Global Capital Markets Update

December 13, 2020

By Paul Hastings Professional

Global Capital Markets: 2014 update

As we progress into the second half of 2014, our Global Capital Markets lawyers share their perspectives on the latest market trends to help guide our clients’ strategies through the end of the year and beyond.

Tech IPOs drawn into surging U.S. IPO market

The first half of 2014 saw strong performance for U.S. equity and bond markets, buoyed by a strengthening picture for employment, manufacturing, and services. Through June, 215 IPOs have been filed, up 92% year on year – putting the market on track to beat the 406 IPO record set in the dot-com boom of 2000. Values have also increased, up 53% year on year*. This is an exceptionally well capitalized environment for tech companies looking to grow and list. In this rapidly evolving market, the following are key topics that dealmakers globally should be aware of:

JOBS Act Regulation A+ offers significant opportunities for tech companies

NASDAQ closed the first half of 2014 with 99 new listings totaling some US$13.5 billion. 90% of these benefitted from the JOBS Act accommodations for “emerging growth companies.” Paul Hastings is interacting with the SEC to help shape the final elements of the JOBS Act alternative IPO reform. According to Global Securities and Capital Markets practice chair Michael Zuppone “Regulation A+ presents a game-changing opportunity for start-up and early stage companies, including tech companies, looking to raise capital publicly, as well as the investment banks working with them.” Issuers will be able to complete IPOs with a value up to US$50 million with reduced disclosure and ongoing reporting, thus avoiding the substantial burdens and costs associated with traditional registered IPOs and public company reporting. VCs and private equity sponsors may find this new IPO regime a valuable alternative route to exit investments.

Venture capital-backed IPOs make a strong showing

A vibrant tech environment is, of course, the other major draw for companies listing in the U.S., providing access to a community of informed and committed investors long associated with the tech industry from start-up to launch. Indeed the 35 U.S.-based, VC-backed IPOs in Q1 2014 made it the highest quarter of VC-backed offerings since 2000*. As Jeff Hartlin in Palo Alto observed, “The current environment is providing great energy to the entire start-up sector and drawing in a growing pool of international talent. With tech becoming more integral across industries, this innovation cycle is really just getting underway.”

European interest in U.S. IPOs revives

European technology companies have also been accessing the U.S. IPO market for better valuation, with some 17 high-tech firms coming to market in H1 2014. Frankfurt-based Karl Balz, who recently worked on the IPOs of 3D printing companies voxeljet and Materialise, notes, “Notwithstanding the recent market dip, with issuances tending to price at the low end of the price range, the tech IPO market continues to be strong and open. For European technology companies, a U.S. listing remains the listing of choice, primarily driven by more favorable valuations.”

Chinese tech listings on the upswing

China is a major player in U.S. IPOs, representing 63% of companies by value in Q2, raising US$3.5 billion. As Dan Ouyang in Beijing observes, “We have seen an extremely active U.S. equity market for Chinese tech companies in the first half of 2014, with over 10 Chinese tech companies listing, and this quarter will be even bigger.” Alibaba Group’s upcoming IPO is expected to raise US$20 billion, making it the largest-ever U.S. listing. For Alibaba, a U.S. listing provides market exposure and a higher profile in a world where brand cachet is increasingly important. Additionally, Chinese companies have seen their U.S. listings translate into economic returns. While U.S.-based companies’ share prices increased 21% on average since listing, Bloomberg shows their China-based counterparts jumped 33%.
(*from CB Insights’ 2014 Tech IPO Pipeline Report)

Latest developments from around the world

Asia

The China Securities Regulatory Commission (CSRC) is considering shifting the country’s IPO market from the current approval-based system to a registration-based system. As a result, we expect the CSRC will encourage more IPO listings of Chinese companies in both the China securities market and on the Hong Kong Stock Exchange (HKSE). Another development of significant importance is the rise of B- to H-share conversions, which involve Chinese B-share companies converting their B-shares traded on the Shenzhen or Shanghai stock exchanges into H-shares and concurrent listing of the H-shares on the HKSE by way of introduction. The successful completion of China Vanke’s B- to H-share conversion demonstrates the support of both China and Hong Kong regulators for these types of listings. We expect more quality B-share companies to seek listings on the HKSE through such conversions.
In the Philippines, many corporates tapped the international capital markets in the early part of the year. Other issuers continue to prepare for equity offerings to take advantage of generally stable market conditions. In addition, we have seen global private equity firms and sovereign wealth funds enter the Philippine market, which we regard as a very positive development.

