP to understand the rally and understand going forward

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Speaker 1: how big a bet you're making on big tech in

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Speaker 1: the U S if you invest in the index. Nichols

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Speaker 1: joining us here, co founder of Data Trek Research LLC

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Speaker 1: uh here in our interactive broker studios, can you give

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Speaker 1: us some some sense of how responsible this sector has

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Speaker 1: been for the overall US equity performance. Yeah, it's been sizeable. Obviously.

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Speaker 1: If you look at the past five years, you can

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Speaker 1: have a point of single names like Amazon that hasn't

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Speaker 1: done all this all that well this year, but over

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Speaker 1: the last five years is something like seven percent of

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Speaker 1: the entire SMPS return, even though it's obviously was coming

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Speaker 1: from a small base. UH and XLK, the e t

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Speaker 1: F that follows it is now up thirty plus percent

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Speaker 1: for the year. If you look at sector waitings, it's

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Speaker 1: even more impressive for tech. If you add in Google, Facebook,

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Speaker 1: and Amazon that aren't in tech. You're talking about thirty

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Speaker 1: two percent of the SMP, and that gives people pause.

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Speaker 1: But I would point to two things. The first is

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Speaker 1: there is no European or EFA tech sector to speak of.

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Speaker 1: It's seven percent of EFA. So the waiting that you

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Speaker 1: see in the SMP isn't just for the US economy.

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Speaker 1: It's for US and Europe and Japan and parts of

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Speaker 1: emerging market. So you're looking at a global franchise. And

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Speaker 1: the second issue is, unlike a lot of other sectors,

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Speaker 1: tech is not a stranded asset. If you think about

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Speaker 1: the energy sector, which I think by most accounts is

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Speaker 1: virgin on stranded asset territory, it's now smaller than Apple's

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Speaker 1: market cap or Microsoft's market cap and the SP five

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Speaker 1: hundred and so you have a combination of things. A.

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Speaker 1: It's a growth sector, be it's not a stranded asset,

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Speaker 1: and it probably will never be. So we talk about

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Speaker 1: the fangs in tech, you know, really dominating the market.

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Speaker 1: But that raises a concern of breath. When we think

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Speaker 1: about the lack of breath of the market in this

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Speaker 1: move up we've had, is that a real concern? Do

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Speaker 1: you think to professional investors. It certainly is to professional investors,

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Speaker 1: and certainly to our clients. We we get a lot

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Speaker 1: of emails about this. The way we try to explain

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Speaker 1: it is basically a permutation of what I just discussed is, Look,

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Speaker 1: this is the sector that is growing. If you want

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Speaker 1: to put if you had to lock your money up

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Speaker 1: for ten years, would you either it be in tech

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Speaker 1: or in any other sector of the SMP. Although there's

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Speaker 1: a question of which tech, right, I mean, yes, some

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Speaker 1: of these big giants, particularly Amazon has had an amazing

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Speaker 1: run of it. Uh, Facebook certainly as well. The new

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Speaker 1: tech might be different. It might be cybersecurity, it might

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Speaker 1: be you know, cloud computing, and there will be a

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Speaker 1: breakdown of the halves and the have nots within the

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Speaker 1: tech sector. Netflix may be subsumed by another company based

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Speaker 1: on the increasing competition and streaming. So how do you

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Speaker 1: sort of understand the lasting quality of of of tech

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Speaker 1: that's offered by these companies. Yeah, it's a great question.

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Speaker 1: I mean I would say two points. The first is,

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Speaker 1: if you think about the Big four, the Big five

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Speaker 1: or your fanmag paradigm, they don't really compete with each

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Speaker 1: other very much. That's very unlike the Chinese tech sector,

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Speaker 1: where you have social media companies actively pushing into e

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Speaker 1: commerce and e commerce companies building social networks. We don't

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Speaker 1: have any of that in the States. The giants stick

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Speaker 1: to themselves and that's kind of bad for competition in

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Speaker 1: the US, but awesome for stock returns, and it probably

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Speaker 1: won't change the second digit. You think about Amazon, what

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Speaker 1: is Amazon right now? It's a cloud computing company. What

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Speaker 1: does it want to be? It wants to be a

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Speaker 1: cloud computing e tailor of AI solutions. That's what's really

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Speaker 1: focused on. That's what recognition, facial recognition is about. That's

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Speaker 1: what it wants to be. So if these companies do

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Speaker 1: it right, they should also be the next leg. When

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Speaker 1: you say that there isn't a lot of competition, there's

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Speaker 1: these like alarm bells that go off in my head.

