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Michelle Khalili: Welcome to Market Points. It's great to be here again for another conversation. My name is Michelle Khalili, and I'm the Global Head of Equity Capital Markets and Corporate Finance Advisory at Scotiabank. On this episode of Market Points, we're discussing key highlights and themes of 2024, and our outlook for 2025.
I'm joined by my Scotiabank colleagues, John Cronin, Managing Director and Head, U.S. Equity Capital Markets.
John Cronin: Hey Michelle, good to see you.
MK: Matt Sheehan, Managing Director and Head, Canadian Equity Capital Markets.
Matt Sheehan: Hi, Michelle. Thanks for having me.
MK: And Charles Kerecz, Managing Director, Private Capital.
Charles Kerecz: Pleasure to be here.
MK: Let's get into it. We're going to start with John.
JC: Thanks, Michelle. It has been a strong year for equities building off of the momentum we saw in 2023. So far year to date the NASDAQ is up 36% and the S&P is up 28%, and we've seen a good amount of issuance across a number of sectors. Healthcare has definitely led the way at about 35% of overall issuance, followed by TMT at about 21%, industrials at about 14%.
We've seen strong flows into funds this year with passive funds leading the way. But overall, I would say that investors are very much risk on at this point. We're beyond the election and investors are looking towards 2025 in a positive way and we anticipate it'll be both a good market environment, but also a very receptive new issue environment.
Matt, how are things in Canada?
MS: Thanks, John. While it didn't necessarily feel this way most of the year, the TSX actually had a solid year. As of the end of November, it was up 20 plus percent, led by technology financials in mining stocks. Important to note, though, that the financial sector, given it represents over 30 percent of our composite index and double the next highest weighted sector. That was the big call for investors this year. If you were going to be anywhere close to keeping up with the index, you had to get the financials call right. On the other end of the spectrum, we did see a lag from real estate. Still positive, but lag the other sectors. And then the one sector that was down in a decent amount was the communication sector.
When we think about issuance, I unfortunately can't say that John did, that the hangover's over in Canada. We still have fairly depressed issuance in Canada about $14.7 billion in 2024 on a year to date basis as of the end of November. That's down almost 19% versus the comparable period in '23.
Now it is worth noting that that does include in the fall of '23, the record $4.6 billion equity issue from Embridge. And so, when we look back at what's that an average year in Canada, we're closer to $30 billion. So, we're still well below average when it comes to issuance.
From a sector perspective, it was led by mining for sure. Mining was 46% of the issuance for the year behind the more diversified industries of consumer industrial, retail, and then a little bit of TMTH.
MK: Thanks very much, Matt. So, I just want to spend a moment and talk about major themes that are going on in each of the markets.
John, can you start with the U.S.?
JC: Follow-ons led the way in 2024, representing over half of overall ECM activity. Both secondary sellers as well as primary issuers took advantage of a much more constructive market and open window than we had seen in prior years.
Year to date, on the follow-on side, the file to offer discount was below what we saw in '23 and '22, demonstrating a healthier pricing environment and overall better fundamentals from an investor standpoint.
On the convertible side, converts definitely saw a big uptick in overall issuance, and we anticipate that continuing into 2025. Companies were definitely looking at the relative coupon advantage over straight debt and using it as another financing tool, not only for acquisitions, but also for refinancing debt maturities.
IPO activity picked up as well, but the quality bar remains high. Issuance was primarily driven by larger companies that are cashflow positive and had very strong growth prospects. Investors were really looking for a safer bet on the IPO front in 2024. As we move into 2025, the IPO backlog remains strong and continues to build and we anticipate that we will see a lot of activity supported by investors looking for outsized returns by playing these deals.
MK: Thanks, John. Really interesting. Now, Matt, how about the Canadian markets?
MS: As previously mentioned, the resource sector really dominated in Canadian issuance. Higher commodity prices led to a cost of capital for the mining sector so that they could go out and use their equity capital for acquisitions or to fund capex needs.
What we really lacked in 2024 was those bigger deals in Canada. We only had six deals over $500 million. That's about just over half of what we typically see. When we think about IPOs, we really didn't come out of the IPO lull in Canada until just recently, where we saw the IPO of Group Dynamite in November. The IPO of this, both bricks and mortar and online women's fashion retailer was the first Canadian IPO since March of 2023, and the first one of over $200 million since June of '22. The $300 million dollar IPO priced in the middle of the range is out there trading now.
