Kay McCarthy, Head of Jersey Office at The International Stock Exchange (TISE), explores a number of current themes in financial markets and why they matter to the Exchange, as well as its new private market product offering which is an exciting and innovative development for the Channel Islands and beyond.

Much of our business at The International Stock Exchange (TISE) is correlated to what is happening in global financial markets. Whilst transactions had been subdued, there has been a pickup in activity driven by some key themes, such as environmental, social and governance (ESG) and Artificial Intelligence (AI) – themes that are not just unique to the financial markets, but also reflect the direction of the “real economy”.

Mergers and acquisitions

Why are Mergers and Acquisitions (M&A) important to financial markets? M&A activity is an increasingly important driver of growth which strengthens the economy. This type of activity is good for companies as it helps them to achieve economies of scale and furthermore, transactions can improve products and services as well as create efficiencies.

In the first half of this year, as macro-economic and interest rate uncertainty continued, the value of the global M&A market was down approximately 44%, according to a report from data and analytics specialists GlobalData. Despite this, there are signs that the market is more resilient than headline numbers might suggest and whilst there has been a reduction in the number of large deals (over USD1 billion), smaller, mid-market deals have been easier to finance in the current environment.

Central Banks have continued to raise interest rates, however a full blown recession has not officially arrived despite a concerning inverted yield curve and, as interest rates and inflation stabilise, M&A deal growth is expected to remain resilient.

The yield curve

In terms of market indicators, the yield curve is not something that tends to make headlines, therefore when it does, it is usually because it is setting off some sort of alarm bell.

The yield curve shows us the yields available for bonds of equal credit quality with different maturity dates and, most of the time, there will be an upward-sloping yield as long term interest rates will be higher than short term interest rates.

However, it has been over a year since the yield curve for US Treasury bonds “inverted.” In general terms, that means short term bonds are paying higher interest rates than long term bonds. The yield curve has inverted just six times since 1978 and each time has preceded a recession.

This unusual trend is concerning markets because historically an inverted yield curve is a signal that a recession is on the horizon. This slows bank lending activities which means businesses find it more difficult to expand, in turn slowing the economy. Whilst the current yield curve indicates markets are not sure when and where interest rates will stabilise, the economy has maintained a slow but steady growth rate, and this is good for investing and growth orientated acquisitions.

Current trends

In the current environment smaller deals have been easier to finance, with some key themes driving activity. These have included investment into ESG, generative AI, emerging economies and supply chain distribution related deals.

According to research from GlobalData, ESG was the biggest theme driving M&A activity both globally and across sectors in the second quarter of 2023 as companies increasingly look to reduce their impact on climate and pursue net-zero strategies.

AI is another theme driving activity. This technology is expected to have profound implications for both businesses and the economy, with the market growing rapidly. GlobaData estimates the total AI market will be worth USD984 billion by 2030, with a 37% compound annual growth rate between 2022 and 2030.

"Some key themes driving activity... have included investment into ESG, generative AI, emerging economies and supply chain distribution related deals."

Companies have also been diversifying into faster growing emerging markets and acquiring companies in emerging economies. According to Refinitiv, “despite economic challenges like the global financial crisis and the pandemic, deal volume has remained steady, indicating a sustained interest in risk. However, the current economic climate, defined by investor uncertainty, limited capital access and high-risk aversion has resulted in deals of smaller magnitude.”

Supply chain vulnerabilities and disruptions have been exposed as a result of the pandemic and the war in Ukraine. This has resulted in companies seeking to stabilise their supply chains by acquiring other companies in different areas along their supply chains, such as their suppliers, in order to improve the certainty of delivery and lower their production costs.

Private equity

Private equity (PE) firms play a major role in the M&A market. When they acquire another company as a strategic bolt-on to existing companies in their portfolios, a PE firm can instantly add new products, services, and customers to its portfolio, as well as expand into new markets.

Currently sectors that are appealing and align with global trends include ESG, AI, bolstering supply chains as well as companies and sectors that offer protection against risk and insulation from inflation.

"...global trends include ESG, AI, bolstering supply chains as well as companies and sectors that offer protection against risk and insulation from inflation."

The PE market tripled in size during the last decade and according to an article published by Harvard Law School PE's share of the overall M&A volume is approximately 36%.

TISE sees significant listings activity from M&A related activity and from PE firms globally, where capital is being raised for acquisition or refinancing purposes. We have continued to see major PE and investment houses list their debt securities on the Exchange and whilst this is down on last year (in line with markets overall), the flow has been steady so far in 2023 and is continuing to pick up. We expect that as the capital market shows signs of recovery both in equity and debt, financing should improve and stimulate activity further.

Private markets – new developments

Complementing TISE’s core proposition for bond and equity listings, 2023 has seen the launch of our private markets service.

TISE Private Markets is a platform which provides unlisted companies with a dedicated marketplace through which they can access an integrated set of tailored electronic solutions, including trading, settlement and registry management.

"TISE has onboarded our first client for this service, Blue Diamond Limited, which is one of the largest garden centre groups in the UK and the Channel Islands..."

TISE has onboarded our first client for this service, Blue Diamond Limited, which is one of the largest garden centre groups in the UK and the Channel Islands, including St Peter’s Garden Centre. We expect our new service to be highly attractive to other companies which are privately owned or otherwise currently quoted on public markets but seeking to return to a private ownership model.

This unique solution represents a significant landmark in TISE’s 25-year history and the diversification of our offering. In doing so, it lays the foundations for us to develop additional adjacent services and with its reach in capital markets and corporate services, Jersey is ideally positioned to play a leading role in the delivery to a global client base.

This article was originally published in the Jersey Evening Post, September 2023