How AI and Mega-Cap IPOs Are Reshaping Market Momentum

Speaker 1:
Welcome to Viewpoint - A TD Securities Podcast. Listen in as we draw perspectives from a variety of though leaders on key themes influencing markets, industries, and the global economy today. We hope you enjoyed this episode.
David Erickson:
Welcome to Viewpoint - A TD Securities Podcast. My name is David Erickson. I'm an adjunct professor at Columbia Business School and I'm joined here by Grant Miller, senior executive managing director and global head of capital markets at TD Securities. And we're going to talk about, before we get into the markets broadly, we got to celebrate New York because the Knicks just won last week and we got the World Cup in town and we had the US open yesterday finishing up. So congratulations New York. Let's talk more broadly about the markets.
Grant Miller:
Well, before you get to markets-
David Erickson:
Oh, you want to go?
Grant Miller:
I do want to go. We're not joined by Larry Wieseneck for the first time. We've done this podcast a number of times without Larry. And so I can't start by poking fun of the Jets. So neither of us are New York sports fans, but we are here in New York and I did get the opportunity to go to game four. So I will say I'm still not a Nicks fan, but it was an incredible moment for this city.
David Erickson:
You're a New York fan. That's right.
Grant Miller:
Yeah.
David Erickson:
So let's start kind of big picture. So there's been five trillion of issuance, more than five trillion of issuance across equities, debt, bank markets. We got the SpaceX IPO done a week ago for $75 billion. Are there any issues that you see because that's been a huge issuance already. Do you see any issues in the market today? And if so, what should potential issuers be thinking about?
Grant Miller:
It's an incredible time and I actually want to start with the SpaceX IPO. It is specific because it's one issue, but I do think it's related to a lot of other things we might be chatting about. It's a watershed moment. And so having that company go public at the valuation that went public at today, I think this morning before I walked in, it was about 2.2 trillion. Of market cap, it went up. It has come down slightly. And this morning they launched an investment grade bond deal. And I said investment grade. They are a money losing company. It is the first, I believe, we can source this, check this later, the first company to be a money losing company and getting investment grade rating to go and raise additional capital. And so it's amazing. And I look at it and if there are things we can draw from it.
I would say the exuberance around potential growth is one piece. Starlink is a great product. What they do with their launches is incredible. XAI, I don't know as much about, but it's one of the ... Does it equal 2.2 trillion? It's hard to say. Is Tesla and their evaluation, has that made sense over time? It's hard to say, but it's evolved. So when there's a followership like Elon has, you can follow it. And so I think it was a really important moment because the story of where the growth is going to come from will continue to evolve just like Tesla's has in my view. And the market's following it and got done. So that in and of itself I think is incredibly important. For the other momentum in the market to keep going, particularly on the equity side, but let's see how their bond deal does too.
And so when I take a step back in all this issuance, it reminds me of almost 30 years being capital markets of really the third time wave of issuance that have seen just explode in front of our eyes. I thought it was going to be two, and that was going to be the last one I was going to see. We saw it together when we were at lehman.com. We saw telecom infrastructure being built out. I think there's analogy there to the AI infrastructure and uncertainty of the business models that came after. So maybe we'll come back to that and talk a little bit about it. I saw it again when interest rates are super low and COVID was happening and the exuberance for a lot of high risk assets came and went. And this is the third wave. And so I really didn't think it was going to happen again, but now you're seeing it. And as you suggest, it's broadening beyond just all high risk assets and what's going on.
But just to start with the equity side, one of the things that, and we talked about this last time we're together, is there has been this over the last 20 years, the equity markets have actually shrunk, number of issuers and the amount of equity in the market has shrunk 15 in the last 20 years, but large amounts. Buybacks, that's how earnings have really grown as well as companies being taken out. This year and certainly next year, if this continues, will be a huge reversal to that trend. And so are we getting back to a little bit more of what's happening and getting people wanting to be in the equity markets in IPOs? Now remember, these are still small parts of the overall equity market. So yeah, we're talking about trillions of issuance, but the S&P is 65 trillion of market cap. And so I don't think we're going to stress that piece, but I do think that there's a supply issue that really wasn't here for a long time. Now we're seeing the supply and we're seeing it being taken up, which I think is great.
David Erickson:
But a lot of the supply has been mega caps. I mean, you got another, everybody's talking about the open AI IPO or the anthropic IPO coming next. So you've got a lot of issuance, big issuance by big companies. Alphabet did 80 billion in the equity markets not too long ago. So if you're not in the mega cap space, how do you differentiate yourself? How do you-
Grant Miller:
Yeah. So I think it's-
David Erickson:
You don't have Elon Musk as your founder. How do you get shelf spent?
