A few weeks ago I was interviewing Mario Andretti, the only race car driver to be #1 globally for three consecutive decades, and he explained his philosophy, “If you’re not a little out of control, you’re not driving fast enough.” In thinking about capital markets, it certainly feels like we are a little out of control … the big question becomes how the capital markets race will evolve over the next decade and beyond.
When we talk about capital markets, we are referring to the financial markets where equity-backed securities and debt are bought and sold to facilitate the flow of capital between investors and borrowers. Capital markets play a crucial role in allocating resources efficiently by providing structure for businesses, governments and individuals to raise funds and manage risk for investments, M&A, and other financial activities.
With that in mind among the many structural forces shaping the state of capital markets, here are some top of mind to consider: the global GDP is slightly over $100 trillion, but the derivative market is about 10 times larger at $1 quadrillion; interest rates continue to increase globally and we are witnessing unprecedented geopolitical dynamics dominating the world stage … and the list goes on.
Given the state of capital markets will continue to define and shape industries going forward, I thought it made sense to convene six leading industry professionals who interact with the capital markets on a daily basis and can provide context and insights into the future of capital markets. They are executives from: Capital Group, Cognizant, General Atlantic, Principal Asset Management, R&T Deposit Solutions, and Wells Fargo. What emerged is there are three core drivers of capital markets.
THE GREAT TRANSFER OF WEALTH
It is estimated that baby boomers, who hold the greatest asset level of any generation in history, will transfer about $84 trillion in assets to millennials and Gen Xs through 2045. Maisa Badawy, Head, Global Equity Capital Markets, Capital Group explains, “ The transfer of generational wealth from baby boomers will be the most significant driver. This will impact the structure of deals and what issuers do with free cash flow. Also this will drive the need for innovation to make different asset classes accessible for people to retire with dignity.”
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Kamal Bhatia, President & CEO, Principal Asset Management talks more about the wealth transfer and the big picture of what’s really happening, “As retirement assets held by individuals have increased at a meteoric pace in the 401k generation, there’s also been increased demand for private market solutions tailored to individual investors. To achieve long-term retirement goals, the average investor needs access to investment options that have traditionally been available to institutional investors. The need to build truly diversified portfolios is evolving beyond the traditional 60/40 model, and in the last decade, new private market solutions have come online to offer access to individuals that are free of the tax and liquidity issues that previously kept the average investor on the sidelines.”
THE AGE OF RETAIL INVESTORS
In recent years, there has been a notable transition across capital markets, with traditional institutional investors increasingly joined by a growing cohort of retail investors, driven by the democratization of investing, technological advancements, and more accessibility to financial information.
Justin Kotzin, Head of Capital Markets at General Atlantic discussed the market from his firm’s perspective, “As a global growth equity investor with over 44-years of investing experience, we have experienced firsthand the impact of structural, macroeconomic changes to the state of capital markets. Amidst a shrinking number of public companies over the last several decades and IPO volumes declining recently, the private capital markets continue to surge, amassing more AUM than ever before. This is creating a significant untapped asset class for retail investors looking for more opportunities to diversify. As we see it, there is too much AUM and opportunities in growth companies across the private capital asset class for retail investors to ignore in their portfolios.”
Despite lower IPO volumes, IPOs remain the shiny object in equity capital markets and many market participants are seeing “green shoots” or signs that the market is starting to thaw. As companies looking to go public re-examine their IPO playbooks, they must account for the retail investor.
Jill Ford, Co-Head, Equity Capital Markets, at Wells Fargo’s Corporate & Investment Bank, commented: “As retail investors are coming into the IPO market, we’re seeing that the ‘Everyman’ is getting educated through a wider variety of media sources. Simultaneously, we’re seeing personal interests impacting where these retail investors want to put their money. When it comes to equity investments, particularly IPOs, this must be considered and catered to with a holistic mindset. It’s no longer ‘growth at any cost’ that’s going to drive demand from institutional or retail investors, and with the retail ones, there’s the added factor of personal passions.”
AI AND TECHNOLOGY
We are witnessing real time how AI and technology impact practically every industry and in capital markets this is expanded. Nageswar Cherukupalli, Business Unit Head of Banking & Capital Markets and Strategic Initiatives of Cognizant explained, “Technology and access on a real-time basis will be key, as will education. There will be greater standardization and democratization across the industry. In five years, AI could enable retail investors to independently make numerous investment choices, potentially eliminating the need for an advisor. Meanwhile, advisors will continue to have relevance as investment options continue to evolve, they will continue to enhance their skills and utilize AI to deliver a superior level of service to the investors. As we strive to accelerate our service and enhance customer experiences, we must be mindful that the faster we go, the more speed traps we may encounter.’
Cherukupalli expanded with insights from Cognizant and Oxford economics primary research, “Our Oxford study showed that over 90% of jobs will be impacted by AI over the next 5-10 years, with software engineers expected to be most impacted. As AI becomes more integrated, it will be increasingly important for the industry to focus on upskilling and reskilling talent. From business perspective, one of the big shift we will see is more and more regular investors entering the market and this will inevitably drive more regulations; for instance, the GameStop scenario which prompted and caused for more regulation.”
Joseph Jerkovich, President & CEO of R&T Deposit Solutions, elaborated on the impact of technology in the banking sector: “Technology has empowered consumers to move their money with unprecedented ease, creating new challenges for banks in managing their funding and liquidity positions. As regulators update liquidity rules to better address the risk of uninsured deposit runs, smaller banks that rely on large depositors will need to seek business partners that can help stabilize their liquidity and enhance their earnings and franchise value. The stability of our community banking system is crucial, as evidenced by the decline in the number of banks from 10,000 in 2000 to 4,500 today.”
In summary, as I started with a Mario Andretti quote I’ll end with another one he recently told me, “If you’re five cars back there’s a greater opportunity to move into first place if the track is wet and bumpy.” To me this is analogous to today’s capital markets where we clearly are navigating a wet bumpy track; this means there are significant opportunities for the smart and savvy to quickly accelerate ahead of others.