Speaker 1: Welcome to the Bloomberg Penil Podcast. I'm Paul swing you.
Speaker 1: Along with my co host Lisa Brahma Wicks. Each day
Speaker 1: we bring you the most noteworthy and useful interviews for
Speaker 1: you and your money. Whether at the grocery store or
Speaker 1: the trading floor. Find a Bloomberg Penil podcast on Apple
Speaker 1: podcast or wherever you listen to podcasts, as well as
Speaker 1: at Bloomberg dot com. Well, the U S and China
Speaker 1: continue to make gradual progress on a Phase one trade deal,
Speaker 1: although we have not yet seen anything on paper. To
Speaker 1: get the latest, we welcome and Stevenson Yang, co founder
Speaker 1: and research director of JA Capitol Research, also a Bloomberg
Speaker 1: opinion contributor based in DC and Hong Kong, and thanks
Speaker 1: so much for joining us. What do you from your perspective,
Speaker 1: what is the latest on the China US trade negotiation? Hi? Um,
Speaker 1: you know, to be honest, it's nonsense. So we have
Speaker 1: we have almost two years of back and forth market
Speaker 1: gyrations and you know, high expectations in order to get
Speaker 1: back to the state of quo anti like, what's special
Speaker 1: about this? All right? Well, okay, this is an argument
Speaker 1: that people say we're going back to levels that said
Speaker 1: the forty billion dollars to fifty billion dollars of extra
Speaker 1: uh goods, and that China is supposed to import from
Speaker 1: the United States. There is a question of how feasible
Speaker 1: that is given the structure currently of their economy and
Speaker 1: the different trade routes. What's your sense of that. Do
Speaker 1: you think that that seems very doable at this point? Yeah,
Speaker 1: this reminds me of you know, for many years, the
Speaker 1: Chinese Trade Ministry has been has been running these um
Speaker 1: these buying missions to the US where they'll send a
Speaker 1: whole lot of you know, soe presidents on a delegation
Speaker 1: with the Ministry of Commerce and they'll say they'll sign
Speaker 1: all these agreements and China is going to buy all
Speaker 1: this stuff, and John's gonna invest all this money. It
Speaker 1: never actually happens, it's it's for the headline effects. So
Speaker 1: what China is going to do is they're going to
Speaker 1: kind of um slice away at at the commitments by uh,
Speaker 1: you know, re renaming Hong Kong imports as as mainland
Speaker 1: imports and then uh, you know, signing a deal that
Speaker 1: they don't actually implement, you know, stuff like that. So
Speaker 1: what's happened is that the all the structural demands for
Speaker 1: for Chinese economic change have just disappeared because the US
Speaker 1: realized that they're they're not realistic. In the US really
Speaker 1: has sort of, you know, caved in order to get
Speaker 1: a deal, and instead the US says, okay, just buy
Speaker 1: more stuff please, and China says, yeah, we might do that.
Speaker 1: So and does this call into question the value of
Speaker 1: kind of this bilateral type of negotiation as opposed to
Speaker 1: you know what probably was more the norm of a
Speaker 1: multilateral maybe the transpecific partnership. From your perspective, all the
Speaker 1: history that you have with China and China trade, what
Speaker 1: do you think is the best way to proceed with China? Yeah, yeah, Look,
Speaker 1: it's totally understandable why there's great frustration with China. But
Speaker 1: but the fact is that the real problem has been
Speaker 1: lack of use of the of the dispute resolution mechanisms
Speaker 1: that exist in the w t O, lack of accession
Speaker 1: to the t p P and so forth. There's a
Speaker 1: lot of stuff that we could be doing in demands
Speaker 1: we could be making of China that we have not made,
Speaker 1: and we've hobbled the w t O. And yes, I
Speaker 1: agree the bilateral mechanisms are just not very satisfactory going forward.
Speaker 1: What are you looking forward to determine whether the Phase
Speaker 1: one deal is moving ahead as expected in terms of
Speaker 1: Phase one A, Phase one B, Phase one C that
Speaker 1: actually effectuates the existing tariffs being rolled back. Well, it's
Speaker 1: it seems to me that the only real demand because
Speaker 1: all the concessions on on you know, stuff like intellectual
Speaker 1: property have already been baked into into Chinese um you know,
Speaker 1: new laws and resolutions and the currency thing kind of
Speaker 1: that was that became unimp written about ten years ago.
