It is too soon by far to brand any market trend the dawn of a new era, but it has been about one year since the cataclysmic nightfall which was the market meltdown of 2008, and we’ve seen certain reactions and patterns since that time which warrant our attention. Whether these constitute a new way, or just a reflex that is running its course before it dissipates, we cannot yet know. We can, however, state without hesitation that we hope it is the latter. A few background observations to explain:
According to a recent IPO market summary, there was a total of 21 IPOs in 2008, followed by a comparatively better 36 issues in 2009 to-date. In relative terms, these statistics are roughly on par with the 1978-1979 period, (that “stagflationary” time of double-digit interest rates and around-the-block lines at the gas station), and have not been seen since. Taken in isolation, this IPO issuance data suggests a virtually shut-down market… but that is misleading. In terms of dollar volume, the story is entirely different. The 21 IPOs completed in 2008 represented about $22 billion in proceeds, far above the proportions to which we had become accustomed even as recently as in the current decade. By way of contrast, the 2004-2007 years gave us about 170 +/- IPOs per year, comprising approximately $30-35 billion in proceeds in each of those. The increase in average deal size, from historical norms to the present time, is enormous. First observation.
Second observation. After the one step forward of a slight rebound in venture capital investing in the second quarter of 2009, the third quarter was two steps back. VC investment volume was down 38% from one quarter to the next, (and it isn’t as though the initial quarter was anything to write home about, goodness knows). On a year-over-year comparison, the median deal size has declined from $7 million to $5 million, and late-stage investments are now at roughly 40% of the total (compared to 33% one year ago). In summary, venture money is still not flowing well, and that which is flowing is flowing more timidly – in smaller increments – but not because the targets are more risky, in fact quite the contrary.
Third observation, which is partly anecdotal. We are hearing from countless borrowers and the investors who back them that the corporate credit market may well be improving for companies with at least $20 million in cash flows, but for borrowers with less than $10-15 million, corporate credit is nearly inexistent. Moreover, terms offered at the low end of the the $20-million-or-more cash flow range are by historical measures expensive, (despite currently low base rates on which such loans are priced). On the other hand at the high end, the bond issuers, and especially those with investment grade ratings, the capital markets are actually quite robust.
What we see in all three of these observations, taken from three entirely different market segments, is a concentration of capital flows underway, and this is directed squarely at size as a proxy for quality. Now, quality names and mature issuers have always been attractive… and a flight to quality is always a characteristic of a consolidating marketplace, either recovering from or in anticipation of negative results. What makes the current state different is, firstly, the enormity of the capital concentration and the drastic separation this creates between “haves” and “have-nots”, and, secondly, the era in which this is occurring. With all eyes on the markets and the economy, with so much hope pinned on or taken away by each day’s statistic or market fluctuation, and with critical decisions to be made at every level from the most individual to the most global on the basis of economic prospects, the true nature of such prospects is hugely important to understand.
Capital flows, taken in the aggregate, can cover up a much different reality beneath the surface.
