INVESTOR OUTLOOK 1 | What happened to the widely predicted recession?
We return with our annual series that features six prognosticators including four who have been with us every year.
As we begin our annual “Investor Outlook Series” to start another year, we want to first express our appreciation to those who have participated in this latest edition and to also thank, in particular, four contributors who have been with us for every year, starting with the inaugural series in 2014. They are Eric Dobson, Managing Partner, Community Equity Partners LLC and Sheltowee Venture Fund II; Tony Lettich, Managing Director, The Angel Roundtable; Grady Vanderhoofven, President and Chief Executive Officer of Three Roots Capital, and Ken Woody, President and Partner at Innova Memphis.
We start the 2024 series with this question: “Many predicted at least a mild recession in 2023, but it did not occur. What does your crystal ball say for 2024?”
David Adair, Co-Founder and Managing Director, Solas BioVentures: No one can predict the future with certainty, but they can use prior learnings and experiences. Our view is limited to our industry, biotechnology. The inflated valuation rounds of 2020 are now being revealed as a factor of ultra-low interest rates and investor fear of missing out on the next big growth opportunity. Great companies are being supported internally and are not raising outside capital, through expansion of the prior round or bridge notes. If they are unable, (both great and not so great companies) are being forced to seek external funding at significant down rounds, some in the 60 percent range. Solas does not focus on economic projections, though we don’t ignore them. We focus more on the technology or drug and its impact on patients. The current economic environment simply gives Solas opportunity to focus capital on impactful companies at the best valuations we have seen in years.
Gene Bressler, Chairman of the Upper Cumberland Investment Alliance: My belief is with continued strong employment numbers below 4 percent, the Fed will be able to continue a tight monetary policy throughout Q1 and most of Q2, they won’t have a cut till late Q2 or Q3. This sets up a challenge for the economy to run a slightly up 1-2 percent GDP with continued reinvestment and reshoring pushing investment and capital spending. The “CHIPS Act” and infrastructure (bill) should push up other investments even with a cautious consumer. The home build buzz will continue even as apartments slow at least for projects that have not been inked and underway. This will push down rents as more inventory is available. Private investment will continue to be an alternative avenue as bank lending will be constrained by Fed policy and strict assessments. No Recession. It’s an election year, and the Fed will closely watch employment even as inflation is stubborn.
Dobson: 2023 was the year of the recession that never was. Amongst all the geopolitical instability and financial upheaval, it was an unprecedented year. We invested more in 2023 than 2022, which was surprising as capital became scarce in the market by Q3. Many private equity pundits are saying 2024 will see a tough Q1 followed by a recovery in Q2. However, two things will mitigate that recovery in my opinion. First, the SSBCI (State Small Business Credit Initiative) money has begun to hit the streets and requiring a 1:1 private match. That should have the effect of sparking the market early in 2024 as selected entrepreneurs fully engage the investment community. Second, it is an election year, and, typically, the entire private equity market slows dramatically during the last three months of an election cycle waiting to see which regime is installed. Regardless of who is installed, the market goes back to work immediately after election day, which is, unfortunately, November and the end of the private equity investing year. So, my advice to those raising capital is do it in the first six months of 2024. There is likely a very narrow window in 2024.
Lettich: The business outlook in 2024 is becoming increasingly positive. We are beginning to see lower levels of volatility in the financial markets and improving corporate performance. The rates of inflation appear to be declining despite overall prices remaining high as compared to three years ago. As a result, we see a year of transition toward an improving economy. We expect the first six months of 2024 to be choppy with continuing but moderating pain. However, we expect the latter half of 2024 to strengthen and stabilize as we potentially put recession in the rear-view mirror.
Vanderhoofven: Based on current economic and geopolitical factors, I expect a mild and perhaps short-lived recession in 2024. The effects of some of the decreasing economic activity and other economic impacts attributable to increased interest rates and foreign wars have not yet been fully realized. For a number of reasons, our local/regional perception of such a recession may be different than what people in other regions of the country observe and experience.
Woody: Inflation, interest rates, and credit look to be the big drivers. We don’t have a credit crunch yet, but it still looks likely to me. Commercial real estate doesn’t look great, many banks are struggling, and it’s still challenging for early stage companies to get follow-on funding. A recession may be more dependent on global macroeconomic issues and war than any of those issues right now though.