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The Future of EquityCapital RaisingHow Private Capital is Reshaping Public MarketsClick here for the accessibility optimised versionForewordBy KoenVanhaerentsWhile the futur e IPO pipeline r emains robust, the sands o fequity capital-r aising are experiencing a shif t. In thisforward-looking r eport, we explore the changes that havealready begun t o emerge and those w e expect to see in thelonger term.Technology, private capital r aising and the r ole of theexchanges ar e all set to change the tr aditional r oute to IPOand role of the public capital markets. Emergingtechnologies , such as AI and block chain, are expected toinfluence the way in which mark ets will work and ma y resultin the creation of new platforms for allocation o f capitalacross asset classes. The rise o f private capital due t o higherreturns and les s regulation is se t to challenge the r ole of thepublic capital mark ets in the period t o come.With stock exchanges r e-examining the r ole they have toplay in offerings, modernising their regulations , andpositioning themselv es as credible alt ernative exchanges,we are now seeing the beginnings of rivals to the traditionalgo-to venues of NYSE, Nasdaq and L ondon.Looking fiv e, ten, twenty years down the line , one thingremains certain equity mark ets will remain unmo ved,albeit no t unchanged.Koen V anhaer entsHead of Global C apital Mark ets, Baker McKenzieDespit e a bull run of a decade , the global mark ets ar e no w at a unique set of cr oss-roads . Macr oeconomic and geopolitical turbulenc e continue t o pr olong in vestor andmark et caution acr oss all r egions , and y et, some indus tries and c ountries ar e sho wingexponential ec onomic gr owth, and look set to continue t o do so .Introductionand Key FindingsAssessing the outlook for equity capital markets andthe IPOmarket.From the thr eat of a prolonged global tr adewar and its impact on the global ec onomy, tothe impact o f rising int erest rates andpotential economic disrup tion from Brexit,equity capital mark ets could again bebuffeted by the volatility these risk sprovoke.But looking be yond what c ould happen thisyear, indeed, taking a three to five year view,what is the outlook for equity capitalmarkets and for the IPO mark et in particular ?Moreover, to what extent is the IPO mark etundergoing change ? What ar e the factorsdriving this and what in turn does this meanfor companies going public in the futur e?Some ans wers have already begun t oemerge. The magnitude and availability o fprivate capital has , for instance, been animportant f actor in increasing the age andsize of companies be fore they list. And ther eare strong signs this tr end will c ontinue,giving rise t o even older and lar gercompanies floating in the futur e.There are also some int eresting trends bo thdeveloped and emer ging around wher e andhow companies lis t, and the r ole of newtechnologies in the capital raising processtoo.Indeed the t otal value of cross-borderlistings last year rose to over $60bn thehighest since 2014 with the US , Hong Kongand UK the f avoured destinations andChinese c ompanies , particularly fr om thetechnology sect or, being a k ey driver ofactivity.Its a trend that is e xpected tocontinue t o grow over the longer t erm,supported by, among o ther factors,intensifying e fforts by exchanges t o adaptand adjus t their lis ting rules t o bettercompete and win mor e IPO busines s.The advance of technology will sur ely alsohelp enhanc e the role of the exchange andtransform the IPO pr ocess too. Someexchanges ar e already exploring the use o fblockchain-based pos t-trade settlementinfrastructure for small and medium sizedcompanies . And at the fr ont-end, investmentbanks ability t o make best use of newtechnologies fr om advanced data analyticsto virtual r eality c ould help r e-shape andenhance established lis ting processes,benefiting issuers and investors. These ar ejust some o f many factors driving changeand potentially cr eating a ne w issue marketin the futur e that is dif ferent to what it istoday.In order to assess and under stand some o fthe underlying dynamics shaping the IPOmarket, we surveyed 353 senior e xecutivesfrom public and priv ate companies acr ossindustries globally t o capture their insight onthe topic.A series o f in-depth interviews with equitycapital mark ets bankers, company financeand stock exchange e xecutives as well aslawyers, were also conducted to providefurther insight and opinion on the tr ends anddevelopments the y are seeing. What w efound is that while there is a health y pipelineof potential IPOs , there are some int erestingtrends to have