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Speaker 1: Regulatory risk, regulatory risk. I mean, that's sort of the

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Speaker 1: big concern here is that there aren't major competitors for

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Speaker 1: any of these tech giants. How big of a potential

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Speaker 1: headwind are regulatory concerns given the fact that so far

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Speaker 1: it does not seem like there is much motion on that.

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Speaker 1: While the talk not a lot of action, the most

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Speaker 1: motion has been you know, California eight five, which is

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Speaker 1: the Privacy rule which goes into effect on January one,

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Speaker 1: and it is going to basically be the de facto

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Speaker 1: US standard, but the Senate is still working on regulation.

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Speaker 1: The bottom line to your answer your question is it

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Speaker 1: really kind of depends on the elections, and it depends

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Speaker 1: on how much traction the privacy aspects of this guy.

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Speaker 1: That's the only thing that really people care about. Otherwise,

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Speaker 1: people i think are pretty happy with the way technology

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Speaker 1: interfaces with their life, except for privacy that needs to

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Speaker 1: get resolved. But barring that, regulations should not be that

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Speaker 1: big a deal, and from a shareholder productive hopefully they're

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Speaker 1: not because the system works really well for shareholders right now.

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Speaker 1: So as we think about coming off a very strong

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Speaker 1: even if it would take a look at it from

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Speaker 1: the peak of eighteen, still a real strong period, what

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Speaker 1: do you think investors should be expecting for returns in

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Speaker 1: twenty I've heard either boy load of mid single digits

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Speaker 1: after the big run we've had, or I've had somebody.

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Speaker 1: We've had some people come in and say, gee, the

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Speaker 1: data kind of shows after a big double digit year,

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Speaker 1: you're gonna get another double digit how do you how

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Speaker 1: do you thinking about it? We're very data focus on

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Speaker 1: We've done the same math and it's two observations. The

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Speaker 1: first day is it's very uncommon for the SMP to

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Speaker 1: hover around uh zero to five percent up or down

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Speaker 1: in the following year. In any year, it's like a

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Speaker 1: thirteen percent out of the last ninety one years, so

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Speaker 1: it's not very common. So I wouldn't put a lot

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Speaker 1: of money on the idea that you're not going to

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Speaker 1: move very far. I do agree that you're probably going

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Speaker 1: to get something slightly below long term average that is

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Speaker 1: prefaced on some earnings growth, probably not as high as

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Speaker 1: it's looking for a called three to five percent. And

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Speaker 1: they said that, you know, is true to their sort

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Speaker 1: of devish slanting word that they're not going to raise

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Speaker 1: rates unless inflation gets really out of control and that

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Speaker 1: will keep the ten year low and global growth is slow,

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Speaker 1: so we shouldn't have much of a of a rally

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Speaker 1: and yields. That's the recipe for a decent but not

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Speaker 1: great year. What would you say to people who argued

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Speaker 1: that big tech has just taken the growth from the

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Speaker 1: other sectors, like say retail that's gotten kind of covered

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Speaker 1: by Amazon's rise. I mean, is that sort of what's

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Speaker 1: going on here. It's a piece of it, And I'd

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Speaker 1: say it's more of a feature than a bug as

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Speaker 1: far as as far as stocks go, because you have

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Speaker 1: sectors that competed like retail and fairly inefficient forms and

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Speaker 1: didn't really adapt in over time. Those should not receive

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Speaker 1: capital because they're not innovating, and the companies that are

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Speaker 1: do receive the capital and do receive the valuations that

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Speaker 1: allow them to continue to grow. So I'd say it's

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Speaker 1: a positive, but I get it, it's a painful positive

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Speaker 1: if you happen to own retailers or other ship to sectors,

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Speaker 1: or energy for that matter. Nicholas, thanks so much for

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Speaker 1: joining us again. Nicholas is co founder of Data Trek

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Speaker 1: Research based in New York City, joining us here in

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Speaker 1: our Bloomberg Interactive Broker studio. Nick is also a Bloomberg

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Speaker 1: Opinion Comments. We always love getting his thoughts on the market. Yeah,

