Equity Capital Markets

“A year of surprises”: Global capital markets recap and 2025 outlook

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Amaury Guzman: Hello, you're listening to What's The Deal? on our investment banking series on J.P. Morgan's Making Sense podcast. I'm your host, Amaury Guzman from J.P. Morgan's Leveraged Finance desk in New York. Today, I am joined by returning guest Kevin Foley, our global head of Capital Markets, to discuss market development since our mid-year conversation in July, as well as to explore the outlook for global capital markets in 2025. Kevin, welcome back to the podcast. Great to have you.

Kevin Foley: Amaury, great to be back. Thank you for having me.

Amaury Guzman: Alright, why don't we dive right in. Kevin, almost 12 months have gone by in what seems, at least to me, the blink of an eye. But in reality, a lot has happened this year. How would you characterize market developments almost twelve months in?

Kevin Foley: I'd say it's been a year of, I'd call surprises. The economy's been more resilient than we would've thought. The expectations around rate cuts coming into the year were much higher. We got them less of and later in the year than what was expected, obviously, because that ties back to where the economy has been and the resiliency around it. And we obviously got through an election season as well and in a lot of ways, people would refer to as a Goldilocks environment right now. There is belief that you're gonna continue to have some tailwinds from the Fed easing. You've got a view of less regulation under the next administration. That's the belief. People are putting on rose-colored glasses  with regards to what tariffs or changes in immigration policies may be and the impact that may have on employment. And right now there's a very optimistic view about the resiliency of the economy and the ability to continue that and starting to see that in cross debt and equity markets. And I'd say the animal spirits right now are very much alive and strong.

Amaury Guzman: Markets have reacted accordingly, not only in terms of like asset prices where equities have rallied significantly on the credit side where spreads are tight, how would you characterize what the market activity has been on the primary side?

Kevin Foley: So we've been on record levels volumes when you particularly look at the leverage finance market, right in the leverage loan market, to be even more specific. Interestingly, 90% of that activity has been refinancing driven. So we've been very quiet on true new issuance coming to the market. So it's a lot of recycling of capital. It's created a very borrower friendly market because of the lack of new issues, fair amount of cash still on the sidelines. There's a natural inflows that happen from coupon clipping that happens every month with any fixed income product. All of those have created a very favorable environment of demand outstripping supply. And that is driven a heavy refinancing wave. Because we start to think forward to 2025, the question on top of everyone's mind is M&A gonna pick up. And we start to see actual new issuance coming to the market. You can have volumes come down next year, but if the mix shift happens towards more new issuance tied to M&A, that starts to bring that supply and demand a little bit more in balance which will create... It's not necessarily a bad thing, but it can create a little bit different dynamic than what we're seeing right now.

Amaury Guzman: No, that's a great take and I'm gonna come back to some of your references on M&A and the outlook. But before we do, I wanna go a little bit deeper in one of your references that you just had on the U.S. election, specifically, results are now behind us. They include a sweep of Congress. As you mentioned, as the prices have been on the move, equities rallying, rates higher as the market tries to, if you may, anticipate the impact of the policies. How would you assess the balance of risks and opportunities from what you may call the expected policy shift?

Kevin Foley: It's not an easy proposition right now because I think we do have a market that feels like it's priced for perfection. And while there's a lot of reasons to be optimistic and the economic results are supporting that, and there's certainly the optimism with the election behind this, what that may mean on a regulatory front, what that can do from M&A activity and other business activities. You could debate whether a lot of that has already been priced in. And when you look at the multiple expansion that we've seen in the equity markets, that is pricing in a fair amount of growth. You look from a rates perspective and more in the high yield market and the investment grade market, you look at a spreads basis, we are near record lows. The high grade market has taken out its historic lows on a spread levels. The high yield market is several hundred basis points inside its non-recessionary average. So you've got a market that in a lot of ways is priced for a perfect economy and a perfect world. But at the same time, we've got geopolitical concerns that are still out there. We are not entirely sure if inflation has been whipped. There are things that under this new administration that could be viewed as some headwinds for the economy. So while we're optimistic and you could feel good about the outlook, it's not a throw caution to the wind environment.

Amaury Guzman: Yeah, I mean, I just had you walk through the fiscal side of the puzzle, but for instance, if we were to look at it from the monetary side of things, for instance, the Fed has outlined that they will remain data dependent, right, in assessing near term policy decisions. The market itself is pricing additional cuts in December, maybe January, March, who knows? And potentially quarterly thereafter, as the market expects, bring the policy rate down maybe closer to the 300 quarter, 3.5% range. Do you think, these kind of fiscal policy plans throw a wrench in those plans?

Kevin Foley: I think it's... When I started this talking about 2024 being a year of surprises, we obviously saw a lot less cuts than what the market was expecting. And the market was comfortable with that, right? They focus on the fact that here, the market got comfortable with less rate cuts during the course of 2024 because the economic picture continued to be strong. You can definitely have a debate about here, the stimulus that's happening from less regulation, some of its positive sentiment too around the anticipation of that. Is that going to then prevent the Fed from doing some of those policy tightening that is expected, and are they even gonna have the luxury to even debate it? We're still not at that 2% inflation target. There are still things out there that are, by definition inflationary. Take for example, the fact that as we're shifting towards more sustainable energy, that by definition is inflationary. When you look at the investment that's needed on the defense front because of the geopolitical picture, that is inflationary by definition as well. So whether they're gonna have the luxury even easing policy further, is it going to be the challenge that they're facing now, is that gonna increase because of the stimulus that's coming in from other aspects? Yeah, that's gonna be a something we're all gonna be watching in 2025.

Amaury Guzman: Thank you for that, Kevin. I mentioned I was gonna go back to the M&A point. We recently had Alka Gupta and Matt Gell on our podcast discussing tech sectors IPO and M&A trends in EMEA. They were positive about the IPO market in '25 and '26, but they did note that companies are still cautious about M&A due to regulatory uncertainty. What are your thoughts on this outlook? And does this echo with what you're viewing at a global level?