Speaker 1: Um So, so the only significant issue here is whether
Speaker 1: China will actually make the purchases that it says it will.
Speaker 1: And most of those purchases are focused on soybeans and
Speaker 1: corn ethanol, right so, and that's very important obviously to
Speaker 1: Trump because they're they're they're base constituencies that rely on
Speaker 1: selling those commodities. So it's kind it becomes a question
Speaker 1: of well, China, does China really want to boost the
Speaker 1: Trump chances of reelection? Um there have been signs that
Speaker 1: it did for a long time. Now it's not so clear.
Speaker 1: So as we look back on this process, or not
Speaker 1: even done the process yet, because yet We've not even
Speaker 1: seen anything on paper, but assume the Phase one deal
Speaker 1: turns out the way it's been reported. Looking back, well,
Speaker 1: this will this outcome, this Phase one deal will be
Speaker 1: worth two years of all this uncertainty in the global markets. Yeah,
Speaker 1: totally not did did there need to be a reset
Speaker 1: of the US China relationship, Absolutely, But I think that
Speaker 1: a lot of that reset is about uh no longer
Speaker 1: um capitulating to unreasonable Chinese you know, actually bullying over
Speaker 1: things like you know, the name that we called Taiwan
Speaker 1: and whether Leotill boy gets a Nobel Prize and stuff
Speaker 1: like that. Um, so we need to stop being cowed
Speaker 1: by that sort of thing. But this, you know, weaving
Speaker 1: back and forth on tariff levels is really just not
Speaker 1: a good thing for either economy. And Stevenson Yang thank
Speaker 1: you so much for being with us. And Stevenson Yang
Speaker 1: is co founder and research director at Jay Capital Research,
Speaker 1: as well as a Bloomberg opinion contributor. There are a
Speaker 1: number of ways to sort of size and scope the
Speaker 1: fang stocks, or as I call them earlier fanmag which
Speaker 1: is Facebook, Amazon, Netflix, Microsoft, Apple, and Google. Um well,
Speaker 1: I mean that's sort of the sort of guts of
Speaker 1: the of the tech sector. I think you just is
Speaker 1: that yours and I remember discussing it with some colleagues.
Speaker 1: I don't want to take full credit about this, but
Speaker 1: I think that it's important to to look at the
Speaker 1: performance of the fanmag socks aside from the rest of
Speaker 1: the SMP to understand the rally and understand going forward
Speaker 1: how big a bet you're making on big tech in
Speaker 1: the U S if you invest in the index. Nichols
Speaker 1: joining us here, co founder of Data Trek Research LLC
Speaker 1: uh here in our interactive broker studios, can you give
Speaker 1: us some some sense of how responsible this sector has
Speaker 1: been for the overall US equity performance. Yeah, it's been sizeable. Obviously.
Speaker 1: If you look at the past five years, you can
Speaker 1: have a point of single names like Amazon that hasn't
Speaker 1: done all this all that well this year, but over
Speaker 1: the last five years is something like seven percent of
Speaker 1: the entire SMPS return, even though it's obviously was coming
Speaker 1: from a small base. UH and XLK, the e t
Speaker 1: F that follows it is now up thirty plus percent
Speaker 1: for the year. If you look at sector waitings, it's
Speaker 1: even more impressive for tech. If you add in Google, Facebook,
Speaker 1: and Amazon that aren't in tech. You're talking about thirty
Speaker 1: two percent of the SMP, and that gives people pause.
Speaker 1: But I would point to two things. The first is
Speaker 1: there is no European or EFA tech sector to speak of.
Speaker 1: It's seven percent of EFA. So the waiting that you
Speaker 1: see in the SMP isn't just for the US economy.
Speaker 1: It's for US and Europe and Japan and parts of
Speaker 1: emerging market. So you're looking at a global franchise. And
Speaker 1: the second issue is, unlike a lot of other sectors,
Speaker 1: tech is not a stranded asset. If you think about
Speaker 1: the energy sector, which I think by most accounts is
Speaker 1: virgin on stranded asset territory, it's now smaller than Apple's
Speaker 1: market cap or Microsoft's market cap and the SP five
Speaker 1: hundred and so you have a combination of things. A.