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Speaker 1: and this to me is such an interesting issue because

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Speaker 1: people say, well, if you strip out the big tech

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Speaker 1: from the SMP performance, it's really unimpressive or even a loss,

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Speaker 1: and just say, you know, this is a potential problem

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Speaker 1: for the market right, that there's weakness elsewhere, and is

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Speaker 1: it a problem or is it, you know, one of

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Speaker 1: the strengths of the market frankly, because if these companies

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Speaker 1: continue to innovate, or if they continue to make as

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Speaker 1: much money, then it will be something that can drive

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Speaker 1: things forward. But it is sort of one of the

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Speaker 1: existential questions facing the market. Today is a great day

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Speaker 1: to get an informed perspective on what is going on

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Speaker 1: with the pound. We see a big drop today, the biggest,

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Speaker 1: I believe since July. As we hear, Boris Johnson raised

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Speaker 1: the specter essentially of a hard Brexit if there isn't

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Speaker 1: some sort of trade agreement created with the European Union.

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Speaker 1: Allah what they did with Canada but in approximately six

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Speaker 1: years fewer time joining us now. Marcus Ashworth, Bloomberg opinion columnist,

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Speaker 1: And I'm wondering, Marcus, is your take here that markets

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Speaker 1: are overreacting to something that Boris Johnson said with respect

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Speaker 1: to basically raising the spectrum of hard Brexit again, or

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Speaker 1: do you think that this is real uncertainty that the

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Speaker 1: markets have been overly sanguine about in their post election enthusiasm.

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Speaker 1: HIU high very much the former I mean, this is

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Speaker 1: a gift for next year. I mean, it's very difficult

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Speaker 1: to get on board ahead of in liquid markets before

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Speaker 1: the new year. But let's face it, the most stable

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Speaker 1: government in the Western world now we have a very

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Speaker 1: clear majority under Boris Johnson, a very undervalued, very very

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Speaker 1: undervalued stock market. It's it's dramatically on the performed europe US, etcetera.

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Speaker 1: This year. Um. Yes, there's some wibbly wobbily about whether

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Speaker 1: a deal is going to be done. I think no

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Speaker 1: deal Brexit, which everyone in the media seems to go

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Speaker 1: on and on and on about, has been clearly ruled

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Speaker 1: out by the faculty, along with the rest of most

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Speaker 1: of the mimeral media. But the reality is is that

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Speaker 1: Boris dawn't got that sorted in very short order. He's

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Speaker 1: just serving notice to both his party and indeed it's

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Speaker 1: more of a domestic signal but equally to the European

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Speaker 1: negotiators that let's get on with this. Stop coming up

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Speaker 1: the excuses why it should be seven years or ten years.

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Speaker 1: That shows you how rubbish the EU are negotiating things.

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Speaker 1: Let's do something. We both stand at one with each other.

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Speaker 1: We want to diverge by X on this, and why

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Speaker 1: on the other Let's just get on with it, stop

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Speaker 1: coming out the excuses, and let's make everything better for

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Speaker 1: everyone else. And I think that he has the backing

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Speaker 1: and the confidence from from the European leaders which his

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Speaker 1: predecessor did not have. So bloody blah blah, stunning has

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Speaker 1: come down to a level which is I think fairly priced,

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Speaker 1: if not cheap, under pretty much every monitor. So as

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Speaker 1: far as I'm concerned, do I think stuning will be

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Speaker 1: higher in a year's time. Absolutely? Do I think the

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Speaker 1: stock market in the UK will be higher? Absolutely? It

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Speaker 1: might have some wi wobbilis, of course, but I think

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Speaker 1: it's it's one of the gifts of all Right, So

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Speaker 1: Marcus asking me the time period we're uh, the UK

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Speaker 1: and the EU and the US are gonna have to

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Speaker 1: get down to hard work about bilateral trade deals. What

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Speaker 1: do you think the market's discounting as it relates to

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Speaker 1: those negotiations. Well, it's funny you'd say that, because that's

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Speaker 1: exactly the way I think. I think it's a three

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Speaker 1: way deal. It's going to be done, and it needs

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Speaker 1: to be done that way. If we have intelligence to

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Speaker 1: link in the fact that the U, EU and the

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Speaker 1: US absolutely needs a deal and vice versa to each other.