emerged and ar e emergingaround when c ompanies go public, why,where and even how.Throughout 2 019, equity capital mark ets will c ontinue t o be s talked, and perhaps even held hos tage , bysome of the same macr o-ec onomic and geopolitical risk s that c onspir ed t o der ail benchmark indic esand IPO activity at the end of 2 018.While the futur e IPO pipeline r emains robust, the sands o f equity capital-raising are experiencing a shif t.Koen V anhaer ents - Head of Global Capital Mark ets, Bak er McK enzieKey FindingsA pr omising IPO pipeline for the futur e83% of 200 executives from private companies said their company is considering a partial or full IPO , withmost of them (65%) stating this ma y happen some time in the ne xt three to five years.Valuation and liquidity mos t impor tant in deciding wher e to lis t66% of executives from private companies said v aluation and liquidity was the mos t important f actor inselecting which exchange to list on, followed by the strength of the local r egulatory regime (55%) and peergroup performance (34%). Executives from public c ompanies tak e a similar vie w although the y rank analy stand investor coverage (39%) as mor e important than peer group performance (22%).Recognising the t entativ e emer genc e of IPO alt ernativ es65% of executives from all companies ( public and priv ate) expect to see a higher v olume of direct listings(free of traditional in vestment bank underwriting support) in the futur e. In addition, almost all (94%)executives expect to see equity cr owdfunding bec ome more important t o start-up companies seeking toraise capital f or growth and de velopment.The rise and f all of public and priv ate mark ets84% of executives from all companies belie ve some form of shift specifically from public t o private markets is underw ay in wher e companies sour ce equity capital from, with mos t of them (53%) belie ving a shif t isonly temporary. Most executives in Europe and Asia see the shift as potentially marking the beginning of alonger term trend.The impact of priv ate capital on IPOs84% of all executives believe that companies ar e waiting longer t o go public compared to the pas t. And closeto half (48%) of private companies belie ve the amount o f private capital a vailable is an important factor indetermining when the y might lis t, ultimat ely enabling them to stay private for longer be fore they list. Mostprivate companies in E urope and Asia belie ve this.Unders tanding the k ey benefits of public mark etsMost executives from public and private companies belie ve the mos t important bene fit of public equitymarkets is the e fficient allocation of capital (5 5%), followed by enabling c ompanies t o repair balanc e sheets(50%), and the pr omotion of transparency and high c orporate governance standards (44%).Future of IPOsFrom established to emergingtrends.The jury is s till out on which directionequities will tak e and when. But c ertainly themarket correction and v olatility o f last yearat the very least reflects economic gr owthand stability concerns, and the lat e stage inthe cycle that global financial markets are in.The futur e is, therefore, far from certain. Butthere are strong signs o f resilience and inequity capital mark ets, the signs ar estrongest for company IPOs.Indeed companies globally r aised just over$200 billion thr ough IPOs las t year thehighest annual t otal value since 2014 andthis despit e a five-year high o f 173 pulled orpostponed tr ansactions due t o the mark etvolatility at the end of last year.Year-on-yearthe number o f IPOs was down on 2017 butthe total capital r aised was up due lar gely tosome 40 IPOs fr om unicorns, or high-gr owthprivate companies v alued at $1bn, and mega-fundraisings such as the $21bn float o fSoftBank Group Corps telecoms subsidiary one of the largest IPOs of all time .A health y IPO pipelineWhats promising f or 2019 is that ther e aremega-fundr aisings in the pipeline and thelist of unicorns planning t o go public is longand includes global brands from Uber, Airbnband Pinterest, to Peloton, Slack, W eWork andAnt Financial, Alibaba s digital pa yments arm.Supporting this is the suc cess of most IPOs sofar this year, including the $6 23m New YorkStock Exchange lis ting of denim clo thingcompany, Levi Strauss & Co. Importantly , thelarger $2.4bn IPO on Nasdaq of ride sharingcompany, Lyft Inc., sho ws the dep th ofinvestor demand f or technology unic orns.Looking out longer , the pipeline o f potentialtransactions look s to be pretty strong too.Some 83% of executives we surveyed from200 private companies acr oss industriesglobally, said the y are considering a lis ting,with mos t of them