Speaker 1: It's a growth sector, be it's not a stranded asset,
Speaker 1: and it probably will never be. So we talk about
Speaker 1: the fangs in tech, you know, really dominating the market.
Speaker 1: But that raises a concern of breath. When we think
Speaker 1: about the lack of breath of the market in this
Speaker 1: move up we've had, is that a real concern? Do
Speaker 1: you think to professional investors. It certainly is to professional investors,
Speaker 1: and certainly to our clients. We we get a lot
Speaker 1: of emails about this. The way we try to explain
Speaker 1: it is basically a permutation of what I just discussed is, Look,
Speaker 1: this is the sector that is growing. If you want
Speaker 1: to put if you had to lock your money up
Speaker 1: for ten years, would you either it be in tech
Speaker 1: or in any other sector of the SMP. Although there's
Speaker 1: a question of which tech, right, I mean, yes, some
Speaker 1: of these big giants, particularly Amazon has had an amazing
Speaker 1: run of it. Uh, Facebook certainly as well. The new
Speaker 1: tech might be different. It might be cybersecurity, it might
Speaker 1: be you know, cloud computing, and there will be a
Speaker 1: breakdown of the halves and the have nots within the
Speaker 1: tech sector. Netflix may be subsumed by another company based
Speaker 1: on the increasing competition and streaming. So how do you
Speaker 1: sort of understand the lasting quality of of of tech
Speaker 1: that's offered by these companies. Yeah, it's a great question.
Speaker 1: I mean I would say two points. The first is,
Speaker 1: if you think about the Big four, the Big five
Speaker 1: or your fanmag paradigm, they don't really compete with each
Speaker 1: other very much. That's very unlike the Chinese tech sector,
Speaker 1: where you have social media companies actively pushing into e
Speaker 1: commerce and e commerce companies building social networks. We don't
Speaker 1: have any of that in the States. The giants stick
Speaker 1: to themselves and that's kind of bad for competition in
Speaker 1: the US, but awesome for stock returns, and it probably
Speaker 1: won't change the second digit. You think about Amazon, what
Speaker 1: is Amazon right now? It's a cloud computing company. What
Speaker 1: does it want to be? It wants to be a
Speaker 1: cloud computing e tailor of AI solutions. That's what's really
Speaker 1: focused on. That's what recognition, facial recognition is about. That's
Speaker 1: what it wants to be. So if these companies do
Speaker 1: it right, they should also be the next leg. When
Speaker 1: you say that there isn't a lot of competition, there's
Speaker 1: these like alarm bells that go off in my head.
Speaker 1: Regulatory risk, regulatory risk. I mean, that's sort of the
Speaker 1: big concern here is that there aren't major competitors for
Speaker 1: any of these tech giants. How big of a potential
Speaker 1: headwind are regulatory concerns given the fact that so far
Speaker 1: it does not seem like there is much motion on that.
Speaker 1: While the talk not a lot of action, the most
Speaker 1: motion has been you know, California eight five, which is
Speaker 1: the Privacy rule which goes into effect on January one,
Speaker 1: and it is going to basically be the de facto
Speaker 1: US standard, but the Senate is still working on regulation.
Speaker 1: The bottom line to your answer your question is it
Speaker 1: really kind of depends on the elections, and it depends
Speaker 1: on how much traction the privacy aspects of this guy.
Speaker 1: That's the only thing that really people care about. Otherwise,
Speaker 1: people i think are pretty happy with the way technology
Speaker 1: interfaces with their life, except for privacy that needs to
Speaker 1: get resolved. But barring that, regulations should not be that
Speaker 1: big a deal, and from a shareholder productive hopefully they're
Speaker 1: not because the system works really well for shareholders right now.
Speaker 1: So as we think about coming off a very strong
Speaker 1: even if it would take a look at it from
Speaker 1: the peak of eighteen, still a real strong period, what
Speaker 1: do you think investors should be expecting for returns in
Speaker 1: twenty I've heard either boy load of mid single digits
Speaker 1: after the big run we've had, or I've had somebody.