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Speaker 1: Why not trying to do one big, happy deal? Now,

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Speaker 1: I know that's that's a land of fantasy, but that's

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Speaker 1: where we ought to go heading towards. And I think

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Speaker 1: the cently coordination much more now between the UK and

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Speaker 1: the US, and it's whether you can get over itself

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Speaker 1: and work out what with a massively declining manufacturing setcher

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Speaker 1: in Germany and the France in on riots and riots

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Speaker 1: a variety of other problems with governments across Europe that

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Speaker 1: they could do with a big, nice, lovely fat trade

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Speaker 1: deal to keep everyone happy in I'm going to be

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Speaker 1: optimistic and think it can be done, and I think

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Speaker 1: we've seen that that whether Donald Trump caved in or

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Speaker 1: the Chinese cajun I'm not getting to the semantics of that,

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Speaker 1: but certainly it's the first bottle of trade deal has

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Speaker 1: been done. There are is a way forward. In twenty

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Speaker 1: was a very big year outside your UK equities, I

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Speaker 1: think can still be okay, if not better than okay,

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Speaker 1: if the world's government's get out of themselves. So you

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Speaker 1: said that you think that UK assets are dramatically undervalued

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Speaker 1: heading into and that this is a gift for people

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Speaker 1: who can bet on some of the stocks and bonds

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Speaker 1: and housing and anything else. I'm wondering how the economy

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Speaker 1: factors in because we are looking at a potential contraction

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Speaker 1: in the UK economy for the fourth quarter. I think

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Speaker 1: it's noise with its contract. I don't think it will contract,

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Speaker 1: but let's us say it does. It doesn't mean anything.

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Speaker 1: Um there's a massive fiscal spending splurgs coming. I still

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Speaker 1: think if you read what all right, that that probably

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Speaker 1: the next cut, the next movement banging and should be

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Speaker 1: a cut, but it will be an insurance cut like

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Speaker 1: the Fed's done three already. There will be a hockey

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Speaker 1: stick squish um coming when that that physical spending kicks

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Speaker 1: in and a bit of a Brexit bounce and all

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Speaker 1: that sort of stuff. But I think the banking will

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Speaker 1: try that to resist cutting. But if they need to,

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Speaker 1: let's cut basis points doesn't really matter. The point is

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Speaker 1: is that the economy is very soft, because that is

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Speaker 1: why Boris Johnson won, because the economy was absolutely going

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Speaker 1: into into a into a absolute channel of doom because

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Speaker 1: of this extended Brexit nightmare which he is about to

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Speaker 1: get us out of. Whether you agree with that or not,

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Speaker 1: it's just what's happening. It's democratically put forward. The EU

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Speaker 1: itself needs to realize the fact that it's second thirdligest

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Speaker 1: members leaving the fifth lige economy world is leaving it

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Speaker 1: and it needs to shape shift and get over itself

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Speaker 1: and make a deal. And I think that can be

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Speaker 1: done politics aside by the end of the year. It

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Speaker 1: may not be the full deal. I think that's where

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Speaker 1: the fudge comes. We've seen this for the US China

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Speaker 1: trade deal, a nice little phase one deal by this

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Speaker 1: time next year, and then we have Phase two which

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Speaker 1: fills in all the gaps. That's that's the direction travel

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Speaker 1: and I think the markets will will probably see through

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Speaker 1: that over the course of the year, see through the politics,

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Speaker 1: and all things being equal, it should be better for

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Speaker 1: the europe stock markets and better for the UK and

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Speaker 1: and hopefully better for the US as well. So Marcuts

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Speaker 1: just give us a just some color as to how

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Speaker 1: this will actually proceed over the next days, weeks, months,

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Speaker 1: the negotiations if any in terms of ratifying this Brexit

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Speaker 1: deal between the UK and the EU. What are the

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Speaker 1: actual steps in timing? Well, we have um the withdrawal agreement,

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Speaker 1: build the web, if you want to call it, coming

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Speaker 1: through first steps or second steps. Technically, um, right here,

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Speaker 1: right now, in the next couple of days, that'll be

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Speaker 1: formally rapti fied um. But later in January, and then

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Speaker 1: we're out of the Upean union from the by the

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Speaker 1: end of Janut one. Then we're go into this period

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Speaker 1: of negotiating in the transition period which the EU classic

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Speaker 1: EU are trying to limit in June July. And you can't,

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Speaker 1: you know, you must tell us we can extend. By

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Speaker 1: this period, all this will be washed away. I'm sure

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Speaker 1: of it, because it's it's just roadblocks that they're putting

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Speaker 1: there to try and help their own procrastination, which which

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Speaker 1: suits their their sides. They don't really want to face

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Speaker 1: up the reality of the fact. As I said, the

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Speaker 1: largest colom the world is exiting um their single market.

