In this issue of the peel:

• 💸🔥 Slim Shady said “Guess Who’s Back?” in Q3 with a new album, and so did private equity. Deals are so hot you might be able to take off that Patagonia vest.

• 🥤💻 Don’t believe me that deals are back? Just check out KKR’s Q3 numbers below. Plus, Doctor Pepper just announced a new deal… and the market hated it.

• 💰🧱 Americans are all BRICed up over the group’s threat to the U.S. Dollar’s dominance. We should definitely be worried, but not about BRICS…

Market Snapshot

Banana Bits

• Who says the French are cowards? This Frenchman has $28mn on former President Trump winning this year’s election.

• TKO Group is buying a brand of luxury hotels, a sports marketing agency, and a professional bull riding league from Endeavor for $3.25bn.

• Striking machinists at Boeing gave management the finger on their deal proposal, extending the strike for another 5 weeks.

• Southwest shares nosedived despite beating earnings expectations and striking a deal with activist Elliott Management.

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Macro Monkey Says

Lace Up Your Deal Sleds

It’s a bad day to be a stable, mid-cap, low-multiple European manufacturing company with advanced specialized technical capabilities. Private equity is coming.

You might’ve noticed a few more Patagonia vests and pairs of St. Crispin’s walking the streets of NYC in recent months. 

If that wasn’t enough signal for you, let us go ahead and spell it out: Deals are back, and in Q3, they were backer than ever.

Let’s get into it.

The Numbers

Through the first 9 months of 2024, global M&A activity soared 27.6% in deal value and 13.3% in deal count compared to the first three quarters of 2023, per Pitchbook data.

And, for once, we can thank private equity.

After a nuclear-scale fallout in M&A activity in 2022 amid rising rates and an uncertain macro outlook, corporate mergers and buyouts led the road to recovery, given their stronger balance sheets and reduced interest rate risk exposure compared to PE firms.

But now that borrowing costs have drifted lower, private equity players are screaming back into the M&A market like a bunch of barbarians at the gate.

Between 2022 and 2023, private equity’s share of total global buyouts fell from 44.7% to 39.5%. However, from January through September 2024, PE’s share of the dealmaking market has shot back up to 41.5%, right in line with its 5 year average.

Private equity deals alone have increased 8% in volume since last year and a huge 20% in deal value. Thankfully for their LPs, exits have been on the rise too.

Q2’2024 saw the highest value of exits since Q4’2021 at $239.9bn, a 21% YoY jump. By deal count, Q3’24 also saw the highest among since Q4’21, growing 5.6% annually.

Private and public markets have a dynamic relationship, but generally, public markets set the vibe and PE gets on board a little later. 

And as all you wise apes know, public markets have been cooking all year. Not only are global stocks largely on the rise, but so is IPO activity, especially in the U.S. Compared to the same time in 2023, U.S. IPO activity is up 36.9%.

Taking firms public is one of the most common exit strategies for PE firms to get liquidity, so the increase in IPOs that began in 2023 has now partially led to an increase in exit volume in private markets as well.

In addition to healthier IPO activity since bottoming in late 2022, two other factors in the last two years have helped private equity dealmakers make their nut: valuations and, of course, artificial intelligence.

The multiples paid on sales and EBITDA by PE firms declined precipitously from 2021 to 2022 but have since remained relatively rangebound, leading many to believe the “valuation reset” has been complete following the Fed’s rate hiking cycle.

In 2021, the global median multiple paid on spiked to 5.6x on deals above $100mn and 1.4x on deals under. In the last 12 months, the median multiple sits at 3.9x and 1x, respectively. 

On EBITDA, a similar trend is at play, with valuations down from Icarus levels in 2021 of 11.2x down to 9x now.

And finally, since I think I’ll get arrested by Jensen Huang if I don’t mention it, artificial intelligence deals have been on a tear.

As part of their report, Pitchbook ranks how hot each sector of deals is by equally weighting deal volume and value, then winsorizing at the 98th percentile to create what they call a “deal momentum score.” And there’s no contest for the lead:

The Takeaway?

Many of these trends—such as high activity in the tech & AI space, falling valuations, and increasing exits & IPOs—were already ongoing in 2023. But it’s great for the M&A market and, presumably, your odds of landing your dream job to see them continue.

Now that rates have been on the rise for roughly the past month, it will be important to monitor activity starting at the top, like with public valuations and IPO activity, to get any foresight on private deal activity.

But, since the S&P 500 seems to be at a new high every time I log off my computer and JPow still pinky promises he’s cutting rates, there’s not much reason for concern now.

Just make sure your pencils are sharpened and your Pls are fixed.

Career Corner

Question

I am applying for an Equity Research role (that I believe fits me well despite focusing on IB). The position is 1 week old and has over 100 applicants; would I stand out if I wrote an interesting statement as asked by LinkedIn ("mark as a top choice")?

Answer

I don’t have a strong view on these LinkedIn applications, but I assume marking as your top choice can’t hurt.

But also, importantly, you should be networking! That will likely have a bigger impact than whether or not you check this box. And strong interview prep with a strong stock pitch will go a long way! (Also, as an aside, you can’t trust the number of applications on LinkedIn—some submissions are completely unqualified, and some are bots)

Head Mentor, WSO Academy

Check out WSO Academy

What's Ripe

Whirlpool Corp. (WHR) 11.17%

• In the first positive news for housing since the Homestead Act of 1862, shares in appliance maker Whirlpool surged on solid Q3 numbers and new home sales.