With respect to converts, unfortunately, we're about flat year over year with convert issuance. This is both surprising and frankly disappointing, given the relative attractiveness of the convert coupon versus straight debt for the most of the year until we started to see rates falling.
That all being said, we think that the relevance of this product in Canada will continue to grow. And like John said, we would expect to see more issuance as we go forward, even if we do see lower rates.
One very important trend in Canada, has been the number of public companies that were taken private in 2024. The combination of depressed valuations in Canada, specifically relative to our U.S. peers, and dry powder in private equity, suggests that this trend could continue in 2025.
It would be disingenuous of me to ignore the potential negative impact on ECM issuance of having less public companies. That being said, this does create a big opportunity for existing growing small cap companies in Canada and potential new companies via IPOs to have an increasing relevance among institutional investors.
I know I've said this on most of the podcasts this year, but the issuance lull in Canada is not a function of demand, it's a function of a lack of supply caused by stubbornly low valuations, which make accretive growth using equity capital very difficult in many sectors.
MK: Thanks very much, Matt. So now let's highlight some key deals. John, let's start with the U.S. side.
JC: Well, you can't talk about deals this year without at least highlighting the Boeing transaction. $18.5 billion follow on combined with a $5.75 billion mandatory convertible offering, clearly the largest deal of the year and the largest equity offering since SoftBank's $15.9 billion sale of T-Mobile back in 2020.
But there were a number of other key transactions that occurred this year and Scotiabank was a book runner on several of them, including Lineage’s $5.1 billion IPO representing the largest REIT IPO in history. Southern Company's, $1.5 billion convertible offering in the utility space, and OneStream's, $564 million IPO in the software space.
Matt, what were you seeing in Canada?
MS: Thanks, John. While overall issuance was tepid as I've mentioned before, there were a number of substantial transactions that we had Scotiabank played a key role in. We were joint bookrunner on Capstone Copper's $430 million dollar common share offering that was used to advance their near term growth initiatives in Chile.
We were a joint book runner on Equinox Gold's $409 million common share offering used to purchase the remaining 40 percent interest in the Greenstone project. We're also a joint book runner on Chartwell Retirement Residences $345 million offering of trust units. That was one of the larger REIT transactions in Canada over the last number of years.
We will also remain a leader on the convert side here in Canada, being a lead book runner on the Fortuna Mining U.S.$173 million dollar offering of convertible debentures.
Simply put in Canada, rising tides did not lift all boats. The sectors and names that can be considered the haves, they were happy to use equity capital to grow. There just was a smaller portion of them.
MK: Thanks, Matt and John. There were some really interesting deal highlights here. Certainly, they're a testament to the ongoing support and creative solutions that Scotiabank provided to our clients to tap equity markets in the past year.
Let's look ahead, what can we expect for the coming weeks and months going forward, John,
JC: With the election behind us, both issuers and investors are turning their attention to 2025. We believe the IPO market is going to be strong as we move into the new year driven by issuers looking to come public and investors looking to get outsized returns by participating in IPOs.
We also think that follow-on and convertible issuance is going to be strong as well, driven by increased M&A activity and strong CapEx needs as the economy grows.
Overall sentiment remains strong and investors are in a risk-on mode and looking to put capital to work.
Matt, what's the outlook for Canada?
MS: From a macro perspective, the fear of higher rates has been replaced by the fear of the unknown associated with another Trump presidential term. Once both Canadian and foreign investors can get a handle and get some clarity on the potential implications of another Trump term, we think equity weights are going to continue to move higher in portfolios as the relative attractiveness of fixed income continues to wane with lower rates.
Why the Canadian IPO resurgence definitely is waning behind that of the U.S., I can definitively say that we have some great private companies that are likely to be public over the next couple of years. Frankly, I couldn't have said that a year ago when having this conversation. When we think of the types of companies that investors want to see come public over the next year to two years, they want to see large companies that have established market share in growing industries.
Less relevant, I think, is particularly what industry they operate in. That being said, we have to remember that the Canadian market structure has almost three quarters of the Composite Index that's made up of financials, energy, industrials, and materials.