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Speaker 1: But it needs to be done in an elegant way

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Speaker 1: for everyone either side. All the important stuff like aircraft

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Speaker 1: flying and pharmaceutical licensing can be done in a heartbeats

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Speaker 1: already there. Um, it's it's a bit more motive on

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Speaker 1: certain things, on certain tariffs, and of course financial services

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Speaker 1: is something which will probably at the very end of it.

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Speaker 1: It always is, but you know, there is ability to

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Speaker 1: get a bare bones deal done by December twenty, which

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Speaker 1: is the circled end the transition period which boris Johnson's

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Speaker 1: and Dust announced today that he's going to make sure

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Speaker 1: he is stuck to That is meaningless because he can

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Speaker 1: actually introduce a bill a month beforehand and extended. But

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Speaker 1: it's just a signal. What's it is? Marcus, Thanks so

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Speaker 1: much for joining us. I really appreciate your commentary. Marcus

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Speaker 1: Ashworth Bloomberg Opinion columns covering European markets, giving us his

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Speaker 1: thoughts on the ongoing Brexit issue clearly is coming to

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Speaker 1: a head. Here. You can read more on this and

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Speaker 1: other stories from Bloomberg Opinion at Bloomberg dot com, slash

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Speaker 1: Opinion and on the Terminal by typing O p I

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Speaker 1: n GOT. One consistent theme throughout the past few years

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Speaker 1: has been the incredible rush of cash into private markets

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Speaker 1: of all sites, of all sorts. Private equity, private debt,

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Speaker 1: and the convergence of those two sectors in particular has

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Speaker 1: led to a boom in jer's and acquisitions and buyouts

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Speaker 1: within the middle market sector in particular, and Luckily for us,

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Speaker 1: we have somebody who knows a lot about that, Karen

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Speaker 1: Davies joining us here in our Interactive Broger studio as

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Speaker 1: private equity managing director and group head at Huntington National

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Speaker 1: Bank and usually in Cleveland, but today here in our

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Speaker 1: eleven three oh studios. Karen, I want to just get

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Speaker 1: a sense of twenty nineteen. Deal count a little lower,

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Speaker 1: valuations very high. What's your big takeaway? So, I think

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Speaker 1: nineteen has been UM basically on pace with what was.

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Speaker 1: If you look at the total value of deals, I

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Speaker 1: think the number is we you know, we should end

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Speaker 1: up in the fourth quarter very close to two trillion

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Speaker 1: dollars of M and A. Again, UM, that's the same

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Speaker 1: number that was done in two thousand eighteen. The deal count,

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Speaker 1: as you had mentioned, UM was a little off, a

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Speaker 1: little lighter, but very large mega deals that got done.

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Speaker 1: So the deal value was very high in the third quarter.

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Speaker 1: And so we've seen that trend that the deal values

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Speaker 1: are higher, the multiples are still elevated. UM. I kind

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Speaker 1: of think that's the new norm. I think that's the

431
00:23:01,960 --> 00:23:04,240
Speaker 1: new norm with that much capital available in the market,

432
00:23:04,680 --> 00:23:09,639
Speaker 1: you know, related to UM in the banks having capital

433
00:23:09,680 --> 00:23:13,360
Speaker 1: available the capital markets, having capital sovereign wealth funds coming

434
00:23:13,440 --> 00:23:16,080
Speaker 1: in trillion dollars, a dry powder. On the private equity side,

435
00:23:16,920 --> 00:23:19,080
Speaker 1: I think that those valuations are going to continue to hold,

436
00:23:19,320 --> 00:23:21,399
Speaker 1: so one of the things at least, And I've noticed that,

437
00:23:21,720 --> 00:23:24,240
Speaker 1: as you mentioned, there's just so much money coming into

438
00:23:24,280 --> 00:23:26,359
Speaker 1: the private equity business over the years, and it seems

439
00:23:26,400 --> 00:23:29,560
Speaker 1: like every big firm is raising just jillion dollar funds.