• A Census report on Thursday showed new home sales up 4% YoY. Given that appliance sales closely track home sales, this put a positive spin on Q3.

• That positive spin was desperately needed, considering sales fell 18% since Q3’23. However, price hikes and strong cost-cutting sent profits up 31%.

• So, I guess we know who to blame for inflation. Anyway, the best part was when their CEO said they expect margins to close 2024 at 819%, up from the 5.6% to start this year.

KKR & Co. (KKR) 3.41%

• In case you didn’t believe me that dealmaking is more back than Slim Shady in 2002, look no further than your future employer, KKR’s Q3 earnings report. 

• The investment firm netted record fee revenues of $1bn, up 32% YoY. Total operating earnings and AUM were also ripped by 72% and 3%, respectively.

• The firm’s PE portfolio grew 17% in the last year and 5% in Q3, second only to the infrastructure portfolio, up 18% and 6% in the last year and quarter.

What's Rotten

IBM Corp. (IBM) 6.17%

• IBM’s nickname “Big Blue” made even more sense on Thursday as that’s exactly how all their shareholders felt after missing revenue estimates for the quarter.

• Your grandparents’ tech company beat on the bottom line, but weakness in its consulting and infrastructure unit caused sales to miss. Total revenue grew just 1.5% YoY.

• Software carried the team with sales up 10% thanks to a strong performance from Red Hat, a 2019 acquisition that just had its best quarter ever. Gross margins in this segment also set a record at 83%.

Keurig Doctor Pepper (KDP) 4.80%

• I’m starting to think this Pepper guy isn’t a real doctor. As far as I know, most MDs don’t recommend sugar water, sh*tty coffee, and definitely not energy drinks.

• But Pepper’s a renegade as his practice is acquiring Ghost, an energy drink maker, for $1bn. $990mn will come as cash up front, giving Keurig 60% ownership, with the remainder coming in 2028.

• It’s a relatively small buyout for the $50bn Keurig Doctor Pepper. But, energy drinks are a new growth avenue for the firm that also owns Snapple, Bai, Swiss Miss, Canada Dry, and others.

Thought Banana

The Real Threat to Dollar Dominance

As those absolute bricks, I mean *BRICS are conducting their 16th annual “I Hate America” conference, many Americans are concerned over the threat these countries present to the U.S. Dollar’s status as the global reserve currency.

There’s definitely reason to worry, but not from those guys. The dollar’s real threat can be seen right on your computer.

Let’s dive in.

What Happened?

According to Andreesen-Horowitz’s “State of Cr*pto 2024” report, digital asset usage and activity hit an all-time high earlier this year. Much of the adoption was driven by one type of digital asset: stablecoins.

For the uninitiated, stablecoins are digital coins like BTC that are designed to maintain a constant value, usually pegged to a reserve asset, such as the U.S. Dollar (USD).

By market cap, Tether (USDT) is the world’s largest stablecoin and third largest digital asset, behind only BTC and ETH.

According to Andreesen, “Stablecoins have found product market fit.” In Q2’24, stablecoins handled more than 2x the transaction volume of Visa and more than 20x that of PayPal. 32% of all digital asset activity is tied to stablecoins.

To maintain their peg, stablecoins will buy the actual currency they’re pegged to or assets denominated in that currency, such as USD and U.S. government debt. In fact, these babies have become so large they’re now the 18th largest holder of all U.S. debt:

So, Uncle Sam officially owes more to these digital monies no one had ever heard of a decade ago than it does to countries like Germany and Bermuda, which itself is pegged to the USD.

The attraction comes from the ability to transfer money safely, quickly, and at a low cost compared to existing systems like wires and ACHs or other digital asset-based systems, such as the ETH blockchain.

According to Adnreesen, international wire transfers cost as much as $44. Back in 2021, when my 90-year-old grandmother was asking me to buy her a Bored Ape, it cost $12 to send USD overseas using ETH.

Even today, using a stablecoin on ETH will run you $1. But, using a stablecoin on Base L2, the most active EVM chain, costs less than $0.01.

The Takeaway?

Stablecoins separate itself from the digital asset market in that it has an actual use case. That keeps their activity and usage largely uncorrelated with asset prices in the rest of this crayon-eating market.

The threat to the USD arises in threatening the stability and central bank control of fiat currencies. 

If stablecoins became “too big to fail” and a run occurred, there would be no body to oversee users to ensure they get their funds. Say what you will about fractional reserve banking when an SVB-like event occurs, but no depositor loses a penny of their savings.

Although, I did lose a lot of money on my SVB shares…

The Big Question: Could the increasing popularity and adoption of stablecoins eventually lead to a significant challenge to the U.S. Dollar's role as the global reserve currency?

Banana Brain Teaser

Previous

The price of a certain stock increased by 0.25 of 1% on a certain day. By what fraction did the price of the stock increase that day?

Answer: 1/400

Today

A certain work plan for September requires that a work team, working every day, produce an average of 200 items per day. For the first half of the month, the team produced an average of 150 items per day. How many items per day must the team average during the second half of the month if it is to attain the average daily production rate required by the work plan?

Send your guesses to [email protected]

How Would You Rate Today's Peel?

Happy Investing,
David, Vyom, Ankit & Patrick

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