Kirsten Longbottom 00:26
Hello Everyone and Welcome to EPFR Exchange Podcast! My name is Kirsten Longbottom and we are joined by EPFR’s resident economist, Cameron Brandt and guest speaker today, Product Manager of PlacementTracker, Will Shephard. We'll walk you through what our teams were monitoring last week in the data EPFR tracks as well as what we are looking for in the upcoming weeks, then dive into Will’s insight. This week, the possibilities of the Fed hiking rates soon and Russia taking military action against Ukraine dominated the overall picture – Bond, Equity and Money Market Funds dedicated to the US all saw outflows, while Europe Equity, Russia and Sector Funds took in fresh money. Cam, what’s the update to the market this week?
Cameron Brandt 01:14
Well certainly last week, it was striking how unconcerned the financial community seemed to be with the possibility of a major conflict on the borders of the European union. But markets do seem to be taking heed of that. So just after the reporting period ended, those concerns certainly started to impact on the market though, flows remain sort of a little sanguine. Though we'll see how they look at the end of the current reporting period on the 27th.
Kirsten Longbottom 02:00
Is there is there a sense of any credibility issues with the Fed or is it just kind of a waiting game in a sense?
Cameron Brandt 02:10
Well, I think part of the angst about the Fed is not so much that is going to raise rates because even though Orthodox Economics is looking a little rough around the edges these days after the application of massive amounts of QE, the inflation numbers really dictate. They take some action. But the credibility point which you raised, I think is important because there's certainly worry in the market that the Fed having changed its narrative from “transitory” to “not transitory” may be more aggressive than they, the markets, are hoping for in order to reassert its credibility and hence the impact of its guidance.
Kirsten Longbottom 03:00
Okay, well we'll see how that all shakes out. Will, can you give us a brief overview of PlacementTracker and maybe how it connects to EPFR?
Will Sheppard 03:16
Sure, PlacementTracker collects, analyzes, and sells data for the private investment in public equities market, also called the PIPE market or commonly known as private placements. PlacementTracker joined EPFR in early 2020 and it was a good compliment because we have equity-linked and equity data surrounding the private markets, as opposed to a more public and retail focused end. PlacementTracker has over 31,000 transactions covering $1.2 trillion dollars of gross proceeds raised since 2000 and we have data all the way back to 1995.
Cameron Brandt 03:55
On a sort of a more research-oriented level, one of the areas where the Venn diagram of EPFR and the one representing PlacementTracker intersect is in the area of sectors. And three sectors in particular see a lot of private placement activity. Those would be financials, energy, and healthcare, though certainly there are private placements in other sectors that we track. As you and I have discussed Kirsten quite a bit in recent podcasts, the sector level has been the area certainly from a fund flow perspective where we've seen the greatest conviction and I have to say largely positive conviction certainly over the last nine months or so. The latest week, that conviction was again broad but perhaps not quite so deep. But we did see over $2 billion dollars flow into the Financial Sector funds we track, part of a fairly lengthy streak for them of above average inflows. From our perspective, the obvious driver is the hope that there will now be a steeper yield curve which sort of allows them to price in bigger margins on their loans. But while that's going on there's a fair amount of activity in that sector at the PIPE level and I think it would be instructive for Will to tell us a little bit about what he’s been seeing in parallel with these sort of gross flows that you and I have noted in the EPFR tracked Funds.
Will Shephard 05:51
Yeah, Thanks Cam. So what we've noticed really since the beginning of the pandemic is an explosion in SPAC activity, so specified purpose acquisition companies, and the use of these SPACs to take companies public in an alternative fashion has really seen an explosion activity both in deal count and dollar volume. In 2020 there were 98 transactions for about $12.5 billion dollars raised for SPACs issuing PIPE securities. And in 2021 we saw a 460% increase in in deal volume and a 579% increase in dollar volume. So we saw $85 billion dollars of SPAC dollar volume in [2021].
Cameron Brandt 06:45
Wow, did that momentum persist into the current year?
Will Shephard 06:50
It has trailed off a little a little bit but there is still quite a bit of SPAC activity and the market seems to be changing from just common stock issuances with SPACs. We've also started seeing some convertible debt being issued alongside common stock placements in conjunction with these SPACs.
Kirsten Longbottom 07:14
And when we're going into more of a focused view - I know for, like cam mentioned, we've seen kind of three top sector funds kind of emerge. I believe it's Financials, Energy and Real Estate or Healthcare too. Do you track any of those and if so, are there any trends that you're seeing there?
Will Shephard 07:40
We are seeing a lot of trends with healthcare. Healthcare is about a third to 50% of the market depending on how you slice the data and PlacementTracker covers all of the major sectors. And we track it all the way down to the subindustry level. So, if you wanted to get data on say Biotechs or you could drill down even further to get to Therapeutics. So, if you wanted to see which companies have raised money for therapeutic drug programs in conjunction with say the vaccine pushes that we've seen since the start of the pandemic. We have data that you can really drill down into and you can even search by use of proceeds. You can see why these companies are raising money, who they're selling it to, and at what discounts to the market.