Kevin Foley: So there's definitely a lot more enthusiasm about M&A activity in 2025. I think some of it has to do with a year ago we were sitting anticipating when were we gonna actually see an economic slowdown and anticipation of a recession. That recession never showed up. And so while the economy has slowed down, it's been more resilient. So I think there's an increased confidence in a lot of boardrooms to think about a backdrop that allows them to even think more strategically about what they wanna do. So I think that's a factor. The rates coming down, that's another positive factor. I do think the U.S. economy has been more robust than other parts of the world, in particular when you compare the U.S. with Europe, that you probably would expect to see the U.S. leading the way on the pickup and M&A activity. We've been at near historic lows for the level of activity for private equity shops exiting their investments. So we expect to pick up on that, which will be say the opportunity for strategics to add to their portfolio, to look at other sponsors who may be trying to expand the footprint in this particular industry. There's gonna be a lot of opportunities on that front. So yes, I think that the tailwinds are coming. We're expecting a lot more activity. Some of the concerns that we have, if any of them come to fruition, you can see them derailing that M&A pipeline pretty quickly.

Amaury Guzman: Now, Kevin, as we sit here today in December of 2024 and we look forward to 2025, what are you keeping an eye on for what could be a material risks to markets next year?

Kevin Foley: Well, I think a lot of the risks that we've seen in 2024 remain. I think you're gonna continue to look at the long end of the Treasury curve, where we're gonna continue to be running fiscal deficits. We are gonna have to increase borrowing. At the same time, the buyer base that's been buying Treasuries over the past 5 to 10 years, the banks, the Fed, foreign entities, foreign investors are all pulling back. So despite what the Fed may do in cutting rates on the short end, think of the long end, you continue to have pressure upward because of the supply demand and balance.

Amaury Guzman: Got it. Thank you for that assessment. I think that resonates a lot with what we're hearing from other market participants. Now, the last topic that I wanna review with you today for benefit of our listeners is our upcoming Global Leverage Unions conference, which is happening February of 2025. It is a special edition for all of us at J.P. Morgan as well as for market participants given it's our 30th anniversary of the conference. Why is this your conference particularly special for market veterans like yourself?

Kevin Foley: Well, I think you stare at that number of 30 years, and you look at what's happened in markets over the past 30 years. Pretty astounding when you start to look at a lot of things from dotcom to GFC, COVID, and that's just to name a few. So there's been so much history and development in the growth of the market. The conference in a way has grown alongside with the growth of the market. And so it's kind of watching both grow up and expand over time, and it's become a incredible ecosystem. And I think in a world. We've watched the evolution of road shows become shorter and less in person. The conference has taken on even more of importance because it is definitely a guaranteed couple days where investors and lenders are able to get with issuers and borrowers face to face and really get an update on where things stand in the economy, where things stand with those individual businesses and how they're performing. So we have the good fortune of J.P. Morgan and being a leader in the market and really nurturing that ecosystem. It is thrilling to be a part of that. It's just been fun to watch that grow over the years.

Amaury Guzman: Thank you for that. And what themes are you expecting to emerge from our 30th Global Leverage Finance Conference, upcoming in February?  

Kevin Foley: I think as you think about the themes for next year, I think it's a lot about what we've been talking about. We're gonna continue to gauge the economy. You'll have had the new administration in the office by that time for over a month, maybe we've had some progress on the geopolitical front. We're gonna be debating where Fed policy is. Feels like it's more of the same, but I feel like you take the best pulse when getting out there and hearing the management teams and the CEOs and CFOs of all these businesses and a lot of different industries from across the globe really give you a good insight. And it's a great pull-up at that to understand where we are in a lot of things we've been talking about today.

Amaury Guzman: Kevin, thank you so much for that. We really appreciate your time and you coming and spending your thoughts with us and our listeners and just kind of sharing your insights for what has been a lot of market activity in 2024, as well as your outlook for '25. A big thanks to Kevin Foley for joining me today.

Kevin Foley: Amaury, thank you. And I just say to all our partners out there, thank you for placing your trust in J.P. Morgan, and thank you for a terrific 2024. And we're looking forward to a great 2025 and hope you and all your families have a wonderful holiday season.

Amaury Guzman: And thank you to our listeners for tuning into another episode of What's the Deal. We hope you enjoyed this conversation. I'm your host, I'm Amaury Guzman. Until next time, goodbye.

Voiceover: Thanks for listening to What's The Deal?. If you've enjoyed this conversation, we hope you'll review, rate, and subscribe to J.P. Morgan's Making Sense to stay on top of the latest industry news and trends, available on Apple Podcasts, Spotify, and YouTube. To stay ahead of the curve, sign up for J.P. Morgan's In-Context newsletter packed full of market views and expert insights delivered straight to you. To subscribe, just visit jpmorgan.com/in-context. This material was prepared by the investment banking group of J.P. Morgan Securities LLC and not the firm's research department. It is for informational purposes only and is not intended as an offer or solicitation for the purchase, sale, or tender of any financial instrument.

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Tech Stars Conference: What's next for EMEA tech?

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Katharina Ochs: Hi, you're listening to What's The Deal?, our investment banking series here on J.P. Morgan's Making Sense podcast. I'm your host, Katharina Ochs, from the EMEA Equity Capital Markets team. Today, we're going to talk about the J.P. Morgan Tech Stars Conference that took place earlier this month here in London. The conference brings together founders, CEOs, and investors to discuss key trends in the market, the sector, and more. We saw really strong attendance again this year, with over 100 technology companies participating and meeting with over 500 investors in one-on-one groups and larger panel discussions. Joining me to discuss some of the highlights and insights from the conference are Aloke Gupte, our co-head of International Equity Capital Markets, and Matt Gehl, co-head of EMEA Technology Investment Banking. Aloke and Matt, welcome to the podcast.

Matt Gehl: Thanks for having us.

Aloke Gupte: Thank you, Kathi.

Katharina Ochs: It was really an exciting few days last week that we had with interesting sessions, fascinating companies. So maybe, Aloke, Matt, what were your personal highlights and key takeaways that you took from the conference?

