Health Care, Private Equity & Debt: Key factors In The 2025 Market Outlook | TD Securities

Speaker 1:
Welcome to TD Cowan Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.
Larry Wieseneck:
Happy New Year and welcome once again to another episode of our Intellectual Capital Podcast series. I'm Larry Wieseneck, Head of Corporate and Investment Banking at TD Securities. And once again, I'm joined by my good friend and former colleague, David Erickson, Adjunct Professor at the Columbia Business School. With that, I'm going to turn it over to David to get things rolling for our first call of 2025.
David Erickson:
Thanks, Larry. So we've obviously had pretty strong market performance in the last couple of years, and the last time we had 20 plus returns each of the previous years, so I'm talking about now '23 and '24, the last time we had that consecutive 20% plus performance, was in 1997 and 1998, and that led into the tech bubble that we experienced in 2000. Make the argument why you think potentially 2025 will be different.
Larry Wieseneck:
So I'm not sure I'm ready yet to define whether it'll be different or not, but David, I think it's worth taking a note as to what are some of the similarities between the environment that we are in, call it, we've been in the last 24 months and compare that to '97, '98 and maybe think about some of the differences, and that might be our lens that we can look at what might happen going forward.
I think on the similarities front, both periods were marked by investors starting to recognize the value of new and emerging technologies that had the opportunity to really reshape productivity, reshape the way that we work and communicate, et cetera. 97-98, pretty obvious, but maybe for those who weren't around at the time need to be reminded that it was the advent of the internet and the financing was disproportionately going to everything from the abundance then that came about of email, of e-commerce models, things that today are just part of what we do, but back then were novel and had to be funded and fundamentally changed the productivity paradigms. And so that's what was being priced in.
And then you had to build out all the infrastructure to support that, semiconductors, fiber, et cetera, so that was cell towers. So that was a lot of what was driving the market, those things being financed and then pricing into basic industries, what the productivity benefits were of using those tools, very similar to what we've seen over the last few years, whether it be AI, machine learning, the impact of the blockchain, distributed ledger, all of these are elements, which really have been repriced over the last two years, are viewed to be enormous productivity enhancing and therefore will benefit the rest of society, so everything has benefited or presumed to be benefited by those technologies.
David Erickson:
To some degree, it seems like the markets are over enthusiastic about the near-term opportunities like they were back in '98, '99.
Larry Wieseneck:
I think that might be right. I think you're totally right. I think that we saw in '97, '98, some of the investments that were made in that period into '99, 2000, didn't start to really create the productivity benefits until 10 years later. Nothing's a straight line. So the market potentially be getting ahead of itself, particularly as it relates to the largest players. I think one of the things that is maybe different today, if we want to use that is, it was a broader market recovery back in '97, '98, more global. There was certainly a lot more focused on the emergence of globalization. We were seeing changes in the capital markets in Europe, Russia was opening up, there's a bunch of elements, China was opening up. So you're pricing in a more global economy.
That's not true today, right? The one difference today is that, if anything, what's now driving a lot of the market movements is a near-shoring or reshoring. There's a lot of discussion about building, if we talk about the US market, the North American market, building resilience locally, and it's even become a discussion of national security, what are we doing in semiconductors? Making sure that our data centers are secure because in many respects we can no longer rely on the long global supply chains, and we're in this reverse globalization, so that's definitely a difference.
The other difference I see is that we're in a moment where the recovery among the largest cap is diverging from what we've seen in the small cap private companies, etc. We still have not yet seen the success of the high-flyers pull up the rest of the market. So it's been a relatively narrow rally, and I think therefore what we might think about in the next year, year and a half is do we see rotation where people start moving to relative value? We very easily could start to hear the GARP phrase banded about again, which is growth at a reasonable price, a term we haven't talked about in a while, but I do think that that's a potential. But the other piece that we have to bring in, and we can't ignore is because of the near shoring, because of the events around the world, the fact that government policy and the such will have a bigger impact today than anything we ever would've thought about 20 plus years ago.
