By Christian Reuss, Head Cash Markets Swiss Stock Exchange and Member of the Management Committee, Securities & Exchanges at SIX.
Capital markets are facing a turbulent period, driven by the volatility brought about by Covid-19. The Swiss Stock Exchange shares its unique insights into how capital markets are likely to evolve over the coming months and years.
EXPANDING THE MARKET
Macro-economic and geopolitical issues, combined with investor sentiment affected the IPO market in 2019, nevertheless it was relative resilient supported by a strong equity market. EY reported global IPO deal numbers declined by 19% last year, compared to 2018, while proceeds fell by only 4% and reached $198 billion.
We’ve seen a variety of market developments over the past few years: the rise of private markets; fintech innovation and development; and the emergence of new technology and providers. These factors all point to the potential future in the capital raising space.
Options for raising capital have increased in recent years. Private Equity and Venture Capital grew substantially this past decade, maturing together with the rise in pools of capital at the disposal of family offices and sovereign wealth funds. The overall trend was also supported by the low interest rate environment and the search for yield.
At the same time, alternative technology-enabled options like crowdfunding have emerged, offering smaller businesses and start-ups a new option to fund their growth.
The increased private capital raising options provide companies with greater financial flexibility, and allow them access to the public market – on average – when they are more mature, more sophisticated, and more established.
WAVING THE IPO FLAG
A 2018 survey by the Economist Intelligence Unit and PWC found that, although 50% of executives believe a public listing is becoming less important when it comes to funding, 70% think it would be beneficial for successful companies to go public later in their lifecycles.
IPOs will remain an essential fundraising mechanism for companies moving forward, and that is unlikely to change. There are a number of uniquely correlated benefits of going public: Being public allows companies to raise additional capital efficiently through follow-on equity capital raise and other instruments. And the benefits go beyond the capital raise: the enhanced transparency and corporate governance of being a public company increases visibility and credibility not only among investors but also in the eyes of clients, suppliers and employees.
NAVIGATING AN EVOLVING REGULATORY LANDSCAPE
There are several important aspects which the development of capital raising revolves around. These include global and local regulation for public markets, tax and incentive policies, procedures and compliance requirements. In many ways, these factors weigh heavily on the choices that companies can make. Regulatory requirements are key to protecting investors and issuers alike and striking a balance is fundamental. There are many examples where market euphoria has led to lower regulations and new market segments, ultimately failing investors. (ICOs have been the most recent one in this context). Despite this, small and medium enterprises may need more customized regulatory frameworks to accommodate their route to access public markets – an already popular debate that is further fueled by the Covid-19 lock-downs in recent weeks.
At the moment and apart from the regulatory requirements, raising capital – both publicly and privately – remains a resource-intensive exercise – in particular for smaller companies. Consequently, technological solutions embedded in fully functional ecosystems that streamline the funding process will most likely be the most successful in the long-term. The demand for such improvements, and the arrival of innovative technologies, could impact how markets operate in the future and could create new platforms for capital allocation, consolidate existing and newly created ones, rewire how market participants connect, change processes and procedures, and support, complement and compete with existing stock exchanges.
LOOKING AHEAD
Ultimately, the range of funding options available to companies of all sizes is likely to continue growing, addressing different needs and available funding pool thereby offering even more alternatives to those wanting to raise capital. For investors, the challenge will likely be finding the right risk-return profile as part of their respective investment portfolio – another question will be how much regulatory requirements can mitigate overall investment risk.
While positioned to continue challenging the public capital markets, private capital should also be seen as a feeder to IPOs. For the foreseeable future, public markets will continue to play an essential role in the global economy; the future development and the importance of all forms of capital raising will be driven by a range of factors including efficiency gains, technology, market environment, the evolution of regulation, and the balance between protecting investors and issuers while fostering market developments.