Aloke Gupte: Look, I think there were a number of them, but in the interest of brevity, maybe I'll highlight three. One was, you touched upon, Kathi, a number of people that attended across the three days, and that was fantastic to see. But it's really actually the connectivity that this event fosters between those people. That's not just about investors meeting companies. It's also about companies meeting companies, investors meeting investors. That, I think, is the magic of this event. It brings people together and it helps you foster new connections. It deepens existing ones, and that was great to see. I think the second thing I'd flag is that the Tech Stars brand has now been around for a long time. It's been more than a decade.The Tech Leadership Forum, which is part of Tech Stars, is only three years old. But collectively, the event really seems to have seeped into the consciousness of the tech ecosystem, not just in London here, but all across EMEA, as well as across the pond. We had a lot of attendees from the U.S. this year as well. So this is really an event which is on the calendar, people keen to attend. You saw a lot of senior CEO and founder attendance there. The third takeaway was we had some great panelists and sessions. I thought it was exceptional listening to Andy Murray, fantastic champion and his perspectives of life on and off the court were great to hear. I think I might add, who knew that Matt Gehl was Andy Murray minus the talent and great in determination? So I'd say tennis's loss is J.P. Morgan's gain.

Matt Gehl: I protest the comment that I don't have any talent, but maybe that's not what you said. But I think Andy showed what the combination of drive and exceptional talent can do and I think gave some really interesting life lessons that were applicable, not just on the tennis court, but for CEOs and for investors out there in the crowd. And I think his humility and ability to tell his story was a really inspiring way to start things off. So I think that's a great couple of highlights there. Look, I think then turning a bit more practical. I think what was really interesting for me at the conference was, last year it was more let's get to know each other. Let's talk about things for the future. This year with an improved market for tech, with more IPOs having happened, we were seeing much more tangible discussions and we've seen a lot more follow-ups initially. Companies were more actively talking about raising capital, whether that was a purely secondary round, a combination of primary or secondary round. We were seeing them openly talk about with investors and we're seeing investors booking follow-up meetings with those companies versus last year was ‘Great to see you. Let’s touch base in 6 or 12 months.’ So I think that was really, really positive to see. The second big thing I want to come off of what Aloke said we're seeing a resurgence of U.S. interest in investing into Europe. We saw more U.S. investors over here than we have in the past. We're seeing that in all of our rounds right now. That's the crossover funds. That's the growth equity funds. And increasingly, not just the U.S. funds, but we're seeing a number of the sovereigns out of Canada, out of Singapore, out of the Middle East that are really looking to get involved in a private round. So that was a big takeaway for me. This wasn't just a nice get-to-know-you for an IPO in two or three years. This is let's put money to work in your company over the next six months.

Katharina Ochs: Sounds good. And definitely both of these topics, something that I want to pick up a little bit later again. I personally really thought the session on the U.S. elections was super interesting. It really helped me connect dots and topics that I just didn't connect, coming from educated U.S. experts. So maybe Aloke, did this come up, also considering it's so topical with elections just a few weeks away? What was the mood at the conference about the U.S. elections?

Aloke Gupte: Yes, look, first up, it was a fantastic and clearly topical session with the election just a few weeks ahead of us. I should call out a big thanks to Governor Christie and Paul Begala for sharing their candid views. I think everyone enjoyed listening to them. In terms of the mood of the conference, it seems to be quite a widespread belief that this election is frankly just too close to call. It feels like a toss-up and that's clearly what many of us think and clearly what the conference attendees seem to think as well. The interesting part to take away really is that whilst there are significant areas of policy differential between the two sides, there are also some commonalities. There are some elements on the geopolitical side on the trade side, et cetera, which are common irrespective of who wins. Spending will go up irrespective of who wins. That will create its own set of opportunities and challenges for the economy. And if you generally look at where the mood of the market is, people are sort of saying this is close to call. There are some differences, but hopefully, the similar points are vast enough or meaningful enough such that you won't actually see too much of a disruption in terms of deal flow and activity and, the mood of the market, so to speak. That's clearly the hope as of now. time will tell., so we'll wait and see what happens.

Matt Gehl: So Aloke, maybe to build off your comment there, the election is coming up soon. I think we heard it was too close to call. But I think what's interesting is the focus from technology CEOs and technology investors is really the same no matter who wins. A number one focus is going to be the regulatory environment. The regulatory environment has really had a chilling impact on deal activity over the last several years. And that's not just the U.S. It's in the U.K. It's in Europe. It's in Asia. And so whoever wins, if they take a bit more business-friendly approach to regulatory environment, not just from antitrust, but to AI and to other areas, there's some optimism. You could start to see an unlocking of some of the M&A in the overall space. So I think that's the number one focus from the investor base is going to be on regulatory and who's most friendly, most aggressive, and we'll have to see what happens in a couple of weeks.

Katharina Ochs: Like you said, Aloke, it's only three weeks away, so we'll see what happens. One topic that I think has to be more discussed than the U.S. elections has to be artificial intelligence, and this wouldn't be a podcast on technology if we didn't touch on it. I know in many sessions, or at least all of the ones that I attended, it was also a topic of conversation of the presenters and the companies. So Matt, maybe one for you. How do you see it transform the tech sector going forward?

Matt Gehl: I think it's about big trend. I haven't seen anything like it since the rise of the Internet early in my career, where the whole industry coalesced around one thing. That was the topic to invest in. Right now, if you don't have an AI story, you simply aren't going to raise capital. So everyone is focused on it. There's very divergent views on how it's going to impact different companies. Everyone says they're a net beneficiary. That cannot possibly be the case, but it's got everyone excited again around investing. But I'd say two things I'd call out. One of the things that's having a little bit of a chilling impact is on some enterprise software investments because with AI causing such disruption in major corporates, there's a potential reallocation of technology budgets, and what we are seeing is elongation of sales cycles. Some of the enterprise software that's selling into large-scale enterprise is seeing a situation where maybe there's some reallocation to AI spending versus traditional seat license software. So that's causing a little bit more lumpiness in some of the numbers. Then we've seen that actually disrupting some processes. It's caused some companies to think about potentially delaying their IPOs a little bit until they've got more visibility.  On the other side, the companies that have really been AI first from the get-go have risen to the front. And these are the companies that are still raising private rounds at north of 15 times ARR. So if it's been embedded in your DNA from day one, you're batting investors away. If you're potentially facing a little bit of a slowdown in your spending because AI is disrupting your customers a little bit, it's having a slight chilling impact. But beyond talking about some of the private companies here, I actually think I want to get Aloke’s view here because the IPOs in tech, there's only been, I think, eight or nine of them year to date. Every one of them has come to market with a pretty strong IPO story. You look at the likes of Menestera or Reddit that were done earlier this year. How are the public investors looking at AI and how is that driving IPO demand?