So, the private companies that are in these underrepresented industries, such as tech, healthcare, consumer, great companies in those sectors we think make for great IPO candidates.
MK: Had a really great discussion, John and Matt, on the public markets, and we've started to talk about private companies. So, I'd like to take a look at the private capital markets.
Charles, what does 2024 look like, and what can we expect for 2025?
CK: 2024 was really a rebound year for equity private capital markets, as volumes and medians fish-hooked from the lowest level scene in 2023, returning to where we were pre-pandemic, which we think on a normalized basis is a little more realistic for the private markets.
Deal flow in 2024 was driven by two primary factors, 1) capital needing to find a home as cumulative dry powder in North America between private equity and venture capital has continued to exceed over a trillion dollars, and 2) issuers have started to become more amenable to the new valuation paradigm and need to accept the private valuation levels from 2021 are no longer achievable.
Investors have continued to exert more valuation discipline, and as a result, down rounds, bridge rounds, and flat rounds have become more common.
The other major observation we took note of in 2024 was the concentrated nature of transactions. While some weeks this year have been characterized by very modest activity, there have notably been some very large, lumpy weeks that have been driven mostly by companies in the AI space, Anthropic, for instance, raising $9 billion across three late stage rounds, OpenAI raising $6.6 billion in October alone, xAI raising $12 billion this year across three different rounds, Waymo raising $5.6 billion, and even Cohere in Canada, raising $500 million in a series D in July, and even as, we sit here in mid-December, both SpaceX and Databricks are in talks to be facilitating large multi-billion dollar insider rounds.
And when you look at a lot of those large transactions and the construct of the broader year, the reality is they probably cumulatively contribute to over half of the volume in North America in 2024, which is interesting and different than what we've seen in prior years where issuance has been a little more evenly distributed.
Looking ahead to 2025, issuers will need to tick all the boxes to really be able to induce a sense of FOMO from investors like we've seen in the past in some of these large AI related raises this year.
Volumes, I expect will be driven mostly by a heightened level of IPO and M&A activity. More activity in both of these arenas should translate into heightened volumes and better valuations in the private capital markets.
MS: Could you unpack the relationship between M&A volumes and IPO volumes and how that could be a driver in your world of private investments?
CK: I look at it as a virtuous cycle in that M&A establishes valuation tension. M&A provides that sort of credible threat that can be utilized away from a minority private placement process, or even to an IPO to that matter.
I also think the capital needs to be recycled. And so, when you think about M&A and particularly private equity assets, as that capital gets freed up, that capital needs to get redeployed.
Additionally, as more private companies move into public company life, I think you will see heightened activity in the later stage private arena, which has been a little dormant post 2021 and hopefully as IPO deal performance reaccelerates, people will get more competitive as it relates to deploying capital ahead of an IPO as a means for defending an IPO allocation.
MK: Thanks, Charles. Really interesting to hear the dynamic and the linkages between the private and public markets. You know, certainly as we look back, further clarity on trade policies and interest rates will certainly help, but I'd say overall key themes were expecting to see more constructive markets. There will definitely be windows of opportunity for corporations to access capital, be it private markets or in public markets. So with that, I'd like to say thank you. John, really appreciated hearing your views.
JC: Thanks, Michelle. Good to be here.
MK: Matt, thank you for your perspectives.
MS: Thanks, Michelle.
MK: And Charles, we appreciate your insights.
CK: It's great to be here. Thank you, Michelle.
MK: Certainly from a Scotiabank perspective, our commitment and support of our clients has allowed us to grow the Scotiabank platform. We are the only bank that operates at scale across the North American corridor.
We're a leading bank in Canada, and in Mexico, and we are already a top 10 foreign bank in the U.S. We have a long history in the U.S., have been gaining momentum, and expect it to continue to be a key area of growth. For example, the sectors that the bank has made a commitment to, in order to drive growth, are technology, healthcare, and consumer industrial retail, with key hires being made across all facets of the bank in these areas.
We had an outstanding year of conferences, including our fifth annual growth technology conference in Quebec , and our second annual global technology conference in San Francisco in December, featuring notable keynote speakers from Databricks and ServiceNow. We have a terrific lineup of events in the coming year, a building pipeline of transactions and a more constructive market for issuance activity.
Overall, there's lots to look forward to. Thanks again and stay tuned for our next podcast.
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