Same as the old boss. The classic line from the Who’s, “Won’t Get Fooled Again,” is what many M&A professionals are thinking as it comes to Trump 2.0[1]. But in 2024 are we similarly situated as we were in 2016?
Some things are similar in as much as we came out of the GFC with tepid growth and that continued for about 5 years. Recently, we came out of the pandemic with tepid growth that continued (and continues); and both exogenous events caused a massive updraft in federal deficits. However, after the GFC interest rates were 0 (one of the greatest moments of my young adult life was when my 5/1 ARM adjusted and the notification letter said my interest rate was zero) and inflation was at or near the two percent target (in fact there was great concern that we would move towards some type of Japanese stagflation or deflation). Of course, not everything was tied to accommodative interest rates, there were other factors as well: the fracking boom took full effect and lowered energy costs, cheap goods from overseas (mostly China) flowed into the USA and the American consumer (and Wal-Mart) was the greatest beneficiary of those cheap goods.[2]
Nonetheless, while history does not repeat itself it does tend to resemble other parts of the timeline (especially the older you get); however, as John Kenneth Galbraith once said: “We have two kinds of forecasters, the ones who don’t know and the ones who don’t know they don’t know.” I aspire to be neither. Instead I’d like to briefly discuss some data points on what really moves individuals to buy, sell or hold: sentiment.
According to the latest data as of the end of the third quarter 2024, the consumer confidence index (“CCI”) stood at 98.7.[3] That’s a slight downward tick from Q2 of 2024 which was 100.4; and further it is a large gap from the prepandemic reading of 132.6 in February of 2020.[4]
While the CCI is hovering around neutral (100 handle), the Michigan Small Business Owners survey has surged to a nearly 3 ½ year high. The National Federation of Independent Business (NFIB) said on Tuesday its Small Business Optimism Index jumped 8.0 points to 101.7 last month, the highest level since June 2021. Now, while this survey is somewhat skewed because a majority of small business owners lean/vote Republican (and in case you hadn’t heard Donald Trump won the race for the White House and the GOP will control Congress), it is a good indication of what to expect in 2025 as perception becomes reality.[5] For example, according to the survey, “the share of small business owners expecting the economy to improve increased by 41 points, to 36% of all respondents (basically nearly 1/3 of all small business owners are highly optimistic) the largest since June 2020” and to hammer home how sentiment can drive transactions (i.e., M&A, capital expansion, etc.), the number of small business owners expect to increase capital expansion is at an almost 3-1/2 year high.[6] Conversely, the “uncertainty index” dropped 12 points from a record high of 110 in October. Lastly, there was a marked increase in respondents who expect higher sales growth and decrease in respondents believing inflation is the top issue. (As an aside, as one can tell from parsing through the data, sentiment numbers have been low/negative for some time so any move upward (or to say in a positive direction) is going to appear amazing (like going from 0 to 1 you’ve doubled output)—reminds me of the Doors lyric: “I’ve been down so very damn long—it looks like up to me.”)[7]
To be fair, all is not rosy, especially if you look at the direction of the country poll. As I write today (12/10), according to the Real Clear Politics poll the direction of the country has a negative thirty-six handle (-36).[8] Concededly, the polling for direction of country is done from likely and/or registered voters so a lot is dependent upon who answers the call (I guess you can say that for any poll but when you’re dealing with likely voters often it’s whomever has a home phone and who answers that phone in the middle of the day—generally older citizens (if I could drop a meme in here it would be Grandpa Simpson: Old Man Yells at Cloud).[9] Nonetheless, anecdotally it appears direction of the country polls will start to trend in a positive direction provided that inflation (especially fuel) stays at or goes down from where it is currently. And, not that this dovetails with how main street feels about the country, the stock market is usually a leading indicator and as such it appears that Wall Street believes the country is heading in the right direction.
Lastly, according to Jeffries bank lending standards remain tight but have likely peaked.[10] What this means is simple, banks start lending to companies which will spur expansion, which will create competition for loans and push the cost of commercial loans down. In tandem with commercial credit, private credit will (likely) start to expand and rates/fees compress as competition starts to swing leverage to the borrower.
To that extent, some fund sponsors such as Dustin Martelo of Groverton, a real estate and private fund partnership, believes the real catalyst for the loosing of lending standards is as follows: (i) rates decreasing, (ii) loosing of internal underwriting criteria; and (iii) accommodative regulations (i.e., a thawing of the current regulatory regime). Hard to counter the foregoing positions, especially a more accommodative regulatory body but how long will it take to reverberate through the economy is the question.[11]
So what does all of this mean for corporate and M&A, private equity and independent sponsors? Before I give my final wrap up, let me add one more thing into the mix: the rise of secondary funds. Secondary vehicles, either continuation or LP vehicles are a growing sector of PE and a dynamic and growing part of the alternative space (including providing LPs with much needed liquidity).