Aloke Gupte: Yes, I think it's a great question, Matt. And this is clearly the thematic of our times, as you clearly pointed out. One of the things that investors are clearly looking at is you also saw that people were looking not just at the conceptual dynamic of what AI brought to those businesses, but they were also looking at the other factors you'd look at for any other business, which is what kind of sustainable growth do you have? Is there a path to profitability if not existing profitability? What kind of scale can you actually operate the business at? So some of these elements are actually, frankly, common across sectors, but the addition of AI is just sort of ticking the boxes of if people sit down at the start of the year and say, ''I'm going to buy 15 or 20 IPOs this year, what needs to be top of the list?'' AI is definitely the thematic that seems to be there. I think as we move forward into 2025 and this becomes a much more entrenched approach where many businesses actually come out and say that they have this AI component or pillar to their entire strategy, maybe markets will be a bit more discerning as to where there is a lot of depth within that, where that is very real and relevant to the business. So that distinction will perhaps come in time, but at this point in time, it's a very valuable thematic to have. It's an essential thematic to have, and all of these companies are met with a very positive reception.

Katharina Ochs: Considering we've talked a little bit already about the technology IPOs expected to come, and given there has been some lows over the recent years, but it seems to be more constructive at the moment, Aloke, how do you feel about European technology IPOs coming back to market? Do you see the activity picking up again, maybe going back to 2021 levels?

Aloke Gupte: Yes, I think the quick answer, Kathi, is yes. Though you might say that I'm slightly biased on this particular topic. Let's set the context a little bit before we get into that. The last three years have not been a homogenous set of three years. What you saw in the beginning across 2022, and maybe the first half of 2023, was there was a big pivot from growth to profitability. And a lot of companies had to go back to the drawing board and figure out how exactly they were going to meet that new paradigm. And then you started to see a bit of a change, particularly in the second half of 2023, and certainly with a stronger accent on it in 2024, is growth started to come back. You know people still value profitability, but the matrix for now, as we talked about in the earlier question, is really what is your long-term sustainable growth? How can you maintain a good degree of profitability within that or have a good path to profitability, which is relatively near term? And I think a slightly underestimated criteria, which is scale. If you think about it, it's the IPOs that are large and meaningful that have done better over the last few years than the ones that are typically smaller. So those are the dynamics and trends in the market. The second part I'd say is that tech has been the top-performing industry from a public market performance perspective in 2023 and 2024. Now, both of those were also slightly different. In 2023, it was completely led by the large-scale tech, the Mag 7. The performance of the Mag 7 was four times the performance of the NASDAQ and so on and so forth. That has altered slightly in 2024. The large companies have continued to do well, but many others have done well as well. What we're starting to see is the creation of conditions which will be quite appropriate and ripe for companies to go IPO. For the IPO market itself, this has been a build-back year. You know we all wish, and Jamie talks about this as well, about why we haven't seen more IPOs. What we have seen this year is that IPO volumes in both the US and Europe are up three times from what was albeit a low bar last year. Most of those IPOs have performed well. If you look at the top 20 IPOs that have happened globally this year, 17 of them have traded well. So it's a great build back here. We think that hopefully markets will take this momentum into 2025 and you'll start to see a lot more IPOs happen at that point in time. Some of that has been why people have waited has been because of markets. They’ve wanted to see that the market is strong and stable for a period of time before going ahead. But some of that is also just to see confidence within their own business and see that the business is set up in a great way to meet these three or four criteria that we've been talking about. So, yeah, going back, in short 2025, bigger year for IPOs than 2024. 2026, bigger than 2025.

Katharina Ochs: Sounds good.

Matt Gehl: Yes, and maybe jumping on top of that, you said, are we going to go back to where we were in 2020 and 2021? I don't think we're going to go back to where we were. I think we've learned a lot of lessons and I love to mention how the market has moved on. And actually you know we probably won't have as many tech IPOs in '25, '26 as we saw in 2020 and 2021. We may raise more money for these IPOs because the IPOs that are coming are bigger. There's more investor demand and the IPOs that are being prepared are being done so with much more methodical time being spent with the story, with the investors, getting to know people. We were doing IPOs in some cases, three months from the company deciding they wanted to go public to going out, never having met investors back in '21. There was a bit of a FOMO where you had to get public as fast as possible. Now it's a conscious decision that going IPO is best for my business for the long term. And so the IPOs are going to come are going to be must-own IPOs much more so than '21. It was like, I need to get public because everybody else is. I think that's going to be a very positive dynamic for this reopened IPO market we're going to see going forward.

Katharina Ochs: Yes. The conditions are there from the market perspective for companies in a good shape to list. You've talked about the U.S. investors having an increased interest in European tech IPOs. Do you think that means that more European technology companies are going to list in the U.S., or do you think they might choose their home grounds after all?

Matt Gehl: Yes, I think at least initially we probably will see a bit of a shift to the U.S. The reality here is the company needs to choose the exchange that is best for them. And there's no one-size-fits-all answer. If you're a global enterprise software company with sizable revenues in the U.S., with your competition in the U.S., with your biggest customers in the U.S., the U.S. feels like the more natural home. If you're a semiconductor company, the price is all of your revenue in U.S. dollars, and the majority of the market cap is there. You're more likely to gravitate to there. If you're a European-only software business with good growth, high profitability, Europe is more likely to be your home, a dedicated marketplace business. And so I think companies will find their natural home. What you probably won't see is anyone making a decision, ''Oh, the valuation at this period of time is better There's a scarcity effect.'' They're going to make the decision based on what's right for the next 5 or 10 years of the company, rather than optimizing for the short term. And I think we saw some companies looking to do that at the tail end of the last cycle. But what that means is because Europe's been building more global champions over the last 5 or 10 years, that there are more companies that are able to go public in the U.S. And I think whether companies are going public in the U.S. or Europe, that's a great win for the European ecosystem. So while the governments might not love if some of our great champions go public in the U.S., as long as the R&D base, the management base stays in Europe, it's a win for the whole sector.

