Intellectual Capital
Insight by Larry Wieseneck
Cowen & Company Co-President Larry Wieseneck speaks with David Erickson, a former colleague from Lehman Brothers and Barclays and currently a Senior Fellow at Wharton Business School. On this episode, they discuss “the new normal” in light of more COVID-19 vaccines being deployed and recovery from the pandemic is starting (hopefully). They share their thoughts on the business environment, capital markets, and returning to the office. They also share what they are learning from recent conversations with clients about the problems they are trying to solve and what they are looking forward to.
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Transcript
Speaker 1:
Welcome to Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.
Larry Wieseneck:
I’m Larry Weiseneck, co-president of Cowen and Company, and I’m joined by my friend, David Erickson, a former colleague from Lehman and Barclays and currently a senior fellow at the Wharton Business School. Today, David and I will be discussing the new normal. Depending on when you’re listening to this, there may be another type of normal at that moment. But for today, David, why don’t you kick us off?
David Erickson:
Great, thanks Larry. So as we’re getting more vaccines deployed and the recovery from the pandemic is starting, hopefully, we’ve also changed gears in terms of the market. How do you see the business environment now, versus where it was at the end of 2020?
Larry Wieseneck:
When you ask a question about the environment, I guess, we need to clarify. The clarifying term you used was the business environment. I’ll answer that because I think that’s maybe different than the market, or let’s at least say the equity markets and the bond market. So in terms of business environment, we’re clearly, here in the US, gathering a lot of steam. I don’t think it requires me or any other observer to note that.
All you have to look at is the predictions of GDP growth on one hand, and on the other hand, if you walk around in most places where vaccine in arms has gone up, you’re seeing more restaurants opening, you’re seeing offices getting a bit more crowded. I still don’t think we’re at the point where people are coming to the office in significant numbers, but there definitely is the appearance of quickening of the pace.
I think we and others certainly anticipate that as we move into the summer months and the second half of the year, that will gain significant momentum. From a business environment standpoint, I think we’re looking at a very, very positive backdrop. You asked to compare it to the end of 2020. I think in 2020, what we were seeing was the markets were pricing a recovery once we started to have an increase in vaccinations, et cetera, but you weren’t seeing it in the actual business numbers. Now it’s starting to show up in numbers.
David Erickson:
Right. So when you think about the recent conversations you’ve had with clients, what are the big problems they’re trying to solve now, and as they look forward, what are they most nervous about?
Larry Wieseneck:
I think that we have to just start with the basic human issue that our clients have, which is as they get beyond the initial concerns they’ve been working through for their own health, their family’s health and that of their employees, and let’s assume that we’re working through that because of the increase in vaccinations, et cetera, I think they then turn to the practical implications for their business.
So let’s continue with the earlier question about vaccinations. I think the first thing they worry about is what will it look like in terms of going back to the office and how do they do that? If they’ve been working mostly at home, what will the flexible office of the future look like and how would that impact their business? So I think that’s kind of step one. I think step two is focusing on what will the business environment be like in a world where things start opening up more.
So for those who are in the manufacturing space, they’re thinking about redundancy in their supply chain. They’re worried about, the US is opening up more, but how about if I’m reliant on goods that come from other parts of the world where we still have significant challenges? Do I have to localize my supply chain more? That’s definitely a conversation we’re having with folks in the consumer space, industrials, tech for that matter.
Folks are worried about what’s happening in the semiconductor space, where we have a shortage. If you think about so much of what we learned during the last year and the businesses that worked were tech enabled and driven by the internet and other technologies, which require more chips. And so that’s a problem because if your plan is that you’re going to grow and you have a commodity that you need and in this case, the commodity being semiconductor chips, that’s a challenge to their plans.
So I think it’s fairly kind of standard worries that you’d have, your suppliers, your customers, your people, but in this case with a significant crystal ball that’s not very good because we’re moving from a world that we understood really well pre-March 2020 to a world we’ve kind of gotten to know the last year, which was mostly a work from home, no commute, et cetera world, to now entering into this next world of this flexible workspace so to speak, which is unknown. And we’re going to have to see how that plays out.
