Capital Markets in Transition as Houston Leads Economic Recovery
Say Experts at Annual BoyarMiller Forum
HOUSTON (Sept. 18, 2013) – Optimism regarding middle market M&A activity, private equity growth and Houston’s economic performance was dampened some by the uncertainty of the bond market and its expected “great rotation” at the annual “Current State of the Capital Markets” forum hosted annually by BoyarMiller. Expert panelists gave an overview about the key trends impacting the capital markets and provided a boost of pride for Houstonians as they described how the city leads the nation in recovery.
The public markets were discussed, along with private equity activity and trends in mergers and acquisitions. A national perspective of real estate finance had a local emphasis on Houston and Dallas and the availability of cross-border capital. The panelists were Drew Kanaly, chairman of Kanaly Trust; Cliff Atherton, managing director with GulfStar Group; and Tom Fish, executive managing director / co-head real estate investment banking of Jones Lang LaSalle.
Kanaly discussed “the great rotation,” the financial industry’s term for the market’s expected rotation away from bonds and toward stocks, prompted by record-low bond yields.
“We are seeing the end of a 30-year megatrend, a bull market in bonds. The Federal Reserve has held interest rates at zero for quite some time,” said Kanaly. “As the Fed begins to taper off its buying of bonds later this year, we will see interest rates rise; it will change the market considerably and prompt investors to pull money out of bonds and into other investment options.”
The bull market in equities remains intact, according to Kanaly. He anticipates stock earnings to accelerate into 2014 and said U.S. stocks are valued fairly while emerging market stocks are cheap. While there is slow global growth, with Europe in recession, improvement is anticipated by the end of the year. Key strengths of the U.S. economy are housing, automotive, energy and the deficit reduction, according to Kanaly.
Atherton reviewed how those trends affect middle market merger and acquisition activity and private equity capital. Middle market deals normally represent more than 25 percent of total deal value in the U.S. and about 80 to 90 percent of the number of transactions, said Atherton. And many of the deals are occurring in the oil and gas industry, as Atherton jokes that Houston’s economy is diversified into the upstream, midstream and downstream energy sectors.
“Good news for energy is good news for the entire country, not just Texas,” said Atherton. “Cheap domestic energy from shale resources can get our U.S. economy moving and help pay off the national debt someday.”
M&A activity has increased significantly since the 2008 crash, said Atherton. The average multiples, which denote the worth of the selling company, in middle market deals reached 6.3 times in 2012 and since 2010 the number of deals has increased. While the buyout market was stable from 2010 to 2012, the trend in the first half of 2013 is toward larger deals, but fewer are occurring.
Atherton also cited a rotation in the private equity market that has grown since 1980. “Private equity firms have about 7,000 companies in their portfolios today,” said Atherton. “That means those companies will either be sold or will rotate into the public market.”
He believes the most remarkable story about the private capital market is the amount of growth it has experienced over time. “In 1993, private equity accounted for $3 billion of total capital invested. Now, just 20 years later, private equity invested about $358 billion in each of the last three years, and that is most definitely helping to fuel the growth of the U.S. economy,” said Atherton. “We all know it is the small and mid-size companies that create the majority of net new jobs; the availability of this capital is making an impact.”
Also making an impact is Houston’s new position as a revered “gateway” market, defined as a global Tier-1 real estate investment market typically reserved for U.S. cities like New York, San Francisco and Boston. Gateway markets are the top destination of choice for cross-border capital into the U.S., which remains strong overall with investments from Canada leading the way, followed by Singapore, Germany, China and South Korea.
Fish said Houston is ranked 6th in total real estate transactions, including apartment, industrial, office and retail sectors. “It is interesting to note that Houston has outpaced Boston and San Francisco in volume of transactions since 2011,” said Fish. “Houston has attracted its share of foreign capital and the city ranked 4th in the nation for cross-border capital, after New York, Los Angeles and Washington, D.C. It surprised many that Houston was on that list right after the well-established gateway cities.”
Additionally, the strong GDP growth of Houston and Texas – which is above the national average – produces highly favorable borrowing rates and continues to fuel the regional economy. Fish said the energy markets in Houston and Dallas are still dominating the growth of the office sector with about 25 percent of all office absorption in the U.S. taking place in Houston and Dallas.
Fish assured the audience that about 70 percent of the office space under construction in Houston is preleased and that the city’s job growth will accommodate the in-fill apartment locations under construction. He said his optimism is because “it’s all about the energy business.”