Aloke Gupte: Couple of things that add to that is, if you set out really what are the various parameters that companies look at? They look at, what are management and shareholder objectives long term? That's an important factor. When you look at some of the more prosaic and technical factors, you think about depth of demand and valuation and where is your comp set based. And then actually comes to the stuff that really makes a difference. Matt touched upon it. Natural home is a really good way of putting it. You know you're listing once, but you're going to be listed for a long period of time. Therefore, long term, where do you really belong? Where are your revenues coming from? What would give you an investor base or a shareholder register that is very long-term, that is a mix of the right kind of global names with some local names if you were to choose Europe and so on and so forth? I think in a nutshell what will happen is that a good number of companies will choose to list in the U.S. because it makes absolute sense for them to do so, as Matt's highlighted. And a very sizable number will choose to, stay at home in Europe because that makes a ton of sense for them.

Katharina Ochs: Exciting. Looking forward to the wave of European tech IPOs then. Now, we've talked a lot about the public markets, but maybe taking it a step back and looking at private companies again, could you both give us some perspective as to what was the mood at the conference, more on the private companies?

Aloke Gupte: Look, there's a definite buzz. I think the quick takeaway is that we're incredibly busy on private rounds at this point in time. It's a race against time through to the end of the year, but we have a number of transactions that could be up for close. And that is great to see because it is true that across '22 and '23, you saw a big slowdown in activity as far as the private markets were concerned because you saw the public markets in a significant amount of pain. The public markets did recover, but private markets, if you look at all of these cycles over the last, 10, 15, 20 years, you'll find that private markets always recover 6 to 9 months after the public markets. And that's exactly what we've seen here today. I think going back to the earlier point we talked about, the level of attendance that we had, the conversations that people were having, Matt touched upon the fact that this year felt much more like there was a touch-and-feel element to it, that these are deals we can do now. You know people talking about it from that lens. We certainly feel that the mood in the private markets has improved substantially. Is there a place where it was in 2020 or 2021? No, but that's similar to the IPO market. That's frankly no surprise.  But we're starting to see investors get more active. We're starting to see companies raise capital. We're also starting to see an interesting trend around secondaries, where a lot of secondary rounds are happening right now. It's a great opportunity for companies to actually write and clean up their shareholder registers. It's an opportunity for some of the early investors in these companies to take money off the table at valuations, which are increasingly becoming more attractive. The type of investor that is focused on private capital right now is starting to expand again. So we're seeing obviously some of the high growth we see is there. We're seeing the sponsors there. We're seeing the sovereign wealth funds there. We're seeing family offices there. So there's a great amount of variety there. Even the crossovers have started to become a little bit more active. So we're pretty bullish about the private capital markets. We have a number of things, as I said, that we hope to close through the course of the year. And again, much like the IPO market, we see that as an improving trend through to 2025.

Matt Gehl: Building on that, I think Aloke mentioned the secondary topic. If you go back two years, most secondary deals were being done by companies. I don't want to say from a position of weakness because they're not selling, but oftentimes because a shareholder just absolutely needed the capital. Now they're being done in a situation where investors are pounding on the door of these companies saying, how do I invest? These companies in some cases have no need for primary capital. They've raised substantial capital back in 2021, '22, more than they even expected or needed. They're not in a rush to go public. So they're saying, well, how do I bring new people into the cap table? Aloke mentioned a lot of value of cleaning up the cap table. The benefit of that is, one, it can make it simpler for the IPO. It can also reduce some of the pressure to potentially need to be in that first wave of IPOs. And so when we're seeing companies going out and raising pure secondary, instead of everyone talking about how big of a discount, we're starting to talk about how big of a dollar value can I invest in the company. And we're seeing private rounds in many cases for secondary deals not being priced at any discount at all because we're seeing the crossover fund saying, ''This is my opportunity to build a position ahead of an IPO.'' So I think that's probably the most positive signal I've seen in the private markets in the last three years. And we're hoping it's going to continue. The other thing that's really interesting if you think from a private standpoint right now is with the US investors coming back into Europe, a desire to invest, it's moved beyond just wanting to invest into the UK or into Germany or France. We're seeing people look much further afield. We're seeing interest in the Middle East come up very substantially. We've got a number of Middle Eastern clients that were at the conference that are going to be thinking about raising capital. And I think you've got a much more diverse investor base that's looking to invest there. So the primary capital is looking further afield rather than just in the home markets they've been in the past.

Katharina Ochs: Interesting. And do you feel like it ever has been market dynamics like this before, or is this like a first that you see all of this coming together?

Matt Gehl: I think back in the glory days of four-plus years ago, you could pretty much do anything, public, private, maybe not as much in the Middle East. So I don't think we're back quite to that level. So as Aloke was saying, we're seeing the building blocks. The public markets are up. We're seeing IPOs get done again. That's now translating into the private market initially with primary capital and now we're starting to see secondary capital. The next phase is going to be hopefully a big ramp in IPOs at some point in the course of '25. I think everything's there. I think the one thing that I mentioned earlier is around M&A. I think that's the big thing we need to be thinking about is in an ideal world when you're doing an IPO, you're able to run a dual-track process. Potentially, if you're a financial sponsor, it's nicer to sell everything at once. If you're a CEO, it's great to actually go public and have that public currency. The IPO markets are recovering. The M&A markets, that regulatory aspect I talked about, is still a giant uncertainty. So if we get some more clarity that regulatory environment might be a bit better, we could have everything coming together for a really improved environment, both IPO and M&A next year. That's a tech banker's dream.