Speaker 1: We've had some people come in and say, gee, the
Speaker 1: data kind of shows after a big double digit year,
Speaker 1: you're gonna get another double digit how do you how
Speaker 1: do you thinking about it? We're very data focus on
Speaker 1: We've done the same math and it's two observations. The
Speaker 1: first day is it's very uncommon for the SMP to
Speaker 1: hover around uh zero to five percent up or down
Speaker 1: in the following year. In any year, it's like a
Speaker 1: thirteen percent out of the last ninety one years, so
Speaker 1: it's not very common. So I wouldn't put a lot
Speaker 1: of money on the idea that you're not going to
Speaker 1: move very far. I do agree that you're probably going
Speaker 1: to get something slightly below long term average that is
Speaker 1: prefaced on some earnings growth, probably not as high as
Speaker 1: it's looking for a called three to five percent. And
Speaker 1: they said that, you know, is true to their sort
Speaker 1: of devish slanting word that they're not going to raise
Speaker 1: rates unless inflation gets really out of control and that
Speaker 1: will keep the ten year low and global growth is slow,
Speaker 1: so we shouldn't have much of a of a rally
Speaker 1: and yields. That's the recipe for a decent but not
Speaker 1: great year. What would you say to people who argued
Speaker 1: that big tech has just taken the growth from the
Speaker 1: other sectors, like say retail that's gotten kind of covered
Speaker 1: by Amazon's rise. I mean, is that sort of what's
Speaker 1: going on here. It's a piece of it, And I'd
Speaker 1: say it's more of a feature than a bug as
Speaker 1: far as as far as stocks go, because you have
Speaker 1: sectors that competed like retail and fairly inefficient forms and
Speaker 1: didn't really adapt in over time. Those should not receive
Speaker 1: capital because they're not innovating, and the companies that are
Speaker 1: do receive the capital and do receive the valuations that
Speaker 1: allow them to continue to grow. So I'd say it's
Speaker 1: a positive, but I get it, it's a painful positive
Speaker 1: if you happen to own retailers or other ship to sectors,
Speaker 1: or energy for that matter. Nicholas, thanks so much for
Speaker 1: joining us again. Nicholas is co founder of Data Trek
Speaker 1: Research based in New York City, joining us here in
Speaker 1: our Bloomberg Interactive Broker studio. Nick is also a Bloomberg
Speaker 1: Opinion Comments. We always love getting his thoughts on the market. Yeah,
Speaker 1: and this to me is such an interesting issue because
Speaker 1: people say, well, if you strip out the big tech
Speaker 1: from the SMP performance, it's really unimpressive or even a loss,
Speaker 1: and just say, you know, this is a potential problem
Speaker 1: for the market right, that there's weakness elsewhere, and is
Speaker 1: it a problem or is it, you know, one of
Speaker 1: the strengths of the market frankly, because if these companies
Speaker 1: continue to innovate, or if they continue to make as
Speaker 1: much money, then it will be something that can drive
Speaker 1: things forward. But it is sort of one of the
Speaker 1: existential questions facing the market. Today is a great day
Speaker 1: to get an informed perspective on what is going on
Speaker 1: with the pound. We see a big drop today, the biggest,
Speaker 1: I believe since July. As we hear, Boris Johnson raised
Speaker 1: the specter essentially of a hard Brexit if there isn't
Speaker 1: some sort of trade agreement created with the European Union.
Speaker 1: Allah what they did with Canada but in approximately six
Speaker 1: years fewer time joining us now. Marcus Ashworth, Bloomberg opinion columnist,
Speaker 1: And I'm wondering, Marcus, is your take here that markets
Speaker 1: are overreacting to something that Boris Johnson said with respect
Speaker 1: to basically raising the spectrum of hard Brexit again, or
Speaker 1: do you think that this is real uncertainty that the
Speaker 1: markets have been overly sanguine about in their post election enthusiasm.
Speaker 1: HIU high very much the former I mean, this is
Speaker 1: a gift for next year. I mean, it's very difficult
Speaker 1: to get on board ahead of in liquid markets before
Speaker 1: the new year. But let's face it, the most stable
Speaker 1: government in the Western world now we have a very
Speaker 1: clear majority under Boris Johnson, a very undervalued, very very
Speaker 1: undervalued stock market. It's it's dramatically on the performed europe US, etcetera.
