By ICR
There’s nothing more valuable than experience when it comes to understanding the financial markets. When you’ve seen almost everything in the markets through every business cycle, you become adept at seeing around the corner.
Gregg Nabhan is a grizzled Wall Street veteran who has nearly four decades of experience leading hundreds of deals that have raised billions of dollars. He is Chairman of the Americas Equity Capital Markets and Managing Director of the consumer and retail team at Bank of America.
Greg recently visited with ICR CEO Tom Ryan to share some of the insights he has gained from nearly 40 years on Wall Street.
The past three years have been probably the craziest time in the financial markets since the financial crisis of 2008-2009. “Over the past 15 years we have lived in a world of effectively free money with close to zero interest rates, as well as very low inflation, low volatility and rising valuations,” Nabhan said.
But three major historic events have occurred over the past three years that have upended all this: the COVID-19 pandemic, Russia’s invasion of Ukraine and 40-year high inflation rates. “Combined, these three things have had a gigantic impact on our world,” said Nabhan.
During the first half of 2020, the focus was on saving companies. “It was all about getting liquidity and capital to companies that needed it to help them survive and save jobs,” said Nabhan. “We did a ton of convertible bond deals, follow on offerings and block trades trying to get liquidity and capital to companies so they could weather the storm. As things began to stabilize, there was a sense that things might not be as catastrophic as feared, which effectively reopened the IPO market.”
Fast-forward to the end of 2021 and it became evident that inflation was going to be a massive problem for the world. That’s when the market began to anticipate that the Fed was going to put the brakes on.
“There have been 11 incidences like this over the past 62 years and eight of the 11 times the Fed crash landed the economy,” said Nabhan. “The Fed is going to win — they’re going to break the back of inflation. The question is: Will they crash land the economy? The odds are that they will, so we do think we’re going to have a recession. Hopefully it will be mild, but it never feels mild when you’re in the teeth of it.”
Nabhan compared the current slow IPO market with 2008, as well as 1994 when the pound sterling collapsed, and 1988 after the market crash. “This is absolutely on par with those very subdued capital formation environments,” he said. “But one thing I would say is that the IPO market in the U.S. always rebounds and tracks GDP. So if we do have a recession then the economy begins to recover later in the year, we expect that the IPO market will reopen, but it will look very different than it did before.”
Nabhan expects energy, financial, technology, healthcare and consumer companies to lead the way forward. “These companies will be growing and profitable with strong EBITDA and free cash flow,” he said. “They will have low leverage and management teams that think and act like owners, along with tremendous economic resiliency and the ability to weather the storm.
“These are the types of companies that will go public in the new era, which I believe is about regime change and the new paradigm,” said Nabhan. “This is about as serious a pivot as I’ve seen during my 38 years on Wall Street.”
Nabhan anticipates a valuation reset in which companies will trade at lower multiples than in the past. For example, he believes that high-quality, fast-growing consumer companies that used to trade at 25 to 30 times forward EBITDA will trade at 20-22 while those that traded at 18-20 will trade at 14-16 and those that traded at 14-16 will trade at 10-12.
“This is the new era,” he said. “Companies should only go public if they have a three, five and ten-year view. They shouldn’t go public for a quick flip. The IPO market is about long-term capital formation and playing the long game. CEOs should demonstrate stewardship of capital, high integrity and strategic vision for their business.”
The Fed has been on what Nabhan called a rate-raising “rampage” since late 2021. What will it take for the Fed to initiate a pause in interest rate hikes?
Nabhan noted that the federal government is trying to do something unusual right now: increase the unemployment rate. “Think of how counterintuitive that is,” he said. “The last time this happened was 1980.”
Raising the federal funds rate above the inflation rate will boost unemployment, which will take the heat out of wages and bring inflation down. “That’s how they’re going to do this, but it’s a very painful process,” Nabhan said. “The Fed will take a recession over inflation because inflation crushes the middle class and working class in this country.”
Meanwhile, consumer health is better than one might expect. “At Bank of America we do business with 50 percent of the households in America in some capacity and our data is showing that consumers are weathering the storm,” Nabhan said. “But this can change very quickly.”
The biggest mistake Nabhan says he sees in IPOs is pushing too hard to meet a set of projections that aren’t achievable in order to maximize the IPO price. “Remember that the IPO is the beginning, not the end,” he said.
“Of course you want to maximize the IPO price in the sense that you want to get a fair transaction,” said Nabhan. “But what you really want is to have a series of quarters in a row where you’re meeting and beating expectations and you have a model you can manage and beat. This is how you create tremendous value.”
Nabhan encourages companies going public to focus on what he calls the three Cs of IPOs: Culture, Cash flow and Continuity. “If management teams think about these three things and don’t get pushed too hard by bankers and private equity firms and VCs, they will have a great experience,” he said.
Listen to the entire conversation between Gregg Nabhan and Tom Ryan. Download the podcast today.
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