· Hong Kong Stock Exchange’s regulatory regime gets high scores from listed companies, according to International Capital Markets report
· Increasing trend emerging as corporates increasingly ‘shop’ between major stock exchanges, in particular more consideration is given to dual listing and transfer from one stock exchange to another
· Only 18% of companies believe their exchange’s corporate governance regime is significantly enhancing the transparency of their business
The landscape for international capital markets is being increasingly shaped by growth in emerging markets such as Hong Kong, China and India, private equity strategies, and hedge funds, according to new research from global legal services organisation DLA Piper. At the same time, the survey found nearly one in 12 companies admit to having considered over the past three years whether their business’ needs and aspirations may be better served on a different market.
DLA Piper’s International Capital Markets Survey was conducted amongst publicly quoted businesses listed on eight key international stock exchanges and investment banks across the world. It included 12 companies listed on the Hong Kong Stock Exchange and 24 on the Australian Stock Exchange. The survey was commissioned by DLA Piper to help understand the rationale behind different capital market strategies and highlight key trends within international capital markets from the perspective of both corporates and investment banks.
Asia and other rapidly emerging markets are changing the capital markets landscape at a time when developed markets have been slowing due to the effects of the credit crunch. “It also seems apparent that the emerging economies will continue to have an important influence on the direction of international capital markets,” said the survey report. “The continuing surge in activity by companies in emerging markets in Asia, Latin America, the CIS, CEE and elsewhere has played an important role maintaining a degree of buoyancy within global IPO and M&A markets over the last six months … in the short term, the benefits of the IPO trends in emerging markets are likely to be seen by the local stock exchanges in those markets.”
Stephen Peepels, Head of US capital markets at DLA Piper, Asia, said: “Cash-flush Asian companies, particularly in China and India, will have significant influence over the direction of international capital markets. In the short term, the benefits of the IPO trends in Asia and emerging markets are likely to affect mainly local stock exchanges. However, in the longer term, the growth of these markets will likely have a positive spin-off to the more established international stock exchanges as locally-based companies seek opportunities to tap into the broader investor base that international pools of capital provide, including through secondary or dual listings.”
Other findings included one in five companies give a low score (less than seven out of 10) for the satisfaction they derive from their primary listing; and as many as two in three (66%) cited at least one significant aspect of their listing that they felt needed improvement. Only 18% of companies believe their exchange’s corporate governance regime is significantly enhancing the transparency of their business. Seven out of 10 corporates are positive about the influence of the private equity sector on accessing new pools of capital.
The findings reveal that individual exchanges are perceived by listed companies to have their own particular strengths and weaknesses. Unsurprisingly “access to capital and institutions” receives the highest ranking in the US (both by NYSE- and NASDAQ-listed companies) as well as those on the London main market. However, for Euronext, it is “company profile” that generates the highest rating. At the opposite end of the spectrum, it is “valuation” that is of the highest concern in Australia and “liquidity” for London’s AIM-listed companies. In Hong Kong, it is the regulatory regime (and also access to capital and institutions) which gets the highest score. In other markets, the regulatory regime tends to be of more concern to respondents.
On the different challenges facing individual exchanges, Peepels said: “The extent to which increased competition among international stock markets and the lack of issuer satisfaction affects exchanges does differ. For Hong Kong, the bigger issue is structural with certain regulations in place in China affecting the ability of Chinese companies to list outside the mainland.”
While familiarity with the local market continues to underpin a significant number of listing decisions in Asia, as well as Europe and the US, the growing internationalisation of business and dissatisfaction with primary listings means there may be a trend towards exchange shopping or consideration of alternative listings. Some respondents also believe China and India will continue to be very much capital markets hot spots in the continuing years. Esther Leung, Partner at DLA Piper’s corporate finance group, commented: “Our findings highlight the importance to any company of giving careful consideration to its intended stock exchange and then reviewing the benefits of its listing on a regular basis. The feeling amongst investment bankers is that there has been increasing thought given by their clients to moving their primary listing to other exchanges, and we believe this trend will continue as businesses become increasingly global and as individual stock exchanges implement more active marketing strategies.”
Corporate respondents, including those from Hong Kong and Australia, were asked to assess their primary listing on a series of eight key indicators, ranging from liquidity and comparative valuation to company profile, regulatory regime and the perceived ease of conducting further fund raising. Less than one third of respondents give a high (8, 9, or 10 out of 10) satisfaction rating for their “company’s liquidity” (31%), “analyst coverage” (32%), “company profile” (29%) or the “ease of conducting further fund raising” (26%). Less than one in four (23%) give a high rating for “valuation” and only one in eight (13%) give a high rating for “the regulatory regime”.
Although Asian companies are paying increasing attention to corporate governance, the debate over its actual tangible benefits to businesses globally shows no sign of abating with less than one in five (18%) respondents giving a high score (8, 9 or 10 out of 10) for the value of their exchange’s corporate governance regime as an enhancement of the company’s transparency. Furthermore less than one in 12 respondents give a high score for corporate governance in relation to the tightening of internal processes (7%) or in enhancing the strategic thinking and direction of the company (8%).
The survey also highlights that many listed companies see the increasing influence of the private equity sector and hedge funds on the debt and equity markets as broadly positive. Seven out of 10 (69%) are positive about the influence of the private equity sector on the issue of access to capital; 58% of corporates are positive about the influence private equity has on influencing market valuations, and 53% are positive about the sector’s influence on the involvement and engagement of investors. Corporates’ perceptions of hedge funds are also broadly positive.
Alex Tamlyn, Partner and Head of EMEA capital markets practice, commented: “Our findings underline how much the capital markets landscape is increasingly being shaped by private equity strategies and hedge funds. Over the past three years the interest from corporates in accessing a new pool of capital via private equity and hedge fund investment has increased significantly, and notwithstanding the current economic climate, we expect to see this interest continue.”
The research also highlighted the role that debt played in financing respondents’ business, with a third of all respondents stating that they had a debt listing or other specific debt instrument in place. The investment banking respondents perceive that the usage of convertible notes has seen a steady increase over the last three years. The current credit squeeze may spark a further increased usage of convertibles, with 26% of the investment banks surveyed anticipating a steady growth in the use of convertibles over the next three years.
In terms of which aspects of the listing process are deemed to be most challenging, the survey uncovered a difference in opinion between corporates and investment banks. The companies find the most challenging aspects to be the task of pulling together the offering documentation (only 68% felt it was very or fairly straightforward) and the process of valuing their business for an IPO (only 56% felt it was very or fairly straightforward). However the banks believe their clients have most difficulty in the area of accounting disclosure (cited by four in 10 banks). In addition, they cite compliance with corporate governance requirements of a listing and managing the business during the time intensive listing process as areas which some of their clients find especially challenging.
Dr. LIU Wei, Co-Head of DLA Piper’s Asia capital markets group, concludes: “As Asian and emerging markets companies continue expansion amid the credit crisis or adapt their strategies, they are faced with a changing landscape for capital raising locally and internationally. The components and participants of capital markets are increasingly diverse, with the markets having become ever more accessible to a wide range of companies, regardless of their size. Our findings show that the world’s key international stock exchanges each have their own individual strengths and, as a consequence of this, they suit different companies, according to their stage of development or specific business sector. If businesses are to exploit fully this diverse choice of stock exchanges they must ensure that they take into account every aspect of a market and select the one that best suits their particular company’s business objectives and future aspirations.”