Speaker 1: This year. Um. Yes, there's some wibbly wobbily about whether
Speaker 1: a deal is going to be done. I think no
Speaker 1: deal Brexit, which everyone in the media seems to go
Speaker 1: on and on and on about, has been clearly ruled
Speaker 1: out by the faculty, along with the rest of most
Speaker 1: of the mimeral media. But the reality is is that
Speaker 1: Boris dawn't got that sorted in very short order. He's
Speaker 1: just serving notice to both his party and indeed it's
Speaker 1: more of a domestic signal but equally to the European
Speaker 1: negotiators that let's get on with this. Stop coming up
Speaker 1: the excuses why it should be seven years or ten years.
Speaker 1: That shows you how rubbish the EU are negotiating things.
Speaker 1: Let's do something. We both stand at one with each other.
Speaker 1: We want to diverge by X on this, and why
Speaker 1: on the other Let's just get on with it, stop
Speaker 1: coming out the excuses, and let's make everything better for
Speaker 1: everyone else. And I think that he has the backing
Speaker 1: and the confidence from from the European leaders which his
Speaker 1: predecessor did not have. So bloody blah blah, stunning has
Speaker 1: come down to a level which is I think fairly priced,
Speaker 1: if not cheap, under pretty much every monitor. So as
Speaker 1: far as I'm concerned, do I think stuning will be
Speaker 1: higher in a year's time. Absolutely? Do I think the
Speaker 1: stock market in the UK will be higher? Absolutely? It
Speaker 1: might have some wi wobbilis, of course, but I think
Speaker 1: it's it's one of the gifts of all Right, So
Speaker 1: Marcus asking me the time period we're uh, the UK
Speaker 1: and the EU and the US are gonna have to
Speaker 1: get down to hard work about bilateral trade deals. What
Speaker 1: do you think the market's discounting as it relates to
Speaker 1: those negotiations. Well, it's funny you'd say that, because that's
Speaker 1: exactly the way I think. I think it's a three
Speaker 1: way deal. It's going to be done, and it needs
Speaker 1: to be done that way. If we have intelligence to
Speaker 1: link in the fact that the U, EU and the
Speaker 1: US absolutely needs a deal and vice versa to each other.
Speaker 1: Why not trying to do one big, happy deal? Now,
Speaker 1: I know that's that's a land of fantasy, but that's
Speaker 1: where we ought to go heading towards. And I think
Speaker 1: the cently coordination much more now between the UK and
Speaker 1: the US, and it's whether you can get over itself
Speaker 1: and work out what with a massively declining manufacturing setcher
Speaker 1: in Germany and the France in on riots and riots
Speaker 1: a variety of other problems with governments across Europe that
Speaker 1: they could do with a big, nice, lovely fat trade
Speaker 1: deal to keep everyone happy in I'm going to be
Speaker 1: optimistic and think it can be done, and I think
Speaker 1: we've seen that that whether Donald Trump caved in or
Speaker 1: the Chinese cajun I'm not getting to the semantics of that,
Speaker 1: but certainly it's the first bottle of trade deal has
Speaker 1: been done. There are is a way forward. In twenty
Speaker 1: was a very big year outside your UK equities, I
Speaker 1: think can still be okay, if not better than okay,
Speaker 1: if the world's government's get out of themselves. So you
Speaker 1: said that you think that UK assets are dramatically undervalued
Speaker 1: heading into and that this is a gift for people
Speaker 1: who can bet on some of the stocks and bonds
Speaker 1: and housing and anything else. I'm wondering how the economy
Speaker 1: factors in because we are looking at a potential contraction
Speaker 1: in the UK economy for the fourth quarter. I think
Speaker 1: it's noise with its contract. I don't think it will contract,
Speaker 1: but let's us say it does. It doesn't mean anything.