David Erickson:
As you talked about a number of the old economy type companies, but when you think about some of the new economy type companies that you’ve worked with, whether it be the biotechs or the EV and AAV space or AgTech and other emerging growth companies, private capital markets was a big part of the story last year for many of those companies.
In addition, the SPAC market being able to raise capital, going public via merger with a SPAC grew tremendously last year, really exploded in 2020. Now with something like 430 SPACs out there looking for a private company to acquire, there seems to be a bit of indigestion in the market, which is probably necessary as you see this black market grow. How do you see the market going forward in terms of that as you look forward?
Larry Wieseneck:
Yeah, so again, really appreciate the question. I’m going to lump the types of companies that you described as the disruptors, so disruptive companies or companies in disruptive industries who are solving problems of today in the future with the application of new ideas, and often that means new technologies. You’re right that in 2020, we saw really a significant embrace by the market participants.
That’s everything from, whether it be the SPAC market as you referenced, more private capital raise for those types of companies as well, but also retail investors, not just institutional investors embracing the concept that there are a lot of different entrepreneurs and companies that are lining up their resources to solve the big problems of society.
You mentioned climate change, and I think that’s a big one because it touches AgTech, touches electric vehicles. There are elements I would say of biotech. When you think about what biotech does is by providing opportunities for new drug discovery, where we either make the healthcare decisions easier for extending life, or in some cases just making the quality of life better. They all fit into the disruptive engine.
And I would say going back to really the beginning of the pandemic that it almost was a sea change of embracing those stories in a broader way. Because we are a very active participant in the biotech space historically, we’ve been used to this now for the better part of the last two decades, which is the investor being willing to buy off on the future of these businesses, not necessarily on current revenues. What’s changed is we’re seeing that now applied to these other areas, and I think that’s a positive in terms of accessing deeper pools of capital because as we all know, early stage capital, Series A let’s say, is a much smaller market than later stage venture. Then later stage venture is not much smaller than, say, growth equity. And then when we get to the public markets as the deepest pool of capital.
So we think that’s a positive development. US, I think from there though, how about all these SPACs that are out there and are there, in some respect implicit in that, is, are there too many? What I would say is, like many developments of new products and in this case, it’s really unfair to call SPACs to a new product, it’s been around for over 25 years. But I think that the same embrace of disruptive ideas by the market last year led to an acknowledgement because many of those companies did come to the public market via SPACs.
I think there’s a broader acknowledgement that SPACs are a very interesting way for companies to access the public market. As a big believer in choice, I think it’s a good thing. Do I think it’s good that there’s 400 plus SPACs outstanding right now. I don’t know. We may look back and there may be a time when there’s 800 outstanding. We say, oh, how quaint those days in ’21, when there were only 400 outstanding, or it might go back to a world where there’s more like a 50 or 200? I think time will tell on that front, but there’s no question that at the moment, under the current regulatory regime, there are three truly legitimate ways that companies can access the public markets as new entrants. One is the standard initial public offering. Another is via the SPAC market, and the other is through a direct listing. And depending on the company, depending on the situation, they’ll select a different path.
David Erickson:
Right. So in recent weeks, it seems like concerns about changing tax policy has started to creep into the market, whether it be rising rates on corporations potentially, or recently in the last couple of days, potential raising rates in terms of capital gains taxes. How do you see, and again, it’s early days, but how are both investors and companies thinking about those risks going forward, do you think?
Larry Wieseneck:
It’s a really complex question because really, we have to unpack two separate things at once, both tied to, at least for the US market, increased government spending. On the one hand, what we have is, when we talk about rates, we saw a spike up about a month ago or so on interest rates because of dual fears. I think one was the market is going to get hot, and in an economic environment of significant GDP growth, shouldn’t the long bond be trading off. And we saw that initially.