Katharina Ochs: Thanks, Matt. That actually brings me right to the last point I just wanted to touch on, which is where do you see the tech sector and also capital markets in the sector going maybe in like one crisp answer, Aloke, we've heard now where Matt sees it going. What's your view? Where do you see it going?

Aloke Gupte: I see more issuance and I see more business for us, which is going to be great. I think, look, I echo everything that Matt said. We've got all the right conditions for a lot of companies to raise capital, be it primary or secondary in the private markets, as well as go IPO across 25 and 26. I would just sort of lengthen that time period to say I think we will see a pickup in '25, but we might see a dramatic pickup in '26 as well. I think we do have a very long-term mindset. And so we feel really good about it. I think really, pivoting away slightly from your question, Kathi, I also did want to actually just take a minute to thank Matt for his partnership on the entire Tech Stars event. From both of us, I want to take the opportunity to thank the many people, you  know you included, who worked incredibly hard across many different teams in the organization to make this a big success. Tech Stars is really important to us. We're looking forward to being back next year, bigger, better, and, hopefully in great market environment.

Matt Gehl: Let me just echo that. Aloke's been a fantastic partner. I think we spend more time with each other than our clients and our families over the past couple of weeks, and big thanks to the team. We really do hope to make this, I think, year 13. Next October is going to be even bigger, even better. We really do look forward to even more people coming out. If you haven't heard of the conference before, please do reach out to your J.P. Morgan contact. We'd love to have every corner of the globe, every type of technology company, every type of technology investor be here for the event next year. So it's only getting better in the tech industry, and our conference will follow suit.

Katharina Ochs: Really looking forward to it. Just to recap, today we talked about some of the key themes moving the sector and the market at the moment, including the upcoming US elections, artificial intelligence, and we spent some time talking about private and public capital markets and where we see the sector and the market going in the next few years. So big thanks, Aloke and Matt, for joining me and taking part in this podcast today.

Matt Gehl: Thank you, Kathi. You've been a fantastic host. Did a great job at the conference. I really appreciate you having me here.

Aloke Gupte: Thanks a lot, Kathi. It was a delight to be here, and always great to chat with you, Matt.

Katharina Ochs: Thanks, everyone, for tuning into another episode of What's The Deal?. We hope you enjoyed this conversation. I'm your host Katharina Ochs. Until next time. Goodbye.

Voiceover: Thanks for listening to What’s The Deal? If you’ve enjoyed this conversation, we hope you’ll review, rate, and subscribe to J.P. Morgan’s Making Sense to stay on top of the latest industry news and trends – available on Apple Podcasts, Spotify, and YouTube. This material was prepared by certain personnel of J.P. Morgan Chase & Co. and its affiliates and subsidiaries worldwide and not the firm’s research department. It is for informational purposes only, is not intended as an offer or solicitation for the purchase, sale or tender of any financial instrument and does not constitute a commitment, undertaking, offer or solicitation by any J.P. Morgan Chase entity to extend or arrange credit or provide any other products or services to any person or entity. ​

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The tech pulse: Inside the 2024 technology investment landscape

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Pankaj Goel: Hi, you're listening to What's The Deal?, our investment banking series here on J.P. Morgan's Making Sense podcast channel. I'm your host, Pankaj Goel, co-head of J.P. Morgan's Technology Investment Banking for North America. I'm looking forward to giving our listeners an update on trends in the M&A and equity capital markets across technology and our expectations on deal activity going forward. Today I'm excited to be joined by my colleagues, Drago Rajkovic, vice chairman and head of Technology M&A, and Greg Chamberlain, co-head of Technology, Equity Capital Markets. Drago and Greg, welcome to the podcast.

Greg Chamberlain: Thanks for having me, Pankaj.

Drago Rajkovic: Hi Pankaj. Thanks for having me on the podcast.

Pankaj Goel: As you both know, we had our 52nd Technology, Media, and Communications conference at the end of May in Boston. We had 267 companies in attendance, of which 42 were private and over seven trillion in public market cap. There was definitely more enthusiasm and optimism about the markets this year. The attending companies saw a near 15% increase in their market caps for the past 12 months. So Greg, looking at the equity markets, how do you think the mood is coming out of the conference?

Greg Chamberlain: So overall, I would characterize mood as being good. Equity markets are trading around all-time highs and the tech sector has outperformed this year. As we approach the end of Q2, NASDAQ is up around 15% and that's on the back of a very substantial 43% rally in 2023. There's certainly been some stellar performance concentrated in certain parts of the market. For example, the mega cap stocks continue to do particularly well with several of the largest leading tech platforms like NVIDIA and Meta and Alphabet and Microsoft continuing to outperform the market and their impact on both the tech ecosystem overall, as well as from an investment perspective, their contribution to the performance of these main indices continues to be very significant. From an industry perspective, the semiconductor sector has been the standout winner this year. It recently surpassed software and services as the single largest industry group within the S&P 500 and now represents 12% of that entire index. So it's a part of the market that's had extremely strong tailwinds over the course of the year. The exposure to AI that this sector provides, as that technology continues to trigger significant capital investment, and that remains a dominant theme across the market. And then finally one point I’d just make on software which is an important part of the tech sector. We recently conducted a survey across all our public market tech investors around software and despite some recent volatility and in share price movement in that sector in that space the output pointed to continued optimism around both sector multiples and increased exposure to the sector.

Pankaj Goel: Thanks for that. How do you feel about the deal volumes, which has been 15 and under, indices are at all-time highs? Do you expect more deal volumes for the first half of this year or do you feel it aligns with your expectations?