Speaker 1: Um there's a massive fiscal spending splurgs coming. I still
Speaker 1: think if you read what all right, that that probably
Speaker 1: the next cut, the next movement banging and should be
Speaker 1: a cut, but it will be an insurance cut like
Speaker 1: the Fed's done three already. There will be a hockey
Speaker 1: stick squish um coming when that that physical spending kicks
Speaker 1: in and a bit of a Brexit bounce and all
Speaker 1: that sort of stuff. But I think the banking will
Speaker 1: try that to resist cutting. But if they need to,
Speaker 1: let's cut basis points doesn't really matter. The point is
Speaker 1: is that the economy is very soft, because that is
Speaker 1: why Boris Johnson won, because the economy was absolutely going
Speaker 1: into into a into a absolute channel of doom because
Speaker 1: of this extended Brexit nightmare which he is about to
Speaker 1: get us out of. Whether you agree with that or not,
Speaker 1: it's just what's happening. It's democratically put forward. The EU
Speaker 1: itself needs to realize the fact that it's second thirdligest
Speaker 1: members leaving the fifth lige economy world is leaving it
Speaker 1: and it needs to shape shift and get over itself
Speaker 1: and make a deal. And I think that can be
Speaker 1: done politics aside by the end of the year. It
Speaker 1: may not be the full deal. I think that's where
Speaker 1: the fudge comes. We've seen this for the US China
Speaker 1: trade deal, a nice little phase one deal by this
Speaker 1: time next year, and then we have Phase two which
Speaker 1: fills in all the gaps. That's that's the direction travel
Speaker 1: and I think the markets will will probably see through
Speaker 1: that over the course of the year, see through the politics,
Speaker 1: and all things being equal, it should be better for
Speaker 1: the europe stock markets and better for the UK and
Speaker 1: and hopefully better for the US as well. So Marcuts
Speaker 1: just give us a just some color as to how
Speaker 1: this will actually proceed over the next days, weeks, months,
Speaker 1: the negotiations if any in terms of ratifying this Brexit
Speaker 1: deal between the UK and the EU. What are the
Speaker 1: actual steps in timing? Well, we have um the withdrawal agreement,
Speaker 1: build the web, if you want to call it, coming
Speaker 1: through first steps or second steps. Technically, um, right here,
Speaker 1: right now, in the next couple of days, that'll be
Speaker 1: formally rapti fied um. But later in January, and then
Speaker 1: we're out of the Upean union from the by the
Speaker 1: end of Janut one. Then we're go into this period
Speaker 1: of negotiating in the transition period which the EU classic
Speaker 1: EU are trying to limit in June July. And you can't,
Speaker 1: you know, you must tell us we can extend. By
Speaker 1: this period, all this will be washed away. I'm sure
Speaker 1: of it, because it's it's just roadblocks that they're putting
Speaker 1: there to try and help their own procrastination, which which
Speaker 1: suits their their sides. They don't really want to face
Speaker 1: up the reality of the fact. As I said, the
Speaker 1: largest colom the world is exiting um their single market.
Speaker 1: But it needs to be done in an elegant way
Speaker 1: for everyone either side. All the important stuff like aircraft
Speaker 1: flying and pharmaceutical licensing can be done in a heartbeats
Speaker 1: already there. Um, it's it's a bit more motive on
Speaker 1: certain things, on certain tariffs, and of course financial services
Speaker 1: is something which will probably at the very end of it.
Speaker 1: It always is, but you know, there is ability to
Speaker 1: get a bare bones deal done by December twenty, which
Speaker 1: is the circled end the transition period which boris Johnson's
Speaker 1: and Dust announced today that he's going to make sure
Speaker 1: he is stuck to That is meaningless because he can
Speaker 1: actually introduce a bill a month beforehand and extended. But
Speaker 1: it's just a signal. What's it is? Marcus, Thanks so
Speaker 1: much for joining us. I really appreciate your commentary. Marcus
Speaker 1: Ashworth Bloomberg Opinion columns covering European markets, giving us his
Speaker 1: thoughts on the ongoing Brexit issue clearly is coming to
Speaker 1: a head. Here. You can read more on this and
Speaker 1: other stories from Bloomberg Opinion at Bloomberg dot com, slash
Speaker 1: Opinion and on the Terminal by typing O p I
Speaker 1: n GOT. One consistent theme throughout the past few years
Speaker 1: has been the incredible rush of cash into private markets
Speaker 1: of all sites, of all sorts. Private equity, private debt,
Speaker 1: and the convergence of those two sectors in particular has
Speaker 1: led to a boom in jer's and acquisitions and buyouts
Speaker 1: within the middle market sector in particular, and Luckily for us,
Speaker 1: we have somebody who knows a lot about that, Karen
Speaker 1: Davies joining us here in our Interactive Broger studio as
Speaker 1: private equity managing director and group head at Huntington National
Speaker 1: Bank and usually in Cleveland, but today here in our
Speaker 1: eleven three oh studios. Karen, I want to just get
Speaker 1: a sense of twenty nineteen. Deal count a little lower,
Speaker 1: valuations very high. What's your big takeaway? So, I think
Speaker 1: nineteen has been UM basically on pace with what was.