Cameron Brandt 08:35
Well, that's interesting. You just explained earlier some of the bifurcation you've been seeing in the financial area between the conventional issuers and this surge in SPAC issuance. Are you seeing any kind of similar sort of separation in the Healthcare arena in terms of conventional health care issues versus biotech?
Will Shephard 09:04
I would say not as much. I think the traditional PIPE issuers are the really heavily cash burning companies who need to raise financing quickly which is why they turn to the private markets instead of going to the public markets to raise funds.
Cameron Brandt 10:04
And the other sector where you see a fair amount of activity and we have been definitely seeing strong flows for quite some time is the Energy Market. What kind of windows does your data give somebody in that particular sector?
Will Shephard 10:38
We've seen an ebb in flow data, I’m sorry, dollar and deal volume as they relate to the ends of the Quarters. So as a quarter comes to a close and a company reviews their books and they need to know what sort of Cash Flow they're going to need in the upcoming Quarter. You can see deal activity going up and down based on the calendar.
Cameron Brandt 10:50
So, Will last week I was on the carpet with Kirsten grilling me about some predictions I made in the middle of last year and what I'm looking ahead to. From your particular viewpoint, what are the issues you think are going to dominate your space in the first half of the year?
Will Shephard 12:15
That's a good question. I think the volatility in the market and how the market reacts to the I think four-and-counting expected rate hikes this calendar year. As the Volatility Index goes up and goes down, we see an inverse relationship with deal Activity. I think that the deal flow is going to vary based on the four expected rate hikes we're going to have this calendar year and I think that based on the Volatility Index we're going to see deal volume ebb in flow with the changes in the VIX.
Cameron Brandt 12:13
So, that’s interesting, the private market is less receptive when the background is less stable. Good, good. Perhaps swing it back to me Kirsten.
Kirsten Longbottom 13:58
Okay, so Cam what about- what did we see with the fixed income side this past week or maybe so far in 2020…2022?
Cameron Brandt 13:10
Well, while we've been talking about the sort of positive dynamics certainly in sectoral fund flows, that did sort of allow us to avoid talking about the slow crumbling of appetite for Fixed Income funds which had a banner year last year, set another full year inflow record despite inflationary concerns and a broad feeling that the Fed's transitory narrative was not going to hold up. So, this past week we saw actually a fairly conventional response to impending rate hikes, over $2 billion out of Emerging Markets Equity funds, high yield bond funds taking a hit. The mallees spreading to Europe Bond funds which have had a very good run on the assumption that Christine Lagarde will try and hold the tightening screw in the open position for as long as she possibly can. But the vision of competing for institutional demand with treasuries that are actually starting to yield something was somewhat harder for investors to sustain their previous assumptions. That said we remain in a universe where a lot of the demand is coming from retirees who place a higher emphasis on capital preservation than the volatile gains that come with say investing in a fang stock. So, it is noticeable that in contrast to what we saw with the taper tantrum of 2013-2014, the sort of shift from inflows outflows has almost been reluctant. Now I haven't sort of seen some updated numbers this week so we'll see if the trend accelerates but I actually would guess that with a little more attention being paid to the geopolitics we may actually see flows back into many of those fixed income fund groups.
Kirsten Longbottom 16:41
And at the country level, did we see any specific countries that did well in the bond funds or didn't?
Cameron Brandt 16:51
Yes, there were one or two. The fund groups dedicated to the Netherlands, which is a charter member of the Frugal 4 and Frugal 5, so offer offers you sort of at least a soupçon of sort of old school fiscal restraint. And funds dedicated to China took in, you know, not exceptional amounts by recent standards but over $100 million, and the argument there is that this being the year of the communist party congress in the fourth quarter, economic policy is going to be heavily weighted towards stability. Indeed, we are sort of seeing signs that that analysis is going to play out. Having cracked down on the real estate sector the China Central Bank has been back peddling a bit in recent weeks and because they don't want the slowdown to deepen or accelerate. So those were two that stood out and Canada has gotten some positive attention from investors. It offers touch points in a number of areas ranging from commodities to a gearing to the U.S. economy, which is still expected to grow pretty strongly despite anything the Fed might do. But outside of those, it was a fairly muted week at the country level.
Kirsten Longbottom 18:50
Great. Well thank you Cam and thank you Will for joining us this week and we'll see you guys next week!
Cameron Brandt 19:00
We’ll look forward to seeing you, to bringing you back and finding out whether the slight loss in momentum for the SPACs you alluded to was just a hiccup or has turned into a more sustained trend. Cheers!
Will Shephard 19:16
Thanks for having me bye.
Kirsten Longbottom 19:22
Bye.