Greg Chamberlain: It's an interesting question. If you go back, tech IPO issuance peaked in 2021 with 112 IPOs that year. And they came to a virtual standstill for 18 months as we saw tech valuations compress and investor appetite for new opportunities effectively come to a halt. The green shoots of recovery finally emerged in the second half of last year when we saw five IPOs price. We've already matched last year's number in 2024 and there are signs of improvement in activity and most importantly investor appetite. These deals are priced at the top of their IPO price ranges, in some instances pricing above, and despite some mixed fortunes are trading on average 27% above IPO price, so better than the market. What's encouraging is the breadth of issue we've seen in the market this year with deals coming from a range of sectors, including STEM, software, and internet. However the run rate for US tech IPOs is around 35 year. We've seen that for the last decade or so. So we are yet to get back to typical averages despite this big up and activity. When we look forward at our pipeline, it looks strong for the remainder of the year and also next year. So it does feel like this market is gonna see a gradual reopening over time. I think one of the reasons we're not seeing a flood of deals in the tech sector is partly due to the fact that many companies raise money privately in the valuation rich environment of 2020 and 2021, and they're looking to grow into these values over time. Another reason I think is because they've become more disciplined with their cash funds so there's less of a rush to raise IPO capital. A consequence of these two factors is that we're seeing more scaled private companies with an attractive balance of growth and profitability and these issues when they do come will be very well received.

Pankaj Goel: And what do you think has been driving the performance? Some of these IPOs like Astera Labs that you and I worked on have ended up being successful and some others have not fared that well. So what are you hearing from the investors? What are they expecting from the first line of IPO that are coming to the market?

Greg Chamberlain: I think there are certain things that investors have been looking for. Firstly is an ability to articulate a clear and differentiated vision. There is a premium on durability in this market. Investors that understand the competitive advantage that a company has, the sizeable opportunities looking to penetrate is a really important factor as they think about making multi-year investments. Another factor is the expectations that these issuers have set at the time of coming public. Investors look for reasonable expectations both in the short and the midterm, that they think the company can match exceed as they mature in the public market. And then the final point is the amount of time many of these issuers have spent getting to know the investment community. They've ensured that by the time it comes to the IPO roadshow, there's a pretty fulsome understanding of the business, its vision, and a familiarity with the management team well in advance of that final investor meeting, which has led to a strong reaction at the time of the IPO itself.

Pankaj Goel: Got it. So you think pre-education before the deal launch is critical to getting a successful outcome. Thanks for all those views. Drago, let's start with the current tech M&A activity. It's definitely been more robust than '22 and '23. What do you think is driving increased volumes?

Drago Rajkovic: Yes, the M&A activity has been more robust this year. It is up about 20% year to date. And I would say a couple of things that are driving this phenomenon. Number one, we have entered this year with an improving economy. There are expectations that the Fed is going to be very constructive on the interest rate side. And we also have very strong equity markets. That in turn is driving confidence in the boardroom. And having sat a couple of years on the sidelines, many corporates are eager to move forward with their strategic plans. In addition, many of the strategics have also optimized their businesses over the past couple of years and are looking to drive value from incremental M&A gains. So this more positive sentiment has driven both strategics and sponsors to get more active. And we're seeing elevated dialogue across the spectrum of buyers, strategic sponsors, size, except the mega deals. Those transactions we're still not seeing yet in the marketplace. These are transactions 30, 40 billion plus. Companies are still uncomfortable doing those in this environment. And I don't think we'll see any of that until 2025.

Pankaj Goel: Let's pull on the trend a little bit. So we advise Altium on the same earlier this year. We advise HP on the acquisition of Juniper. We also advise Squarespace on Go Private transactions recently. There's been a mix of strategic private equity sponsors and VC firms who are approaching the market. What's the difference in their approach as they look at the M&A as an outcome?

Drago Rajkovic: Yeah, so Pankaj, the strategics are still somewhat resistant in this market, even though a lot of them are seeing their business stabilize and demand stabilizing, and they're feeling more positive about the outlook, there are a number of things that are still holding the strategics back. The investors are valuing profitability more than growth in many instances today. And many of the strategics have been focused on delivering that. So we've seen a lot of companies be inwardly focused and still are. Activism in tech has risen significantly. So making sure your housing order is also important as well. The interest rate and cost of debt are still high and finding accretive deals has been more difficult in this environment. And then investors are still not fully risk-armed, so any transformative or even material deals are a source of risk for investors, and we have seen negative share price reactions for many of the announced transactions. The last thing I would say is regulatory, of course, in certain sectors, especially semiconductors, has been difficult to solve and is chilling the activity as well.

Pankaj Goel: Thanks, Drago. In IPO markets, as you know, success plays in the public domain, but in M&A context, there's a lot that happens behind the scenes. We have seen a lot of deals not getting across the finish line. What are some of the reasons for deals falling apart and not getting to the finish line in your view?

Drago Rajkovic: Yeah, Pankaj, it's still very difficult to get to the finish line We're seeing them fall apart very close to the announcement date as people are moving through diligence and negotiating agreements. First in the approach stage, it is still difficult to bridge the valuation gap and value expectations from the sellers, especially with healthy businesses. We have a strong equity markets and given where that market is priced, you would think that would be easier to do. But a lot of pockets of tech are still recovering in terms of valuation. Number two, the market volatility has also made it very difficult at times to agree on price and has a number of times disrupted already agreed upon deals and taking those offers and premiums out of act to a point where people had to just part ways. Lastly, we're seeing a lot more scrutiny around diligence. The bar is certainly higher, both with strategics and sponsors and certain liabilities that buyers used to accept in the past and nowadays, they just won't. And so overall, while we're seeing a lot more intent, a lot more dialogue, it is still very difficult to get to the finish line.

Pankaj Goel: Thanks so much for that, that’s a really great point. Let's look forward. Greg, we have seen an extremely robust private capital markets, the first half of the year. Nearly $50 billion has been raised this year, which is more than the volume in all of 2023. As you look forward, what do you expect from the IPO markets in '24, balance of 2024 and going into 2025? And more importantly, given this flow of private capital, do you expect the larger blockbuster IPOs to make a comeback?