Grant Miller:
You don't. And I think that exuberance, by the way, I think there are reasons for the exuberance. Earnings growth has been really strong. So there is, yes, overall. I do think there's some correlation back to the AI infrastructure spend, but for the smaller issuers, it has been a little bit more of a picker's market. And so a lot has been getting done way more than we've seen equity issues up to X from last year, but you have to be ready to go.
David Erickson:
Yeah. So let's talk about biotech as an example, not a mega cap space and there's been a lot of issue in some biotech and then some other kind of innovative technology markets.
Grant Miller:
I think it's a great piece because there is so much connected to the AI infrastructure. When you take a look at some other areas, defense tech is one. You could say that there's some elements that's related, particularly with SpaceX where we're seeing a lot of innovation and a lot of interest and issuance. And then when you look at the other areas typically in the equity markets, biotech is a really big one and it's suffered over the last few years. But starting about a little less than 18 months ago, something started to shift. So you're seeing fundamentals, fundamentals of companies being taken out, biotech companies. Last year is about 90 billion of biotechs being bought. This year already, it's about 60 billion.
David Erickson:
In terms of M&A.
Grant Miller:
In terms of M&A. And so all that capital needs to get recycled. And we're seeing that in really interesting ways, valuations going up. And by the way, results from a lot of these companies have been superior. So we have a client revolution medicine that has data on pancreatic cancer that is just game-changing. And so their valuation is now 35 billion up 4X from about the last year for good rationale. And so you see that coming across and so the issuance is there in a really major way. And so decoupled from all the other pieces, there are these elements of innovation that are absolutely happening with, I think, real fundamentals underlying them.
David Erickson:
One place we haven't had much to talk about for the last few podcasts has been private equity. And private equity used to be a relatively big part of the calendar, both on the debt side and the equity side. And how do you think about that now? Because there's a lot, Bain, the consulting firm has talked about there's 30,000 portfolio companies held in private equity funds. How do you think about that kind of supply?
Grant Miller:
So if you go back to the last podcast, I think we talked about this and we pontificated that's going to change. It's going to be this huge issuance.
David Erickson:
That's 32,000, by the way.
Grant Miller:
Maybe we didn't time that one perfectly yet. So I think there were a couple things underlining. We have started to see some more sponsor backed companies get public that it certainly hasn't opened the floodgates in terms of issuance, but it is starting to happen. But then the new LBO formation hasn't also picked up in the way that maybe we suspected it might have. I think there are a couple of things that are happening there. First, interest rates are not only not lower, they're continuing to be high and probably even continue to go higher. And so that makes it more difficult to finance. And actually I think that there's such a big part of that market has been software, probably 20, 25% of issuance has been the software area.
AI is having a really big effect on people's comfort level with what software companies is going to help, which is going to eat their lunch. And that story has not really started to play out yet in a meaningful way. But I also want to broaden it because not only the private equity folks are trying to figure out how that's going to work for the software companies. AI infrastructure and what's happening is going to change every business model, just like it did in the .com area. We didn't know like pets.com didn't work, but it changed all of our lives in a very material way. It increased efficiency.
David Erickson:
I think pets.com is one that I would say changed our lives.
Grant Miller:
No, no. Well-
David Erickson:
The .coms did, right?
Grant Miller:
Yeah. No, but what I'm saying, but it evolved to making a really big difference in ways we weren't anticipating. So that's what I think there's a little bit of like, "What do we do? A little bit stuck. What do we wait for?" I was actually listening, I read an article over the weekend by Peter Ortia, he's one of these medical gurus that talks about, and his article was about AI and AI as doctors basically. And he went through just how not good these models are. They're good at answering questions. They're not good at differential diagnoses. Okay, that may evolve. And so the question is not only are the infrastructure players raising all this money, but really what's going to happen is the business models of how companies utilize AI, we see it in our own business, is going to evolve.
And so I think that has been a little bit of a trepidation, particularly with a lot of the companies that are coming out, not only software companies, but it's going to go throughout. When we had all the SaaS issues just a few months ago, there were article after article about, "Oh my God, the legal profession's going to change. Oh my God, this ..." And maybe that's died down a little bit because it's going to take some time to work itself out. So coming back to your question about sponsors, yeah, I think that we're still not seeing the flow that we felt we may have because of some of those issues that are coming through.