David Erickson:
Right. So as you look at 2025 on that piece, what's going to have a bigger impact as you look at 2025? Do you think it's going to be Washington or do you think it's going to be the Fed in terms of impacting the markets?
Larry Wieseneck:
I'm going to take a liberty there if it's okay with you. I'll say, we'll define Washington to be more broadly governmental activity. It could be, we could say London, we could say Brussels, et cetera. I think that the political activity is more likely to be critical than the Fed. We're at the point where after many years of Fed activity really going back to '08, where the Fed was so much the game as it related to easy money, easy money, easy money, COVID, more easy money, then quickly tighten, tighten, tighten to try and get control of inflation, we're kind of at the point now where more or less we're in a band, and the market's priced that in. And I don't think the Fed is necessarily the news other than maybe in any given day when they might make a move or not make a move, it creates a little near term volatility.
The bigger issue is around we have a new administration in the US which is going to have a decidedly alternative tone as well as actions compared to the last, and so that will impact both the broad markets but also I think we're at a point where here in the US, we saw it under the Biden Administration, I think we'll see it in the Trump Administration, we're more comfortable than we ever used to be in picking winners and losers. And what I mean by that is that it could be macro in terms of this industry is good, this industry is bad. It could be within industry. This player is in favor, this one's not. That kind of intervention is something that the markets are not used to historically, and I think we have to be careful about that. So that would be the Washington piece.
But we're in a world of multiple conflicts and how those conflicts get resolved will also have a huge impact. And so between conflicts breaking out or being resolved activities in the halls of both the White House and Congress, I think the combination far outweighs anything the Fed could do.
David Erickson:
Following up on the question regarding Washington politics and the Fed, obviously there's been a lot of changes going on in Canada. How are you advising clients about Canada? How is TD Cowan thinking about the changes going on in Canada and what that means for companies going forward?
Larry Wieseneck:
David, thanks for mentioning that. And similar to if you had asked me my view on who was going to win the election in the US, I would've told you, "I don't get paid to make those kind of guesses." I would say I have the same perspective. We have the same perspective on Canada. That said, if you look at the markets, the prediction markets, they currently are at 92 to 94% for a conservative victory when in fact there's an election, so I think the markets certainly are pricing in that we're going to see a return of the conservatives to the majority in Canada.
And I think that I view that very similar to the way I view what just happened in the US. I don't view it in the context of that's a market shift to one part or the other, but rather it's a statement of what we've seen going on across the globe which is whoever's in charge in the last two years in every western country has been thrown out, right? Because when you come off a period of the kind of significant upheaval that 6, 7, 8% inflation creates, the natural response to the body politic is to go back the other way.
And so from that standpoint, I think what we're seeing currently in the prediction markets is very consistent with what we've seen in the UK. It just happens to be the different party because in the UK, the conservatives were in charge, labor came in. I think that the bigger issue is, and that I think everyone is wrestling with and none of us have a secret sauce on, is the whole discussion around tariffs and is this a negotiating position by the Trump Administration or are they going to go through? None of us can predict that, but I do think that certainly it'll be better for North American trade, and we benefit as anyone here in North America does.
If we see a stability in the trade environment, and hopefully what we'll see is it won't take very long for us to figure out what the new arrangements are and then be able to have a market you can price in because the biggest enemy for the market and for any company is uncertainty around court elements like trade between Mexico and the US, trade between Canada and the US, the old NAFTA world. And so hopefully that gets put to bed in the first half of the year either way, but it's going to be interesting. And the other thing that's worth noting is it's very rare that we see in the same short period of time a change in the administrations in both the US and Canada, and so it'll be just interesting to watch how that shakes out because whatever happened in the past, it'll be different. We know it'll be different because we'll have two new administrations.
David Erickson:
With the equity markets near all-time highs and the Fed having lowered rates in late '24, there's a lot of speculation there's going to be a significant amount of strategic M&A activity as we look into 2025, especially with what is perceived to be a more liberal administration in terms of how they think about consolidation and M&A and so on and so forth. When you talk to clients, how are they thinking about the strategic opportunities today and how are you advising clients on strategic opportunities as we look forward to this year?