You then throw in the fact that there’s discussions of an infrastructure bill on top of the other significant spending, and there are many investors who are worried that that will spur greater inflation because there’s too much capital chasing opportunities and I think that put pressure on rates.
We’ve seen that abate a bit over the last few weeks, I think. As you and I have discussed previously, it there’s enormous … I mean, you just think about our conversation a few minutes ago, about these disruptors. One thing to think about. Disruptors generally increase productivity, right? So we do more with less. Less resources use to get certain output. In that scenario, that’s downward pressure on rates. And so we’re seeing that tug of war, and I think we’d be in there to a work for awhile over the next, it could even be 12 to 18 months until either we see inflation creeping up or not. And that’ll be the ultimate determination. The market will determine that. It won’t be the Fed, it won’t be any other central bank. The markets will judge and it’ll be driven by the actual macro economy and inflation.
The recent, in particular the last week or so, and even days, the focus on tax policy I think is a bit more of a challenge for corporates and for companies. And again, I say that because rising rates, if it’s because the economy is doing really well, corporates are doing well in that environment. So it doesn’t really matter if I have slightly higher borrowing costs, but I got great revenue growth, net, that’s a positive and my margins are so strong. I think taxes affect everyone because it’s a friction cost. Without getting into a public policy debate as to whether or not it’s a good thing or a bad thing to have higher taxes, I think when you change the rules or there’s a fear that the rules will be changed … Think of it as if there are increased taxes, all of a sudden it is incrementally more expensive for the corporation, if it’s on corporate taxes, for the investor who invests in US assets, if it’s capital gains tax.
That changes the rules of the game. And if I change the rules of the game in a way that’s going to reduce the value of an enterprise or reduce the value of my investment, there’s only one way for stocks to trade off that. They have to go down, and that means increasing the cost of capital, et cetera. So net-net, I think the market’s pricing and what’s the likelihood of some of the more extreme rumors as relates to what might be the outcome of changes in taxes, and that’s going to continue to get priced in over time.
As we hear, oh, no, no capital gains won’t be that high, it’ll be lower, that’ll be a positive for the market. As we hear, no, it’s going to be higher tax rates, that’ll be a negative. And I do think over time it will fade into noise, meaning net-net, in the end, the most important thing is what are the future profits of the corporation? How many years out until those happen and how do I discount those back to today?
And so, as we get more clarity on what tax rates will be, it’ll get priced in, and then we have a new ceteris paribus and we move forward. But right now it’s, it’s somewhat destabilizing for sure.
David Erickson:
Right. You talked earlier about those two broad groups of companies, and we talked about the new economy disruptors, and for lack of a better term, those old economy, whether it be manufacturing or some of the other industries that you spoke of. Were those really … We had the disruptors and now the disrupted right during the pandemic. And one of those sectors was the traditional energy space, last year where a futures markets went inverted and really causes significant challenge for many of those companies in the traditional energy space. In the first quarter this year, energy has been the top, I believe, if not the top performing S&P sector, one of the top performing S&P sectors. So that’s all good news, but the challenge is with the pressure for not just energy companies, but every company now to be more ESG friendly. Do you think there’s going to be significant changes in that traditional energy market going forward?
Larry Wieseneck:
I do. And it’s not just my view. Even actions we’ve taken with our deployment of some of our resources internally highlight our belief that … We’re really in the, maybe at the second inning, third inning of the complete transition of the way that we both produce energy and consume energy. I think to your point, it’s kind of both are important, right? So when we think about how we produce it, I think there’s an imperative in some respect for everyone involved in the energy sector, that’s everyone from those who extract and create the energy or the resource, to those that move it, to those that deliver it, to figure out how they’re going to do that in a more resource friendly way. So what does that mean? It means that those who are currently big players in the energy landscape have to figure out what is their role going to be in a future where over the next decade, 20 years, 30 years, we rely less and less on hydrocarbons and more and more on alternatives.