David Erickson:
So let's shift gears a little bit in terms of M&A because there's still a lot of strategic M&A going on. Again, not as much on the sponsor side, but a lot of strategic M&A, including this morning AbbVie announced a deal in the healthcare space. There seems to be a lot of, as we talked about, did a lot of stuff going on in biotech and healthcare and so on and so forth. How do you see that continuing to evolve in terms of the market that we're talking about and how much financing activity do you expect to see in terms of M&A related in the balance of the year?
Grant Miller:
So I think that is better and the markets are absolutely there for good corporate M&A and that's going to come down to stories. That's going to come on to being able to show earnings growth and all the regular things we've talked about for decades. I don't think any of that's changed. The one caveat is the trillions that's being spent and financed in this AI infrastructure piece, how much is that pulling away from other sectors? And so far, I don't think that we've really seen it, but there will be, there can be a limit to supply and how it disrupts the IG side, how much is too much and they keep on coming back. And if you think about the trend that we're seeing, it's the big companies are going through their cashflow, they're going through all their debt. Now they're worried about ratings, so they're going into their equity and with sizes that we haven't seen. So I do think it'll affect the markets and including it certainly can in terms of the more marginal M&A opportunities that come through.
David Erickson:
So as we've done in previous podcasts, we talk about some of the things that are in the public markets, but sometimes there's things that aren't as visible to people and things that aren't talked about on CNBC or Bloomberg or whatnot. Where are some areas that you would like to highlight that could be interesting for the next balance that you've seen interest this part of the year and then the balance of the year?
Grant Miller:
So maybe I'll talk about a couple different pieces. I can't get away from what's happening in the AI infrastructure piece. And so how these companies, the big ones, and then also the mid-cap companies are financing themselves is with everything all the time trying to offset both costs, timing, making sure that they can get their deal done. And so we have changed the way we work in terms of making sure that we can help them navigate all their options. We actually created a digital infrastructure finance team that combines our IG folks, securitization, leverage finance, equity, converts, mandatories, ATMs.
David Erickson:
And that's across private markets and public markets.
Grant Miller:
Everything because the companies aren't distinguishing in terms of how do I get the most efficient capital? And so it's a real confluence. And you think about what's happening in IG land and private capital. Well, there are a lot of folks in private capital are actually going into IG. So you have this burgeoning of what markets to go to. They're starting to look like they're together, then decouple. There's a lot of emerging themes there. So I think that that is a part that what are the different options as you start to test the limit of these markets, how you use them in combination with each other, which a lot of them have already started to do. The other piece that we actually did talk about last time and actually has gotten a lot of attention in the previous months, which is the private credit overall. And I think we talked about how there's this wave of worry.
You don't hear about it quite as much recently and I think we're getting through some of the potential walla warrior that people had because yeah, again, it's back to software and AI. All the issues really were around so much of that private credit market was in software. There were going to be winners and losers, but the redemptions that were coming into those BDCs that were retail redemptions, people got really unnerved because they were blocked or shortened or capped. That was, I think, a reaction to a moment in time and it'll probably continue, but it was there for a reason. It was structurally set up so you didn't have those issues. And so we've seen some of that go through. So for corporates, it is safe to look at all your options, your syndicated leverage finance options as well as your private credit options. Although they've started to diverge, private credit now is more expensive. The leverage levels you can get are probably not as high as they once were. So again, it's a, how do you navigate these markets.
David Erickson:
Because of all the press on private credit, do you see issuers shifting back to more traditional sources of credit finance?
Grant Miller:
Because the leverage levels in private credit market aren't maybe taking a step back a little bit and costs are growing up, they're just looking at all their options. "What's the best, most efficient way to get it? Do I need ratings so that private credit has ... Can it be fast? Private credit has an advantage. Is there certainty private credit can have an advantage?" But if you look at overall in the sub-investment grade area, there hasn't been as much issuance across the board. And so a lot of what we see in the syndicated markets is more refinances and repricings and new money deals. It goes back to our sponsor conversation that there aren't many new deals that are coming out from sponsors. And so I don't think that there are folks who are saying, "I'm scared of private credit because of the news cycle that we saw," but more of, "Well, what kind of terms can I get?" And that has evolved over these last number of months.
David Erickson:
Well, thank you for joining me for another conversation on Viewpoint and look forward to our next conversation.
Grant Miller:
Me too. I hope Larry's back, but I will say that-
David Erickson:
Hide me when the jets are losing a couple of games.
Grant Miller:
Well, I'm certainly hoping, but I will also say, Dave, so that is terrific. We were able to get through this. Last time we did this with Larry, we had a split into two podcasts to get through it. See, this is what happens when it's just two old ECM guys trying to figure things out.
David Erickson:
Right, exactly.
Grant Miller:
All right. Thanks, Dave.
Speaker 1:
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