Capital markets drive capital to areas of innovation and positive growth, creating jobs and fueling economies. In the US, capital markets fund 73% of all economic activity. This takes the form of equity and debt financing of non-financial companies. Capital markets facilitate debt issuance, which tends to be a less restrictive form of borrowing for businesses. The usage of debt capital is the most prevalent in the US (80%), versus other regions (only 20–30%) where bank lending is more prevalent.
Record Highs in 2021
Last year, markets made a strong bounce back from 2020. In the US, the S&P 500 closed at record highs, and investor faith was restored following the passage of the American Rescue Plan. The first quarter of the year saw unmatched activity, with a surge in SPACs helping IPOs raise $126 billion. GDP growth is expected to continue, and capital markets should remain strong in the near term as the Federal Reserve keeps a close eye on inflation matters.
Venture capital firms had a record year in 2021, investing $331 billion in deals. The majority were later-stage deals, and the most popular verticals for investors were artificial intelligence (AI), data analytics, blockchain, and healthcare tech. More than half the total venture capital dollar investments were more than $100 million, and median company valuations increased by more than $200 million. The leading investment areas were AI and machine learning and SaaS applications.
Around half of the IPOs were backed by venture capital last year, and the pipeline remains strong. More than 500 venture capital companies valued at $1 billion or more could be in the IPO or M&A pipelines in 2022 and 2023.
In the EU, record levels of capital markets funded businesses in the first half of 2021, indicating favorable conditions for raising capital. Funding to SMEs soared due to momentum from venture capital and private equity growth funds.
Equity markets in the US had a strong year thanks to vaccine availability, stimulus plans, and plenty of cash to support investors. However, IPOs did not fare so well compared to the rest of the markets due to concerns regarding high IPO valuations, plenty of competition, and some other factors. Tech and biotech were among the most negatively impacted. SPAC mergers also did not produce gains in the aftermarket because of price concerns and companies not meeting earnings and operations expectations.
US debt markets also saw a banner year in 2021, with high-yield bonds and leveraged loans setting issuance records. This activity was driven by fiscal stimulus packages, low-interest rates, and a surge in M&A and buyout transactions. Refinancing drove investment-grade bond issuance, raising $1.37 trillion in 2021 and accounting for 30% of the issuance. The leveraged loan market set a record with $789 billion in issuance.
Leveraged buyouts and M&A deals accounted for more than half of the proceeds in the market. There was also increased demand for floating-rate debt under impending inflation.
What to Expect in 2022
This year’s economic outlook should see a slowdown in GDP but should stay strong.
Economic activity will be aided by positive household dynamics and progressively improving supply constraints. There are some risks to watch, though. Labor shortages continue to be a problem across industries, and inflation could also affect growth. GDP growth is expected to remain on an upward trend this year, but could begin to slow by mid-year as stimulus wanes and demand adjusts.
Some of the trends that capital markets could see this year include:
- Changes to the market structure by the SEC
- Sell-side risk pushing investments in cloud computing
- Growth in trading of cryptocurrency
- Increased climate change awareness
- Expansion of AI and machine learning
- Upgraded workforces
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Africa: Anthony McCardle at +27 21 300 2055 / McCardle@BenchmarkIntl.com
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Benchmark International’s global offices provide business owners in the middle market and lower middle market with creative, value-maximizing solutions for growing and exiting their businesses. To date, Benchmark International has handled engagements in excess of $8.25B across various industries worldwide. With decades of global M&A experience, Benchmark International’s deal teams, working from 14 offices across the world, have assisted thousands of owners with achieving their personal objectives and ensuring the continued growth of their businesses.