440
00:23:30,000 --> 00:23:32,000
Speaker 1: But you, you're the one that actually has to put

441
00:23:32,080 --> 00:23:36,200
Speaker 1: senior debt on these deals. You're taking a lot of risk.

442
00:23:36,600 --> 00:23:38,680
Speaker 1: Are you concerned? Are you seeing some of your private

443
00:23:38,720 --> 00:23:41,440
Speaker 1: equity clients maybe doing deals in the last year or

444
00:23:41,480 --> 00:23:43,040
Speaker 1: two that maybe they would not have done four or

445
00:23:43,040 --> 00:23:45,200
Speaker 1: five years ago. Well, I think I think that there's

446
00:23:45,240 --> 00:23:48,840
Speaker 1: still using really good discipline. I think that their investment

447
00:23:48,960 --> 00:23:53,320
Speaker 1: thesis work is very solid um. I don't necessarily see

448
00:23:53,359 --> 00:23:56,400
Speaker 1: them taking more risk that they wouldn't have taken before,

449
00:23:56,480 --> 00:23:59,399
Speaker 1: but they're paying more for it, right, So if it's

450
00:23:59,440 --> 00:24:02,240
Speaker 1: a good as set um and they've done their diligence,

451
00:24:02,480 --> 00:24:06,200
Speaker 1: they will pay up invaluation. We sort of hold study

452
00:24:06,240 --> 00:24:08,000
Speaker 1: on the line in terms of how much senior leverage

453
00:24:08,000 --> 00:24:10,320
Speaker 1: we're going to put out. Really it's the differential is

454
00:24:10,359 --> 00:24:12,159
Speaker 1: coming from them, It's coming from the equity check that

455
00:24:12,200 --> 00:24:15,399
Speaker 1: they're writing. So what used to be maybe thirty back

456
00:24:15,440 --> 00:24:18,680
Speaker 1: in the day equity is now fifty six equity to

457
00:24:18,720 --> 00:24:20,560
Speaker 1: get a deal done when you're paying twelve times. And

458
00:24:20,640 --> 00:24:22,639
Speaker 1: this is something that people have actually been talking about

459
00:24:22,720 --> 00:24:25,040
Speaker 1: as something giving them confidence in the private debt world

460
00:24:25,440 --> 00:24:28,159
Speaker 1: that there is that huge equity cushion, right or pinning

461
00:24:28,240 --> 00:24:30,679
Speaker 1: that there is a concern what if the whole things

462
00:24:30,720 --> 00:24:33,560
Speaker 1: the house of cards and the valuation is ridiculous to

463
00:24:33,600 --> 00:24:35,800
Speaker 1: begin with, and the business model is unsound. I mean,

464
00:24:35,840 --> 00:24:39,720
Speaker 1: are you seeing anything that reeks of that? I would

465
00:24:39,760 --> 00:24:43,600
Speaker 1: say not not yet. But you're as a lender, you

466
00:24:43,720 --> 00:24:47,399
Speaker 1: are very selective in terms of where you put your

467
00:24:47,440 --> 00:24:51,400
Speaker 1: dollars to work. And I think you're seeing the need

468
00:24:51,520 --> 00:24:54,000
Speaker 1: to partner with the right private equity firms who have

469
00:24:54,200 --> 00:24:57,080
Speaker 1: really good track records, who have an investment thesis that

470
00:24:57,240 --> 00:25:00,320
Speaker 1: is sound, they have operating partners who know those in streets,

471
00:25:00,440 --> 00:25:02,840
Speaker 1: versus sort of being a tourist. If you will, you know,

472
00:25:02,840 --> 00:25:04,520
Speaker 1: I'm gonna write a big check out of my private

473
00:25:04,520 --> 00:25:06,320
Speaker 1: equity fund into a line of business that I know

474
00:25:06,520 --> 00:25:08,800
Speaker 1: nothing about, and then I'm going to go ahead and

475
00:25:08,960 --> 00:25:10,840
Speaker 1: line it up with a senior debt provider who maybe

476
00:25:10,880 --> 00:25:13,680
Speaker 1: has no expertise or special specialization in that lending of

477
00:25:13,760 --> 00:25:17,000
Speaker 1: that sector. That that is sort of a dangerous combination.