We’re having lots of conversations, including with our partners at Intrepid Financial Partners who are an energy specific M&A firm, where we’re talking to companies who are in the energy space about that movement. I think we’re going to see lots of M&A where they buy new entrants to deliver a different portfolio for them of resources. I think we’ll see some of them embrace technologies that make them more, let’s think of it as they’ll use less energy, at least less old-school energy, in the production of whatever it is they do. Let’s say it’s fracking. We’re going to see more fracking done that uses less energy because that old-school hydrocarbon effort isn’t going away. The country’s not ready, the world’s not ready to go all electric within five years, 10 years. And so we’re going to have to do first a way of being better users of hydrocarbons on the way to a world that’s going to be more about electric vehicles, et cetera.
And then when we get to that world where we’re using alternative fuels, et cetera, that space is enormously interesting with just a potpourri of companies doing everything from building out the future grid, because we need a smart grid that’s going to be able to fuel all the various components from your house to your vehicle to airplanes in the future that’ll be using electricity or hydrogen, et cetera. But then we also have those who will be delivering it to you, the consumer, or to the company. So, what’s the world going to look like in terms of electric charging stations? What kind of storage do we need locally, nearby, remotely, in order to be able to deliver that future space?
It’s a very exciting time. I think that when we look back in a decade, 15 years from now, it’s going to be hard to believe that most people, if you looked out into their driveways right now, we’re still driving cars that either were fully gasoline fueled or partially because they’re hybrid. I do think that by 15 years from now the majority of vehicles on the road are going to be either electric or they’ll be a hybrid gas and electric. We will not have many just pure gas cars out there in the next generation.
David Erickson:
Last question. Back in 2008, with the financial crisis, things changed pretty drastically in terms of what type of business got done. With the pandemic, not only was the type of business getting done changed, but how people did business changed dramatically. As you look forward, what changes do you think are going to stick?
Larry Wieseneck:
You know, trying to prognosticate is a great thing because the one thing you know is you’ll definitely be wrong, so you go in and you don’t have to worry about being right. So I’ll throw out my best guess and hopefully directionally we’re correct, but the first is flexibility. I think the concept of the five day a week in a given building from whatever it is, the old nine-to-five, or you can call it the … In some businesses it’s far longer hours than that, I think that’s gone. I think that businesses have learned they can operate very efficiently without the rigidness of the old, we’ll almost call it factory floor converted to office space, because that’s really what it was. When we went from an industrial revolution to more of a knowledge revolution, people congregated in offices with similar hours and similar structure to going to factories of the past.
I think that from that standpoint, we’re going to see a significant move towards flexibility. For some businesses that may mean that the majority of people are no longer coming to an office. In others it may mean some days in the office, some days not in the office. Yet in other places, it might mean every day, people make a different decision on where they’re going to work from. I think what that means is that businesses are going to have to adapt to that. That probably means the use of real estate changes because the form of the office may have to match that more flexible lifestyle. I think for sure, finding hybrid solutions for technology is going to be important.
I was on a Zoom recently where it was the first time that a group of people were in an office and they were sitting around a boardroom table. And then there were about eight of us that were on by Zoom, and it was the worst Zoom experience I’ve had because in a different period, those eight people that were sitting around the table would have been eight more faces on Zoom. There would have been 16 of us, and we could have seen everybody when they spoke. As soon as you go into some people are in the office, where some people are in the boardroom and others are on by Zoom, those who are not in the room feel like the other, they’re not there. They’re not seeing facial expressions. That, we’re going to have to evolve. Systems have to evolve to, to allow for that.
I think that the travel issues are going to be real. You know, how much will people put up with commutes in the future? For many people, they haven’t commuted in a year and a quarter. They may not be willing to go back. And so, interesting question, does that mean that for those who do need to be in the office, they’re going to prefer to live closer to their office. Could mean people that live in the suburbs actually decide they need to be in the city, if they work in the city. Could mean that people choose to move to the suburbs and have a more commercial space out there, because if the business is closer to where the people live, we could have a bunch of satellites rather than one big office, connected by video. So those are all the kinds of things that I think I’m hearing from companies as relates to the workplace itself.