Speaker 1: If you look at the total value of deals, I
Speaker 1: think the number is we you know, we should end
Speaker 1: up in the fourth quarter very close to two trillion
Speaker 1: dollars of M and A. Again, UM, that's the same
Speaker 1: number that was done in two thousand eighteen. The deal count,
Speaker 1: as you had mentioned, UM was a little off, a
Speaker 1: little lighter, but very large mega deals that got done.
Speaker 1: So the deal value was very high in the third quarter.
Speaker 1: And so we've seen that trend that the deal values
Speaker 1: are higher, the multiples are still elevated. UM. I kind
Speaker 1: of think that's the new norm. I think that's the
Speaker 1: new norm with that much capital available in the market,
Speaker 1: you know, related to UM in the banks having capital
Speaker 1: available the capital markets, having capital sovereign wealth funds coming
Speaker 1: in trillion dollars, a dry powder. On the private equity side,
Speaker 1: I think that those valuations are going to continue to hold,
Speaker 1: so one of the things at least, And I've noticed that,
Speaker 1: as you mentioned, there's just so much money coming into
Speaker 1: the private equity business over the years, and it seems
Speaker 1: like every big firm is raising just jillion dollar funds.
Speaker 1: But you, you're the one that actually has to put
Speaker 1: senior debt on these deals. You're taking a lot of risk.
Speaker 1: Are you concerned? Are you seeing some of your private
Speaker 1: equity clients maybe doing deals in the last year or
Speaker 1: two that maybe they would not have done four or
Speaker 1: five years ago. Well, I think I think that there's
Speaker 1: still using really good discipline. I think that their investment
Speaker 1: thesis work is very solid um. I don't necessarily see
Speaker 1: them taking more risk that they wouldn't have taken before,
Speaker 1: but they're paying more for it, right, So if it's
Speaker 1: a good as set um and they've done their diligence,
Speaker 1: they will pay up invaluation. We sort of hold study
Speaker 1: on the line in terms of how much senior leverage
Speaker 1: we're going to put out. Really it's the differential is
Speaker 1: coming from them, It's coming from the equity check that
Speaker 1: they're writing. So what used to be maybe thirty back
Speaker 1: in the day equity is now fifty six equity to
Speaker 1: get a deal done when you're paying twelve times. And
Speaker 1: this is something that people have actually been talking about
Speaker 1: as something giving them confidence in the private debt world
Speaker 1: that there is that huge equity cushion, right or pinning
Speaker 1: that there is a concern what if the whole things
Speaker 1: the house of cards and the valuation is ridiculous to
Speaker 1: begin with, and the business model is unsound. I mean,
Speaker 1: are you seeing anything that reeks of that? I would
Speaker 1: say not not yet. But you're as a lender, you
Speaker 1: are very selective in terms of where you put your
Speaker 1: dollars to work. And I think you're seeing the need
Speaker 1: to partner with the right private equity firms who have
Speaker 1: really good track records, who have an investment thesis that
Speaker 1: is sound, they have operating partners who know those in streets,
Speaker 1: versus sort of being a tourist. If you will, you know,
Speaker 1: I'm gonna write a big check out of my private
Speaker 1: equity fund into a line of business that I know
Speaker 1: nothing about, and then I'm going to go ahead and
Speaker 1: line it up with a senior debt provider who maybe
Speaker 1: has no expertise or special specialization in that lending of
Speaker 1: that sector. That that is sort of a dangerous combination.