478
00:25:17,560 --> 00:25:21,040
Speaker 1: So in the middle markets where you focus your team focuses,

479
00:25:21,400 --> 00:25:24,320
Speaker 1: what industries are sectors? Are you seeing the most activity

480
00:25:24,440 --> 00:25:28,040
Speaker 1: right now? So we have a decent amount of healthcare

481
00:25:28,080 --> 00:25:32,520
Speaker 1: related businesses, uh, not just private equity owned, but privately

482
00:25:32,520 --> 00:25:34,600
Speaker 1: owned at Huntington Bank through the middle market footprint that

483
00:25:34,640 --> 00:25:39,479
Speaker 1: we serve, So healthcare, um, some consumer good retail, Uh,

484
00:25:39,720 --> 00:25:41,480
Speaker 1: pretty select there in terms of you better have a

485
00:25:41,480 --> 00:25:43,920
Speaker 1: good e commerce platform. We're starting to see a little

486
00:25:43,920 --> 00:25:47,239
Speaker 1: bit more automotive aftermarket transactions coming to market because those

487
00:25:47,280 --> 00:25:49,959
Speaker 1: would probably be cycled resilient to some extent. And then

488
00:25:50,040 --> 00:25:52,520
Speaker 1: it's just pretty consistent business to business and you know,

489
00:25:52,600 --> 00:25:54,719
Speaker 1: just your basic manufacturing. In the Midwest where we sit

490
00:25:54,720 --> 00:25:57,480
Speaker 1: in Huntington's we see those companies, you know, trying to

491
00:25:57,520 --> 00:25:59,960
Speaker 1: convert wealth right, sell the business, get ahead of a

492
00:26:00,040 --> 00:26:02,520
Speaker 1: cycle and do it now. So are you seeing more buyouts,

493
00:26:02,640 --> 00:26:05,520
Speaker 1: more mergers, more acquisitions. What's the goal other than just

494
00:26:05,680 --> 00:26:09,080
Speaker 1: cashing out? Uh, Well, it depends where you ask right.

495
00:26:09,119 --> 00:26:11,439
Speaker 1: So the goal is private equity has way too much

496
00:26:11,520 --> 00:26:13,159
Speaker 1: dry powder on their hands and they got to put

497
00:26:13,200 --> 00:26:14,760
Speaker 1: it to work, and their gps are screaming, well, but

498
00:26:14,880 --> 00:26:17,119
Speaker 1: but this, but this is this is not great right,

499
00:26:17,200 --> 00:26:19,119
Speaker 1: That's not a great reason. That's not a good reason

500
00:26:19,280 --> 00:26:22,280
Speaker 1: to do it. Um. You also have a lot of

501
00:26:22,400 --> 00:26:24,520
Speaker 1: privately held businesses in terms of if you go out

502
00:26:24,560 --> 00:26:28,239
Speaker 1: and look at the generational ownership who have said, when

503
00:26:28,320 --> 00:26:32,520
Speaker 1: you do these surveys, we're absolutely inquisitive. We're inquisitive. We're

504
00:26:32,560 --> 00:26:34,480
Speaker 1: looking to sell. We're looking at take chips off the table.

505
00:26:34,520 --> 00:26:36,400
Speaker 1: I need to transition wealth. I don't have a third

506
00:26:36,440 --> 00:26:38,560
Speaker 1: gen coming in and I don't want to ride this

507
00:26:38,640 --> 00:26:41,400
Speaker 1: business through the cycle. So you know, I think there's

508
00:26:41,440 --> 00:26:43,639
Speaker 1: some there's a confluence of issues coming. You've got too

509
00:26:43,720 --> 00:26:45,560
Speaker 1: much capital, You've got a lot of people trying to sell.

510
00:26:45,640 --> 00:26:47,320
Speaker 1: It's almost like I think there was an article written

511
00:26:47,359 --> 00:26:49,399
Speaker 1: that you know, everything in America was for sale. So

512
00:26:50,400 --> 00:26:52,040
Speaker 1: if you read that, it's a little it's a little

513
00:26:52,080 --> 00:26:55,800
Speaker 1: scary exactly. So in your markets, like you know, when

514
00:26:55,800 --> 00:26:57,720
Speaker 1: I was in the bank banking world, is a question

515
00:26:57,800 --> 00:27:00,359
Speaker 1: how much of a loan would we keep on books

516
00:27:00,440 --> 00:27:03,600
Speaker 1: versus syndicate out, how are the deals getting done now?