Secondary exit activity has increased dramatically since 2021. Of course, this increase coincides with the decrease in platform dispositions and increasing frustration of LPs due to lack of liquidity but as often is the case, the animal spirits of the market corrects for a shortfall. As the chart provided by Pitchbook indicates, GP led secondaries (which is different than LP’s selling their interest to a buyer) has grown dramatically over the last few years (with an average roll/exit of the platform of five years) and according to Pitchbook the entirety of the secondary market will increase 40% from 2022 to 2028 (500bn to 700bn); AND secondaries continue to grab larger share of total exits.[12]
In conclusion, based upon the data that we know, all signs point to clear and bright skies ahead but as Mark Twain once said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
From the Vault:
I wrote this a few years ago (who am I kidding—I wrote this 11 years ago—when you get older a few just means a lot) and things changed a lot at Tony’s Barber shop. Because of Covid he began to take appointments and people liked that instead of waiting for an hour or more on a first come first serve basis to get your hair cut. While the reservation system is more convenient, we lose some of the communal appeal of the barbershop; you never knew who you were going to run into and you always knew you’d run into someone that you hadn’t spoken to in a while or someone you never knew. I still see Tony once a month on a Friday and it remains a highlight—he is a true professional and gentlemen.
A friend asked why am I am republishing this story and the answer is because it is an important reminder (especially to me), that no matter what you do, tunnel vision is the best practice and remain semper praesens; focus on and care about what’s in front of you.
The Secrets of Success by Tony the Barber
By Paul J. Marino
Anyone who knows me well knows that I am a creature of habit and a very loyal person. While I haven’t lived in Stamford, CT (my hometown) for about twenty-four years, I continue to go to the same barber, Tony’s Barber Shop, from the time I was about eleven years old. For the last thirty years, Tony has been a virtual trip back in time with its unchanged, beautiful wood paneled walls and its wooden chairs in the waiting area, fixtures that never fail to spark memories of my numerous past visits. Some of my more memorable visits include my crew cut and flat top phase when I was younger (which Tony approved of), and my long hair phase when I was college age (which Tony most certainly and expressly did not approve of). Having my hair cut elsewhere (as I once did in college) was a sin in Tony’s eyes, tantamount to infidelity.
I remember one visit, in particular. One day, when I was about twenty-two, after waiting for one hour to see Tony (Tony doesn’t take appointments), I asked Tony if he ever got nervous because there were so many people waiting in the wooden chairs for a haircut. Tony responded with a valuable piece of advice he may not even have intended to dispense. He simply said that regardless of whether there were two or twenty people lined up for a haircut, he does not worry, he only concentrates his focus on the person in the chair. While I did not ask him any further questions about his waiting customers, I took this to mean that Tony’s only concern was the customer he was servicing at that moment. Tony approaches the task of his particular skill with laser focus on perfection. And many customers will attest to Tony’s perfect haircuts. In addition, all of his customers, myself included, will also attest to feeling that they had his full and undivided attention. That he took pride in the job he was doing, and that the customer in his old fashion chair was worthy of the same amount of Tony’s care, whether there were no waiting customers or a room fool of waiting customers.
Tony taught me to focus on servicing the needs of one client at a time, and to ensure that the service I provide to that client (and each client) is perfect (or as close to perfect as I can get). Thank you, Tony, for teaching me such a valuable lesson.
[1] Jefferies has a great piece on the economic outlook of the USA entitled—Trump 2.0.
[2] The last bit of this sentence reminds me of something I read many years ago written by the great Alan Ableson (https://en.wikipedia.org/wiki/Alan_Abelson) the long time editor of Barrons and writer of its influential column, Up and Down Wall Street: quoting (Anglicized quote—so not an exact French translation) Charles Baudelaire “The greatest trick the Devil ever pulled was convincing the world he didn’t exist”; “The second greatest trick was the US sending worthless dollars to China in exchange for real goods.”
[3] For those keeping score at home on the CCI: anything below 100 is negative, at 100 is neutral, and above (or +100) is positive sentiment.
[4] https://www.conference-board.org/topics/consumer-confidence/June-US-CCI; the highest number ever achieved was 144.7 in May of 2000.
