The Hottest M&A Market Ever:

Transcription

1 The Hottest M&A Market Ever: What You Should Do About It Keynote at the World Angel Investment Summit September 27, 2018 Toronto, Canada Basil Peters

2 Early Exits 10 Years On Ten years ago when I wrote the book: Early Exits I described some of the trends I was observing in exits: Big companies outsourcing innovation to entrepreneurs Increasing startup capital efficiency The ascension of angel investors Pre-profit and pre-revenue exits The trend to earlier, faster exits

3 Early Exits 10 Years On But ten years ago, I could not have imagined what we re experiencing now! All of the predictions in the book happened But nobody expected this explosion in liquidity! Or the resulting, dramatic increases in valuation

4 The Hottest M&A Market In History This shows $2.5 Trillion of M&A just in the first half of In every part of the developed world. Data for First Half of 2018 Source: The New York Times Thompson Reuters

5 Examples of Recent Early Exits It s difficult to relate to those Trillions of dollars I d like to use the transactions that my investment bank completed in the first half of 2018 to illustrate Like 95% of exit transactions, some of the financial information is locked down by NDAs To work around the NDAs, I m going to describe all three transactions in aggregate

6 My Firm s Last 3 Transactions All three were 2 to 3 years old 2 of the 3 founders were under 30 when we started Two were virtual companies One had only 1 employee Only 1 company had investors only angels Only 1 company was profitable One company had no revenue at all Total value for all 3 was over $400 million

7 The Hottest M&A Market Ever I don t think any of these transactions would have been possible five years ago And not at anywhere near these valuations In addition to the trends in Early Exits The biggest change is the explosion in liquidity This doesn t just affect angels and entrepreneurs It affects literally every equity, and debt, investment I m going to try and summarize this in 15 minutes

8 Central Bank Liquidity - $ Trillions! $0.7 Trillion to Fix the Mortgage Crisis To stimulate growth and manage the debt after Source: Called Quantitative Easing (QE). Effectively printing money.

9 QE is Exploding the Money Supply This graph shows the US only. It s the same in the EU, Japan and China. $0.7 Trillion to Fix the Mortgage Crisis An explosion in money everywhere. Source:

10 The World is Very Interconnected Now This isn t just happening in the US. The entire developed world is almost in sync. For the first time in history.

11 Record Levels of Corporate Cash This explosion of liquidity has ended up on corporate balance sheets But it s also in Private Equity funds Driving up M&A valuations Source:

12 Fund Dry Powder = $1.7 Trillion Source:

13 Money Supply Interest Rates Money supply is a difficult concept and even economists don t agree on how to measure it Money supply is the amount of money It s much easier to see the effect of money supply which is the cost of money In other words, interest rates

14 Interest Rates Since 2008 All of the developed countries central banks slashed rates. Again, notice the degree of correlation.

15 Lowest Interest Rates in 5000 Years This extreme quantity of money has driven interest rates to the lowest levels in history. In many places, interest rates are negative.

16 Negative Interest Rates on $7 Trillion

17 Valuation - Asset Prices vs GDP This shows the prices of all assets owned by households. Compared to the US GDP. And the last two recessions. We re interested in equity valuations.

18 Public Tech Stock Valuations We can all see public market equity valuations. We don t have a way to accurately track M&A valuations. Source:

19 NASDAQ Market Cap to GDP Valuations are just about back to where they were in Right before the tech bubble crash.

20 Valuations Now 2x Growth Rate There are many ways to illustrate the current public market valuations. We are paying about 2x what we should for growth.

21 Valuations in the Public Market The price-tosales ratio is also back to just before And about twice historic averages. And this is the S&P not NASDAQ. Source: Leuthold Group

22 Warren Buffet s Favorite Indicator Warren Buffet is a pretty successful investor. This is his favorite way to measure valuations. A little higher than in 1999.

23 80% of 2017 IPOs Had 'Negative' Earnings In this environment you can IPO without earnings. Just like it was in Source: Jay Ritter, University of Florida (Are you noticing the number of similarities to 1999?)

24 Exploding Global Debt to $237 Trillion Low interest rates are good for valuations. But they also encourage people, companies and governments to increase debt levels.

25 US Debt Compared to GDP There is no math, or economic model, that shows how this debt can be repaid. Source: Chris Wood's new Grizzle.com blog

26 US Debt is Not Sustainable Pierre Trudeau, Prime Minister of Canada, on the US debt May 28, 2018: we re talking about something that is not sustainable Current Fed chair, Jerome Powell, before congress: "the US is not on a sustainable fiscal path" Janet Yellen, Ben Bernanke and Alan Greenspan have all said the same thing

27 Outcomes: Inflation or Default Source: History shows there are only two outcomes now: inflation or default. Inflation is still very low, but just starting to increase.

28 The Longest Expansion Ever By some measures, we just achieved the longest expansion in history. Should we worry?

29 The Fed is Raising Rates In preparation for the next downturn, the Fed has now hiked rates seven times. And will likely have raised rates again yesterday.

30 Fed Tightens Until Something Breaks The Fed always tightens until something breaks. With the extreme levels of debt in the world, it s virtually certain something will break this time.

31 Central Bank Liquidity Going Negative In preparation for the next downturn, the Fed is also reversing QE. Other central banks saying they will soon. Never happened before ever.

32 Nobody Knows What Will Happen Janet Yellen - previous Fed Chair - said on October 20, 2017: "The FOMC does not have any experience in calibrating the pace and composition of asset redemptions and sales to actual and prospective economic conditions." Past Fed Chairs, big bank CEOs and economists agree that nobody knows what s going to happen Or when it will happen.

33 What Could Trigger The Next Crisis? Nomura Securities tries to summarize the current risks in this graphic. Bottom line: there is no way to know exactly what or when.

34 How Long Do We Have? The question of when is as much about psychology as economics And because the entire world is so interconnected now, the problem could easily start in Europe, Asia or the Middle East There is no way to know when the next downturn will start If I had to guess, I d say we have one or two years

35 Summary Current Economy Central banks have provided unprecedented stimulus Reducing interest rates to the lowest ever And printing enormous amounts of money This money has flowed into every part of the global economy Increasing equity valuations beyond 1999 levels

36 The Best Time Ever to Sell These record high valuations, and other fundamentals, make This the hottest M&A market in history And the best time ever to sell companies I ve often described this as a golden era for entrepreneurs and angels

37 What To Do Now? I m certain that this is a very good time to sell But if you don t sell now, I believe you should be very cautious Be careful about investment valuations now The Fed always tightens until something breaks The concern is that there has never been this much debt in the world before Plan your businesses and portfolios accordingly

38 My contact information: Basil Peters Strategic Exits Corp EXITS ( ) Thank you.