517
00:27:03,680 --> 00:27:06,720
Speaker 1: Because if I were a commercial lender in these deals,

518
00:27:06,840 --> 00:27:09,199
Speaker 1: I'd be concerned. Towards the end of the economic cycle,

519
00:27:09,480 --> 00:27:11,920
Speaker 1: I've got buyers spending you know, big multiples, maybe a

520
00:27:11,920 --> 00:27:13,960
Speaker 1: little b higher than I'm comfortable with. I'd want to

521
00:27:14,119 --> 00:27:15,520
Speaker 1: sell down as much as I can. What are you

522
00:27:15,560 --> 00:27:17,600
Speaker 1: finding in the middle market in the credit side. Well,

523
00:27:17,720 --> 00:27:22,800
Speaker 1: interestingly enough, the middle market syndicated UH lending UM space

524
00:27:22,920 --> 00:27:25,720
Speaker 1: right now is way down in terms of where where

525
00:27:25,800 --> 00:27:27,320
Speaker 1: we used to be in terms of volume because of

526
00:27:27,320 --> 00:27:29,800
Speaker 1: the direct lenders doing the whole deal right there coming

527
00:27:29,800 --> 00:27:32,360
Speaker 1: in and doing the whole deal. There still are customers

528
00:27:32,400 --> 00:27:36,359
Speaker 1: who really value that senior sub sort of transaction UM

529
00:27:36,520 --> 00:27:40,200
Speaker 1: and I think that the syndicate market, when we agent transactions,

530
00:27:40,280 --> 00:27:44,960
Speaker 1: is a very appropriate tool to use to manage risk.

531
00:27:45,280 --> 00:27:47,480
Speaker 1: And and in your book or any lenders book, you

532
00:27:47,480 --> 00:27:49,359
Speaker 1: should have diversity in your book. And that's what you

533
00:27:49,440 --> 00:27:52,040
Speaker 1: use syndicated lending for is is to diversify. And so

534
00:27:52,119 --> 00:27:54,000
Speaker 1: I think it's a tool that you we got to

535
00:27:54,040 --> 00:27:56,480
Speaker 1: continue to use. But it's certainly a competitive situation when

536
00:27:56,480 --> 00:27:57,800
Speaker 1: you have one lender when them to do the whole

537
00:27:57,840 --> 00:27:59,960
Speaker 1: thing exactly. Karen Daviess, thanks you so much for joining us.

538
00:28:00,040 --> 00:28:02,840
Speaker 1: Karen Davies, private equity managing director and group head at

539
00:28:02,920 --> 00:28:05,359
Speaker 1: Huntington National Bank based in Cleveland, but joining us here

540
00:28:05,359 --> 00:28:07,159
Speaker 1: on a Bloomberg and inactive broker studio giving us a

541
00:28:07,240 --> 00:28:09,600
Speaker 1: rundown on the M and A environment, particularly for a

542
00:28:09,680 --> 00:28:12,560
Speaker 1: mid market M and A uh is Karen mentioned another

543
00:28:12,760 --> 00:28:15,360
Speaker 1: good year for M and A broadly speaking, maybe two

544
00:28:15,400 --> 00:28:19,639
Speaker 1: trillion dollars worth of deals in Thanks for listening to

545
00:28:19,680 --> 00:28:22,080
Speaker 1: the Bloomberg P and L podcast. You can subscribe and

546
00:28:22,119 --> 00:28:25,280
Speaker 1: listen to interviews at Apple Podcasts or whatever podcast platform

547
00:28:25,320 --> 00:28:28,359
Speaker 1: you prefer. I'm Paul Sweeney. I'm on Twitter at pt Sweeney.

548
00:28:28,480 --> 00:28:30,680
Speaker 1: I'm Lisa bram Woyds. I'm on Twitter at Lisa A.

549
00:28:30,760 --> 00:28:33,360
Speaker 1: Bram Woits one. Before the podcast, you can always catch

550
00:28:33,440 --> 00:28:35,200
Speaker 1: us worldwide. I'm Bloomberg Radio