Speaker 1: So in the middle markets where you focus your team focuses,
Speaker 1: what industries are sectors? Are you seeing the most activity
Speaker 1: right now? So we have a decent amount of healthcare
Speaker 1: related businesses, uh, not just private equity owned, but privately
Speaker 1: owned at Huntington Bank through the middle market footprint that
Speaker 1: we serve, So healthcare, um, some consumer good retail, Uh,
Speaker 1: pretty select there in terms of you better have a
Speaker 1: good e commerce platform. We're starting to see a little
Speaker 1: bit more automotive aftermarket transactions coming to market because those
Speaker 1: would probably be cycled resilient to some extent. And then
Speaker 1: it's just pretty consistent business to business and you know,
Speaker 1: just your basic manufacturing. In the Midwest where we sit
Speaker 1: in Huntington's we see those companies, you know, trying to
Speaker 1: convert wealth right, sell the business, get ahead of a
Speaker 1: cycle and do it now. So are you seeing more buyouts,
Speaker 1: more mergers, more acquisitions. What's the goal other than just
Speaker 1: cashing out? Uh, Well, it depends where you ask right.
Speaker 1: So the goal is private equity has way too much
Speaker 1: dry powder on their hands and they got to put
Speaker 1: it to work, and their gps are screaming, well, but
Speaker 1: but this, but this is this is not great right,
Speaker 1: That's not a great reason. That's not a good reason
Speaker 1: to do it. Um. You also have a lot of
Speaker 1: privately held businesses in terms of if you go out
Speaker 1: and look at the generational ownership who have said, when
Speaker 1: you do these surveys, we're absolutely inquisitive. We're inquisitive. We're
Speaker 1: looking to sell. We're looking at take chips off the table.
Speaker 1: I need to transition wealth. I don't have a third
Speaker 1: gen coming in and I don't want to ride this
Speaker 1: business through the cycle. So you know, I think there's
Speaker 1: some there's a confluence of issues coming. You've got too
Speaker 1: much capital, You've got a lot of people trying to sell.
Speaker 1: It's almost like I think there was an article written
Speaker 1: that you know, everything in America was for sale. So
Speaker 1: if you read that, it's a little it's a little
Speaker 1: scary exactly. So in your markets, like you know, when
Speaker 1: I was in the bank banking world, is a question
Speaker 1: how much of a loan would we keep on books
Speaker 1: versus syndicate out, how are the deals getting done now?
Speaker 1: Because if I were a commercial lender in these deals,
Speaker 1: I'd be concerned. Towards the end of the economic cycle,
Speaker 1: I've got buyers spending you know, big multiples, maybe a
Speaker 1: little b higher than I'm comfortable with. I'd want to
Speaker 1: sell down as much as I can. What are you
Speaker 1: finding in the middle market in the credit side. Well,
Speaker 1: interestingly enough, the middle market syndicated UH lending UM space
Speaker 1: right now is way down in terms of where where
Speaker 1: we used to be in terms of volume because of
Speaker 1: the direct lenders doing the whole deal right there coming
Speaker 1: in and doing the whole deal. There still are customers
Speaker 1: who really value that senior sub sort of transaction UM
Speaker 1: and I think that the syndicate market, when we agent transactions,
Speaker 1: is a very appropriate tool to use to manage risk.
Speaker 1: And and in your book or any lenders book, you
Speaker 1: should have diversity in your book. And that's what you
Speaker 1: use syndicated lending for is is to diversify. And so
Speaker 1: I think it's a tool that you we got to
Speaker 1: continue to use. But it's certainly a competitive situation when
Speaker 1: you have one lender when them to do the whole
Speaker 1: thing exactly. Karen Daviess, thanks you so much for joining us.
Speaker 1: Karen Davies, private equity managing director and group head at
Speaker 1: Huntington National Bank based in Cleveland, but joining us here
Speaker 1: on a Bloomberg and inactive broker studio giving us a
Speaker 1: rundown on the M and A environment, particularly for a
Speaker 1: mid market M and A uh is Karen mentioned another
Speaker 1: good year for M and A broadly speaking, maybe two
Speaker 1: trillion dollars worth of deals in Thanks for listening to
Speaker 1: the Bloomberg P and L podcast. You can subscribe and
Speaker 1: listen to interviews at Apple Podcasts or whatever podcast platform
Speaker 1: you prefer. I'm Paul Sweeney. I'm on Twitter at pt Sweeney.
Speaker 1: I'm Lisa bram Woyds. I'm on Twitter at Lisa A.
Speaker 1: Bram Woits one. Before the podcast, you can always catch
Speaker 1: us worldwide. I'm Bloomberg Radio