High-Yield Credit Gains Favor, Inflation Eases Across the EMs and Defense-Tech VCs Face Challenges in this Week's Edition...
Take a Lap Around the Industry
NY Community Bancorp Eyes Equity Raise Amid Cash Crunch (WSJ)
AAA Harvard Bond Sale Captures Market's Insatiable Appetite (Bloomberg)
Encavis Eyed by KKR in €2 Billion+ Purchase Talks (Bloomberg)
Fed's Powell Demands More Inflation Confidence Before Cuts (Bloomberg)
Investors Pivot to High Yield and European Credit in Tactical Move
In the dynamic landscape of the past year, where sovereign bond yields have shown considerable volatility and the gap between them and credit yields have tightened, we're seeing a strategic adjustment in investment preferences. The move towards underweighting global investment grade credit in favor of selectively engaging in high yield areas suggests a refined approach to balancing risk and reward, with a special nod towards European credit for its compelling yields despite recent underperformance. Amid an improving macroeconomic outlook, particularly in the U.S. where inflation seems poised to align with the Federal Reserve's target, there's growing confidence in U.S. stocks, euro area high-yield securities, and emerging market hard currency debt. This sentiment is underpinned by a broader readiness to embrace opportunities in these sectors, anticipating a supportive backdrop for risk-taking. Moreover, the interest in private credit over public debt for the longer term illustrates an adaptive strategy to navigate the evolving investment landscape, seeking out potentially higher returns in a market that continues to recalibrate in response to economic signals and monetary policies.
"We heed that lesson as inflation falls and the Federal Reserve readies interest rate cuts. This more supportive backdrop for risk-taking anchors why we’re overweight euro area high yield credit, dollar-denominated emerging market debt and U.S. stocks. We had preferred investment grade credit but now eye fixed income where spreads haven’t tightened as much. We still like private credit."
Wei Li, BlackRock Investment Institute
Private Funding Pulse Check
Securing $82M in Series A funding, Kenai Therapeutics, a biotechnology company pioneering approaches to neurological disorders, has received backing from New York-based Euclidean Capital
Colt Ventures recently took part in a Series B funding round, investing $100M in BlossomHill Therapeutics, a small molecule drug discovery and development company
Fervo Energy, a company developing the next generation of geothermal projects, has successfully closed a $244M Venture funding round, with participation by Capricord Investment Group
With a focus on decentralized non-custodial ETH staking, Ether.fi, has attracted a $27M Series A investment from North Island LLC
Mercer Global Advisors announces acquisition of MDK Private Wealth Management, a Seattle-based firm with $2.5B in assets, emphasizing its growth in the Pacific Northwest
Founded in 2020, MDK specializes in serving ultra-high-net-worth clients with comprehensive services including financial planning, estate and tax planning
Co-founder Paul Meyer, alongside partners Jaimi Dennehy and Chris Kalafatis, sought to expand MDK's scale for a more robust institutional platform
Mercer's acquisition was highly influenced by the unique approach and specialized services it offers (WM)
Easing Inflation in Emerging Markets Signals Economic Stabilization
Emerging markets (EMs) are finally seeing some relief from the intense inflationary pressures that kicked up in the wake of the Ukraine conflict in March 2022. This welcome downturn is the result of several factors aligning just right: commodity prices are on the decline, EM currencies are holding their own against the dollar and other major currencies, tighter monetary policies are in place, and supply chains are getting smarter and more efficient. By January 2024, a significant marker was reached with three-quarters of these economies showing a dip in their Consumer Price Indices compared to the previous month—a clear sign of change. What's more, key EMs in Asia and Latin America are recording inflation rates that are dipping below their long-term averages. This shift comes after a challenging four-year spell where EMs faced more ups and downs with inflation than their developed counterparts, thanks in part to the pandemic shaking up supply chains and food prices soaring. This easing trend in inflation isn't just good news for stabilizing these economies; it's also lighting up the signal for investors to take another look, potentially spurring economic growth.
"As investors parse the latest round of inflation data, it’s important to note that emerging markets have historically held up better in periods of above-trend inflation. Emerging markets have tended to do particularly well in environments in which inflation is above-trend but growth is improving."
Elle Caruso, VettaFi
The Defense-Tech Dilemma: Venture Capital's Strategy Amidst Acquisition Challenges
In the fast-evolving world of defense technology, startups and their backers are threading through a terrain rich with both golden opportunities and daunting challenges. James Cross, a partner at Franklin Venture Partners, provided valuable insights, illuminating a path that, despite the significant influx of venture capital in 2023—with defense-tech startups securing a staggering $33B, a 114% increase from 2019—is fraught with challenges. A big stumbling block? The misalignment between the rapid-fire funding cycles of startups and the Department of Defense's (DOD) more methodical acquisition timelines. Cross, who's not only a sharp investor but also helped kickstart the Silicon Valley Defense Group, recommends a more measured approach. He highlights the crucial role of building strong relationships with DOD's buyers to successfully steer through this intricate sector. This thoughtful, step-by-step strategy marks a stark contrast to Silicon Valley's usual sprint for growth, pinpointing the distinct rhythm of the defense tech world. Yet, with the stakes of global security rising and warfare technology advancing, the sector's allure for those eyeing the long game remains undiminished, despite the immediate challenges.
"I'll give you some inside baseball from other defensive GPs: Some folks are looking at this like there might be a two- to three-year winter scenario, like a clean-tech or crypto-style washout. But we all firmly believe in a three- to five- and 10-year view [of the sector's success]. We take a really long-term view."
James Cross, Franklin Venture Partners
Despite SEC Rule Change, the Pressure to Report Climate Impact Intensifies
The U.S. Securities and Exchange Commission (SEC) recently made headlines with its decision to scale back climate reporting requirements, particularly around Scope 3 emissions, which encompass indirect carbon emissions linked to a company's supply chain and product use. Despite this decision, global companies may still need to report these emissions due to regulations in other jurisdictions like California, Canada, and Europe. While the SEC's new rule provides some relief for businesses grappling with the complexities of tracking such emissions, the broader trend towards transparency in climate-related disclosures seems undeterred. Companies are increasingly facing calls from investors, consumers, and partners to account for their environmental impact, including Scope 3 emissions, which for many, constitute the majority of their carbon footprint. With an estimated 53% of companies reporting some Scope 3 data in 2023 (up from 34% in 2021) and international regulatory moves towards comprehensive climate disclosure, the direction is clear: despite regulatory variances, the push for greater environmental accountability and sustainability practices among corporations continues to strengthen.
"European regulation is ahead when it comes to reporting requirements on sustainability, and we expect that many of these standards will gradually appear in the U.S. and other parts of the world as regulators pursue climate change mitigation..."
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