Greg Chamberlain: Several interesting topics there, Pankaj. I think on the private capital markets, volumes are up pretty significantly year-on-year. The level of interest and participation from crossover investors being those that can invest both in the late stage private as well as public markets has picked up pretty dramatically, and some of the valuations in these deals are up to pretty lofty levels, much higher than they have been in the last couple of years. So it feels like a market that's doing very well. Within that volume, almost half of the equity private-placed issuance has been around the AI sector. Investors very hungry to invest capital in a variety of different opportunities directly connected associated with AI. So that's been a real tailwind terms of the IPO market, I think the pickup in issuance is gonna be gradual. The outcome and receptivity of some of these deals that we've led and we've talked about on this podcast has been fantastic and I think that bodes well for future assurance. As Drago picked out in his commentary, that could also be fueled by the macro tailwinds that we may get from rate cuts that could benefit growth sectors. For many of the larger potential blockbuster issuers, they can afford to be patient. Private markets providing plenty of capital and they are navigating very large market opportunities away from the glare of the public markets. That said, companies have different incentives to go public, both strategic and financial. So I really do feel it's like a matter of time before several of these larger private companies do dust off their plans, start working with banks and the regulators to prepare to go public.

Pankaj Goel: Thanks, Greg. Now let's go to Drago. Drago, you gave a really good backdrop of what's working and what's not working. But if you look at the balance of 2024 and going into 2025, you also have an election year later this year. What are you expecting from the M&A market?

Drago Rajkovic: The M&A market is, as I said before, it's confidence driven. So as long as we have an economy that continues to march towards a soft landing and an easing trajectory by the Fed, I think the M&A market will continue to improve incrementally. This fall with the election, a number of people will wait for that to pass as we all do expect some volatility in the markets and it is typical in that context. However, I do see as we get into the next year and there's a lot more clarity around this economic cycle and how we're going to turn and at what rate we're going to turn, I think the activity will pick up significantly. And number one, the strategics, as I said earlier have been... even though they're looking at more things, they're still reticent to do things, uh, given some of the uncertainties in their own businesses. The sponsors have been picking up in their activity. They're looking at a lot more things. They have still significant amounts of money in their funds.

We're also seeing them putting lot of their assets in the market by necessity. As you all know, their LPs have been demanding some return of capital. And then lastly, they do need to synergize some of the businesses they paid high multiples for three, four years ago. So they're looking to add on complimentary businesses to those assets. And then when it goes to private companies, we are seeing more of them coming into the marketplace. They have been able to buy more runway with their balance sheets than we were expecting. We're hoping to see a lot of privates come to market last fall, early this year. That hasn't been the case, but slowly they're coming to market. The VCs are sorting through their portfolios, trying to decide what they're going to fund and what they're not going to fund going forward. And I think we're gonna see a lot of activity there. We still expect that to continue to be structured. A lot of these assets have had their last rounds to be in 29, 2020, '21, at very early evaluations. So a lot of them are looking for either equity deals or earn outs or partial deals where they can keep some upside and a continuing stake. So overall, I think we're gonna see gradual increase over the course of this year with a little bit of a lull around the election. And then next year, if the economy starts turning slowly, I think we're gonna see quite a bit of volume.

Pankaj Goel: Thanks, Drago. Now, maybe the final question is to both of you. What advice are you giving boards and companies right now when they're thinking about IPOs or private capital markets on M&A? Maybe we start with Drago this time.

Drago Rajkovic: Yeah, sure thing. The key things we're telling to the boards these days is number one, whatever you do, it has to be highly strategic. It has to be very clear to the investors as to what the purpose of that transaction is. And it has to be very clear as to where the value and synergies are going to come from that transaction. As I said before, the market is not still fully risk on and investors get nervous with larger deals unless they're perfectly clear in terms of strategic intent. We're cautioning folks not to go too heavy on the balance sheet. We're seeing a meaningful discount being applied in terms of valuations to the traded companies that have elevated leverage levels. So we are in many cases recommending the folks to go the equity route. And then lastly, we are very sensitive to the terms that any transaction can be affected at. And I'm talking about multiples and premiums 'cause there are only so far you can go with that, even if the value equation works for you, just from an investor reception perspective.

Pankaj Goel: Over to you, Greg.

Greg Chamberlain: Yeah, Pankaj, I think there are several areas of focus that I would recommend any management or board think about as they prepare for either a public market listing or even a capital raising in the private markets. First is to make sure that they have a very clear articulation of the market opportunity, their vision and how they see the company operating over the next five years. Secondly, it's very important to determine the key performance indicators that they want to convey to investors as these will be the quantitative metrics that investors judge them by and through which they will articulate the performance of their business going forward. They're very hard to change once you've gone out with them so ensuring that everyone within the company feels comfortable with the data and the numbers that the company will articulate its success is important. So getting around to meet investors privately well in advance of any raise, public or private, I think is critical.

And then the final thing I just say is companies can't control many of the factors that could impact the timing of their transaction. We've seen that in spades in recent years. So I think there's a real importance on being prepared. You may not be able to choose your exact timing of a transaction, but there is significant option value in being prepared and taking advantage of an appropriate market window. I think looking ahead, we're really optimistic about the next wave of issuance. There are plenty of really well-placed and attractive opportunities in front of us, and we look forward to working closely with clients and bringing many of those to market. Thanks very much for your question, Pankaj.

Pankaj Goel: Thanks, Greg. To recap, today we had a great conversation on trends in tech equity and M&A markets. Overall, we are seeing trends to be more favorable in 2024, and we expect deal activity to continue picking up. Drago and Greg, thank you so much for joining us today.

Greg Chamberlain: Pankaj, great to spend time with you. Thanks for having us.

Drago Rajkovic: Pankaj, thank you for having us today. This was a great discussion.

Pankaj Goel: And thanks to our listeners for tuning in to another episode of What's The Deal? We hope you enjoyed this conversation and be sure to tune in to our next upcoming episodes. I'm your host, Pankaj Goel. Until next time, goodbye.

Voiceover: Thanks for listening to What's The Deal? If you've enjoyed this conversation, we hope you'll review, rate, and subscribe to J.P. Morgan's Making Sense to stay on top of the latest industry news and trends. Available on Apple Podcasts, Spotify, Google Podcasts, and YouTube. To stay ahead of the curve, sign up for J.P. Morgan's In Context newsletter, packed full of market views and expert insights delivered straight to you. To subscribe, just visit jpmorgan.com/in-context. This material was prepared by the Investment Banking Group of J.P. Morgan Securities, LLC and not the firm's research department. It is for informational purposes only and is not intended as an offer or solicitation for the purchase, sale or tender of any financial instrument.

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