The next issue is just travel. Deals get done in person we’ve used, because we had to, Zoom, Teams, and other techniques to replicate seeing people when you’re trying to get to know each other and do deals. I surmise that we’re going to have a hybrid there too, that the idea of traveling for one meeting in a random city, just to catch up, probably not going to happen. But will people still go and see clients or potential customers and go for dinners? I think they will. I think that need to connect for relationship building is a human condition. It’s part of who we are, and I don’t think that changes, but what I would say, and this is for the good, is I don’t believe that you’re going to have people come together for an hour meeting to sit around a table, to do what they could have done much more effectively from their office. So once a client’s engaged, if you think about our business and banking, drafting sessions, flipping through presentation books. We used to do that in person. Much more that will now be done using these technologies that we’ve embraced during COVID stuff.
David Erickson:
Let me give you a specific example, Larry, that … I just went through this recent experience at Wharton, where we just, I think I mentioned, we had this Fintech conference over the last couple of days where we had 3000 participants available via Zoom. I know Cowen does lots of conferences as well. Clearly there’s lots of efficiencies where you can get those companies that want to speak at those conferences to be basically dedicate a couple of hours versus having to travel somewhere or to another destination. Similarly, for those, whether it be investors or other participants in conferences, it’s just much more efficient for them to … Do you think that’s going to be a model going forward?
Larry Wieseneck:
I do, David D. That’s a great point. We’ve had so much success. Packaging, we’ll just call it content. Content could be presenters like companies, content can be our research analyst views. It can be bringing people together. That’s all different forms of shared content. We’ve really found that there are things we can do in the virtual world, we can’t do in the physical world. To your point, a company management might have to be in California on Tuesday. They can’t be in New York or in Philadelphia at Wharton on Monday, but they can dial in and that’s hugely helpful to getting better experiences, better conversations than you might’ve done in the physical world. I think for the participants, there are some that find it even better.
Let’s say I’m a health care investor and I’m interested in some of the trends in technology that impact healthcare. I would never go to a conference that’s dedicated to technology, but if there were three speakers at an event during a two day period that are interesting to me, I’ll dial in. What does that mean?
I think the learning that we’re taking from that is that like the work experience in the office, we think events are going to be hybrid, that there’ll be elements where, you know, people convene because of the dynamic that occurs when you bring, let’s say 200 people together, there’s a certain magic to walking the hallways, sharing ideas, bumping into each other. That’s one portion of a convening. But the other portion, which is the delivery of information can be done via technology. You don’t need to be in the room for that, and how you fuse those in the future and make determinations of when is it worth bringing everyone together for that social and business thing that happens when you’re sharing bread and such versus when do you just do it virtually is going to be a trial and error.
And I, I think it actually highlights the broader issue. You asked about what people are worried about. If I brought it back to what I worry about, because we’re an employer too. It’s not just that we are, what do our clients think. It’s recognizing that just like with the beginning of pandemic, we all knew we’d make mistakes, and the issue was learned from them quickly and improve. We’re going to have to be comfortable with being uncomfortable in this next six to 12 months where we start to find a new world, how we all operate in it and we’re going to experiment and we may do things well. Others may stumble and they’ll learn from us and we’ll make errors and so will every employer and so will every individual. You’ll learn from others who did it better and we’ll get to a better place. I think that’s probably the biggest thing right now is us all having some humility, that we really don’t know what’s around the corner, so we have to experiment based on making the best estimates and then we go from there and learn and improve.
David Erickson:
Great. Well, that’s a great way to finish our first conversation on this. We’ll look forward to it. Subsequent topics in subsequent conversations.
Larry Wieseneck:
Well, thanks, David. Really enjoyed speaking with you. I wish we had more time. And I also look forward to this conversation again. I’d just like to thank everyone for listening in on our conversation.
Speaker 1:
Thanks for joining us. Stay tuned for the next episode of Cowen Insights.