Larry Wieseneck:
So I don't think I can recall in the last decade more pent-up demand for true strategic M&A, and David, I think when you say that the way you're thinking of it is true corporate M&A as opposed to sponsor-backed.
David Erickson:
Correct, correct.
Larry Wieseneck:
I think there's been a lot written about how much dry powder there is from the PE side, et cetera. But the strategic side, I really do feel as if we're entering into a moment where it's finally safe for companies to take more bold actions. I think part of that's driven by, and again, we're predominantly talking here about the US market. Again, I don't think I could say the same thing necessarily in some of the other regions, but with the change in administration where everything from the DOJ to the FTC, et cetera is going to be more supportive, we presume, we presume, more supportive of business combinations that drive efficiency, et cetera, I think what we're going to see is that the last four years, many companies delayed activities for fear that the administration was going to be non-supportive. And so just that switch gets people focused.
In the meantime, the last administration also happened to overlap with a period of self-introspection. It started during COVID, companies had to figure out what their business model was doing, how it was reacting. Then we had significant inflation and it to work itself through the system. It wasn't a time that most companies wanted to be bold.
I think we're at a point now where people feel pretty good about understanding what's working, what's not working, lower inflationary environment, I can build plans and understand it better, and that leads to both better buyers and sellers, so companies will shed assets that don't make sense. They'll want to get bigger in areas where they think they have a competitive advantage, and I think we're going to find a lot of activity. Some of it'll be portfolio swapping, so divisions being sold, product lines being sold, et cetera, and others will be good old mergers of equals.
David Erickson:
So with the exception of biotech this past year, there's been very little IPO activity. There's been a few significant IPOs in the fourth quarter, but still very scarce despite the fact that we've had strong performance. Now that we're kind of entering into 2025, and we've heard about all this pent-up demand and all these companies in backlog, how are you advising companies and how are companies thinking about potentially accessing the markets here as we open 2025?
Larry Wieseneck:
So again, for anyone who's had the chance to hear our conversations in the past, I think we've always talked about that the IPO market's not a market of its own. It's a derivative of the equity market. And I think we have to look at it in that context. Other than in the recovery at the large cap in tech and the significant recovery from the bottoms in parts of healthcare, particularly biotech from where it was 18, 24 months ago, this hasn't been the broadest recovery. And so it's not like you look at the equity market and say, "Wow, industrials have rallied so much." Consumer companies have rallied the same way.
So I think for big parts of the equity market where if we were 15 years ago, 20 years ago, we would've said, "Well the IPO market, yeah, there's tech and there's healthcare, but there's lots of other companies coming public." I don't think it feels that great in many of the other parts of the market. And so they're still waiting, right? The ownership teams that are waiting to see a market that's maybe more resilient. I think that for those businesses that were thinking of going public, I would argue the reality of the second half of the year is we were telling everyone in the first half, if you're going to go public, go public in the first half of the year, you want to avoid the volatility of an election cycle.
This was one of the craziest election cycles. When I say crazy, it is no political view, rather it was the first time ever that we had a sitting president step away from running in the summer and the VP stepping in to run in their place. And so no one knew what would happen in October, November, so people avoided coming to the market. So I think there is pent-up supply to come, and it'll really depend on where the market is as to whether that does ultimately come to the market, but there is something to point out. I think your question before about roughly 25 years ago to today, the last time we had the 20% run, we saw an enormous amount of IPO activity then. One of the differences is that even though there was a scaled private equity environment 25 years ago, it was nothing like today.
David Erickson:
Right.
Larry Wieseneck:
There are far more options now for companies, particularly those that are cash flowing and have some predictability of earnings, far more options other than going public. And so the question that we're really having with a lot of companies is monetization events, whether it be sponsor owned, whether it be a family owned business, and an IPO is not the top of the list for many of those situations, and I think that's just the reality we have to understand is the high point of around 7,000 US listed companies that was really put in around 2000, we're not getting back there anytime soon. I still don't think we are in this cycle, and so there's just more alternatives to not go public.