Europe

London has experienced a glut of IPOs in H1 2014, particularly from PE houses following the Post Office privatization’s effective re-opening of the market earlier in the spring. The market is now showing signs of indigestion from this, particularly as many deals have come off their IPO price. Wider macroeconomic and political pressures continue to affect some peripheral Eurozone economies, but Greece, Portugal, Spain, and Italy are showing ECM deal flow as part of a wider recapitalization of their economies following the restructuring of the last three years. In the debt capital markets, the search for yield and the absence of bank financing continues to drive new high yield issuance from a range of previously untapped sectors and geographies.

The strong rebound of IPOs on the French market which started in fall 2013 was confirmed during H1 with the notable spin-off IPOs on Euronext Paris of Euronext N.V. (€1.3 billion), Coface (€832 million), GTT (€623 million) and Worldline (€575 million), and the PE exit of Elior (€785 million), along with 13 other IPOs, including an unprecedented number of VC-backed IPOs of biotech and medtech companies. Since the end of Q3 2013, investors have been putting prices under pressure and become more selective, showing a savvy level of caution. Prospects seem still good for 2014 with a few anticipated PE (Spie) and VC-backed IPOs, but will depend on the continued good standing of the markets.

U.S.

With the U.S. domestic energy boom expected to continue, publicly traded master limited partnerships will further expand and mature. There are now more than 100 MLPs with a combined market capitalization approaching $500 billion. While the record pace of IPOs has slowed somewhat, MLP equity and debt offerings continue at high levels to fuel mostly midstream infrastructure expansion projects and acquisitions. MLPs are characterized by tax advantaged quarterly distributions in a 3%- 10% yield range paid to the MLP’s unitholders. These distributions are supported by current operating cash and are expected to grow based on future cash flows of accretive acquisitions and organic growth projects. Challenges to continued growth could be higher interest rates, stricter environmental regulations, slow permitting of new infrastructure projects and any significant decrease in global demand for oil and gas. In anticipation of these challenges, we expect continued consolidation among MLPs and further growth of MLP holding companies.

Latin America

So far, 2014 has been a strong year for many Latin American countries such as Mexico, Peru, Colombia, and Chile. We are starting to hear expressions of interest and optimism about Argentina despite the recent developments with the country’s creditors. Brazil, while a very important and promising market in the medium and long term, had a relatively quiet start in 2014. The World Cup put the country in a favorable light and there is a lot of speculation now as to the results of the Brazilian Presidential elections and a general expectation that the markets may pick up after the elections. Of course, a lot depends on the results of the election. Geopolitical tensions, a slowdown in Asia, and a decrease in demand for commodities, plus the specter of higher interest rates, could prove a negative for most of the region. Increasingly there is a sense in the region that governance really matters. This is true for both corporates and governments.
In Mexico, the first half of 2014 saw an uptick in the number of billion-dollar-plus capital markets transactions coming out of the country, including the largest-ever equity offering in the real estate sector in Latin America, and we expect this momentum to continue through the rest of 2014. Following the inaugural US$1 billion senior notes offering by Fibra Uno, marking the first Mexican FIBRA to issue debt in the international capital markets, it is also anticipated that there will be additional offerings of debt securities this year by other FIBRAs. Finally, the unprecedented structural reforms undertaken over the last year in Mexico continue to alter the investment landscape, particularly in the energy and telecommunications sectors. These reforms are expected to generate hundreds of billions of dollars of M&A and financing activity.