stating in the ne xt threeto five years.On the supply side then, ther e is reason to beoptimistic about the futur e.Is your c ompan y considering an IPO ( par tially orfully ) in the futur e?Whats interesting are some o f theunderlying f actors and new developmentsthat are impacting the IPO market, and whatthis means f or how it evolves.The magnitude o f private capital a vailableand being in vested in companies is one suchfactor, ultimately enabling c ompanies t ogrow larger and s tay private for longerbefore they go public. A t the same time , thetentative emergence of so-called dir ectlistings see Direct Lis tings: The Ne xt BigThing ? has at leas t raised ques tions aboutthe extent to which this alt ernative totraditional IPOs can grow. By region andindustry sector, there are some int erestingtrends developing t oo.After a bull run of mor e than a decade , global equity mark ets ar e atan int eresting junctur e, po tentially either tr ending higher onimpr oved ec onomic and geopolitical sentiment or f alling on a mixof macr o-risk s and c oncerns .83%of 2 00 priv ate companiesconsidering an IPOLarger, older c ompanies r aisingmor eFor Doug Adams , Co-Head o f US EquityCapital Mark ets at Citi, ther es no ques tionthat there has been a significant increase inthe capital c ompanies ha ve raised in priv atemarkets, particularly t echnology c ompanies .Uber, for example, raised nearly $13bnprivately from venture capital and priv ateequity firms , sovereign wealth funds andcorporations be tween 2010 and 2016.However at the lo wer end of the scale ,Adams sa ys that the individual privatefundraisings for start-ups or high-gr owthcompanies has on a verage more thandoubled t o $50-$75m today from what it w asa few years ago, reflecting what he calls theSoftBank effect.Japans SoftBank Group Corp, a holdingcompany mainly engaged in telecoms,technology and int ernet related busines ses,has risen t o become one o f the bigges tinvestors in high-gr owth companies . Thisincludes in vesting in Uber , primarily thr oughits $100bn Vision F und, which w as formed in2016 with backing fr om Saudi Ar abia and AbuDhabis sovereign wealth funds .Adams ar gues the dep th and availability o fprivate capital has had two main knock -onimpacts c ompanies ar e in gener al waitinglonger and bec oming lar ger by marketcapitalisation be fore they go public. Heestimates that the a verage market-cap ofcompanies has gr own to between $750m-$1bn from about $4 50m-$500m a f ew yearsago, and says that this incr eased siz ematters. “Smaller public c ompanies typicallyexperience greater market volatility, so bystaying priv ate longer c ompanies ar emitigating this risk, ” explains Adams .IPO siz e on the riseImportantly , staying priv ate for longer alsoallows a companys management t o focus ongrowing the c ompany in the w ay they wantto grow.“Some unic orns have very ambitious gr owthplans which s taying priv ate longer can helpthem achie ve,” says Jackie Lo, Partner atBaker McKenzie. “Before going public, someof these companies c onstantly re-invested togrow, which the y would not have been ableto do to the same e xtent under the scrutin yof public mark ets.”Leverage is an important issue in the public -private market debate as well, says SamuelLosada Borr ajo, Head of Equity CapitalMarkets for Europe, Middle E ast and Africa atBank of America Merrill L ynch. “If a c ompanyremains priv ate, it can run higher leverage,and therefore if it is gr owing, the r eturns forinvestors are magnified, ” he says. “When the ycome to the public mark ets, however, theytypically need t o bring that le verage down,which is ano ther reason wh y shareholdersmay decide t o keep a company private forlonger.”Global data on the average length o f timecompanies w ait and ho w much priv atecapital the y raise before going public is hardto come by. But recent analy sis by US lawfirm Wilmer -Hale on the US IPO market isinstructive. For instance, their analy sis showsthat between 1996 and 2 017, the amount o ftime mor e than doubled fr om three to sevenyears, while the amount of capital r aisedprior to an IPO has risen fr om $10m t o$100m.Interestingly, one of the net effects of thisseems to be how much capital c ompaniesultimately raise when the y float. Indeed,according to global IPO data from Refinitiv, adata provider, the average size of an IPO hasincreased from $89m between 1996 and2005, to $166m be tween 2006 and 2 018. InSmaller public companies typicallyexperience greater marketvolatility, so by staying priv atelonger companies ar e mitigatingthis risk.Doug Adams -Co-Head of US E quity C apitalMark ets at Citi
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