David Erickson:
Yeah. And I want to dovetail on that point with the next question, which kind of goes to the private markets as well. Kind of what you're talking about in terms of the private markets and the public markets. At the beginning of last year, Bane estimated that there was roughly three trillion dollars worth of value of unexited assets sitting in private equity portfolios with the median holding period of 6.1 years or thereabouts, and that goes back to that's double what it was 20 years ago in terms of just size, holding periods, et cetera. So as the private markets continue to grow, how should issuers and investors think about the magnitude of those sizes of pent-up assets?
Larry Wieseneck:
Well, David, you were very kind. You asked that question about investors and companies, you didn't ask investment bankers. With self-interest here, I'll throw us into the loop as well. And I think one of the ways you can look at it is the reaction of the banking industry. We have far more resources devoted, when I say we, I mean the street across the board to the private markets, both in terms of supporting sponsors, supporting private credit funds, and ultimately the portfolio companies that are in those areas. And so it's just a reality of where we are. I think the longer holding periods are actually healthy. If you think about a private equity fund, the minimum period usually of a fund is a 10-year period, and that's because they're supposed to be able to be patient capital.
I think when we see the average holding period only being three years, it's kind of like, well, why were they private in the first place? How much can you really change the future of a company in a three-year period? So I don't think there's anything that's a challenge about the six years. I think that's a very appropriate time for a private investor to help the company both from an operating standpoint, maybe financially support them and then find another owner. I think that the biggest issue here is that we are going to see a significant amount of monetization over the next few years, and it's one of two ways, right? Either they come to the market in the normal format, i.e, they get taken public, or they get sold to another buyer.
Or what we have spoken about really over the last 18 months in our conversations, which continues to be a conversation with a lot of folks, is having continuation funds to basically support and keep holding it, but allow those investors that want a monetization to get out because I think there are certain assets where the private investor feels very comfortable that this is an asset we like. There's more opportunity, I'm not willing to sell today, but some of my investors might want liquidity. And so the growth in continuity funds, secondary funds in order to support that I think is here to stay.
David Erickson:
Right.
Larry Wieseneck:
There are certainly conflicts that come up, and therefore the deals have to be done in a manner that's got all the right bells and whistles attached to protect the investors, but that's a part of it. Look, one of the terms that most people are not aware of that has become de rigueur now is DPI, which basically is the measurement of how the money gets returned to investors. The biggest challenge to private equity funds that might want to raise more money is they can't do that until they've delivered monetization proceeds back to their investors, and that's a have and have not. It's a big dividing mark. Those that have been able to get monetizations and prove it both in venture and private equity can raise more money. Those that have been more challenged have a very difficult time raising new capital right now.
David Erickson:
Last question, as we've done in previous podcasts, I ask you the question about occasionally we touch on areas in the market that don't get a lot of attention that clients should be aware of. Are there areas of the market today that fit in that category and that you would like to highlight?
Larry Wieseneck:
So I guess the one thing that I'm seeing more and more is a gap in the market. I wouldn't say necessarily it's unheralded, but I do think it's going to be a challenge over the next five years is as much as we've seen significant growth in infrastructure funds, the needs for core infrastructure around the world is growing faster than the capital that can go there, and the gaps are that generally the capital is available once infrastructure builds are online, but there's a period that's like construction risk for real estate where you have to build the infrastructure before it's cash flowing.
And when you think about all the growth in developing countries, you think about the rebuild in the more developed countries, whether it be subways, whether it be power, whether it be the electric grid, et cetera. We can't build fast enough the core infrastructure that's needed. And so I do think that's a gap, and there'll be creative ways for that to be filled, but we certainly see that as a growth area for our business. It's a growth area in terms of capital flowing, and even with the additional capital that's trying to flow there, it doesn't start to scratch the surface of what might be needed, so that's an area for us, I think, to watch over the months and years ahead.
David Erickson:
Great.
Larry Wieseneck:
David, once again, thank you so much for hosting. It's always a pleasure, and I look forward to the next time we get together to talk about what's going on in the markets.
David Erickson:
Thank you, Larry. Enjoyable conversation.
Speaker 1:
Thanks for joining us. Stay tuned for the next episode of TD Cowan Insights.

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