AS ECONOMY GROWS, SO, TOO, WILL THE DEALS.
THE PROSPERITY WE HOPE FOR AGAIN WILL BRING THE RISE OF PRIVATE CAPITAL WE’RE USED TO
While most of the economy was shutting down in the first quarter of 2020, Bay Street found itself getting busier.
There was, after all, a fair bit of firefighting to be done during the first wave of the pandemic, as the twin health and economic crises strained companies’ credit lines.
“We had very stretched corporate balance sheets quite quickly, when people drew on their lines," said dan Barclay, chief executive officer and group head at BMO Capital Markets.
The Big Five bank was able to see the crisis looming earlier than most as BMO’S China operations gave head office an early warning about the pandemic wave that was about to hit North America.
“It really happened quite quickly. The timing of the pandemic and the volatility were actually tied together, along with a major thrust in North America to move home,” Barclay said.
“It was really this synchronous shutdown of the economy ... and it was exacerbated by trading desks at home.”
Like the seasons, the issuers’ requirements changed with the quarters. First-quarter activities had come on the back of a strong global and Canadian economy the year before, but were disrupted by the pandemic in March, which fired up Bay Street’s finance machine.
By early second quarter, trading desks were being set up in executives’ spare rooms, basements and living rooms. Boardroom huddles were replaced by Zoom and Team virtual calls and late-night coffee runs didn’t go further than the kitchen, amid a mad dash to give companies lending support. An industry famous for finalizing deals on golf courses or while consuming Wagyu beef, had to quickly learn to function — and then thrive — on a good internet connection and a virtual private network.
With government support kicking in and leaving the economy in deep-freeze mode, the focus turned to companies that were flailing in the third quarter.
“People were looking at rescue financing, which were companies in real trouble, and needed to finance at whatever the cost,” Barclay told the Financial Post, noting that the distress was widespread and not limited to a few sectors.
By the fourth quarter, the green shoots of recovery were encouraging companies to opportunistically load up on new debt and equity.
“When I think about those quarters, it’s really a strong Q1, which is business as usual, and then the impact of the crisis, the stability, and then we had opportunity (in the fourth quarter). That really drove behaviour last year ... We were pushed to truly extraordinary activity levels because of that,” said the banking veteran, who has seen his share of volatility in his 27 years on Bay Street.
BMO rode the roller coaster of volatile capital markets, emerging as the top ownership equity dealer and IPO dealer last year, according to Financial Post data.
In equity, BMO led the league table with 53 bookrunner mandates receiving $3.87 billion in league table credit, or slightly more than 10 per cent of all equity financings.
BMO was also a bookrunner on waste management firm GFL Environmental Inc.'s two offerings that collectively raised $2.92 billion, telecom giant Telus Corp’s $1.5 billion and payment firm Nuvei Corp.’s $1.06 billion. The bank also helped Vancouver-based Abcellera Biologics Inc., which is working on a promising COVID-19 antibody, debut on the public markets for $707.3 million in december.
With rock-bottom lending rates on offer, government and corporate debt made up the bulk of the $528 billion in financings in 2020, according to FP data, but companies shied away from mergers and acquisitions as asset prices looked uncertain.
“My bellwether is M&A activity, which went way down, while financings went way up,” Barclay said. “That’s how I think about M&A activities, the need to take risks, (with companies) wanting to put risk on. And that process went down obviously with the economic uncertainty due to the pandemic and otherwise.”
But as companies and private equity got more comfortable in the post-pandemic world, they started loading up on financing against the backdrop of a resurgent equity market and were on the prowl for deals.
A few years ago, BMO Capital Markets had estimated private capital had amassed a war chest of $2 trillion in cash waiting to be deployed.
“What I would say is that the mountain continues to grow,” said Barclay. “We continue to have this rise of private capital, both on the equity side as well as on the debt side.”
The popularity of Special-purpose Acquisition Corporations (SPACS) and a resurgence in initial public offerings (IPOS) is another strong indicator that private capital is searching for deals, but in sharp contrast to the recent trend that has seen PE firms do most of the buying, this time it has been happening in public markets.
“I think one the big stories of the last six to 12 months, has been actually the validation of some of the equity capital markets and the debt capital markets from a public point of view. In the last 12 months, it’s the SPAC and the IPOS on the equity side and just the volume of money that has been raised in the bond market," Barclay said.
The banker thinks 2021 could see dealmaking accelerate as the world enters one of its fastest GDP recoveries in history, rebounding from last year’s dramatic decline.
“you are going to have great personal hope, you’re going to have economic hope. And I think you’re going to have market hope.”
And while Barclay is eager to fasten his seat belt and travel again, he thinks executives won’t be jumping on planes as frequently as before, with most meetings being done virtually in the post-pandemic era.
That means Barclay — and his clients — may continue to miss the personal touch that has always been a hallmark of dealmaking.
“My family’s happier. But I’m not sure my clients are happier,” Barclay said. “We can still give good service, good advice — we’re all figuring out how to do this virtually. But, you know, I miss the human connection.”
MY BELLWETHER IS M&A ACTIVITY, WHICH WENT WAY DOWN, WHILE FINANCINGS WENT WAY UP ... THAT’S HOW I THINK ABOUT M&A ACTIVITIES, THE NEED TO TAKE RISKS. — DAN BARCLAY, BMO CAPITAL MARKETS CHIEF EXECUTIVE