Mark S Bergman
Paul, Weiss, Rifkind, Wharton & Garrison LLP
The global capital markets staged a strong comeback over the last twelve months, in particular in the last quarter of 2013 and the first half of 2014. Overall activity showed positive signs of recovery with both the number of deals and the level of proceeds raised reaching or surpassing pre-financial crisis thresholds.
Concerns over the pace of economic growth have lessened, attributable in part to improved projections for GDP growth in many countries, including the US and the UK, as key pillars of growth such as employment and housing show continued recovery and strength. Equity market valuations have been at all-time highs in the past year, and this coupled with a rebound in credit availability, strong and consistent after-market performance and an increase in private equity backed deals, contributed to the spike in global equity market activity. Global debt markets continued to reflect low borrowing rates, evidenced by a surge in refinancing and recapitalization activity. Investor risk appetite exhibited steady increases, making leveraged debt more attractive than the safer investment grade options. With cross-border bank lending difficult to secure due to increased regulatory capital requirements and shareholder pressure to de-risk, the global capital markets benefitted from greater risk-taking supported further by attractive rates of return.
Although on average 2013 saw alternate periods of weak and strong activity due to fluctuating global macroeconomic conditions and fluctuations in levels of investor confidence, starting with the last quarter of the year, issuance activity across the principal capital markets increased. The fourth quarter of 2013 witnessed equity capital markets issuances totaling $257.2 billion, which represented a 73% increase compared to the third quarter of that year (according to Thomson Reuters' Equity Capital Markets Review – Full Year 2013). IPO activity in 2013 totaled $164.9 billion, an increase of 40% from the prior year and the strongest annual period since 2010. The last quarter of 2013 reached nearly triple levels of IPOs as compared to the third quarter of that year, with $72.5 billion raised in capital (according to Thomson Reuters' Equity Capital Markets Review – Full Year 2013).
In terms of deal volume, in the first half of 2014, global equity markets reached levels that were 21% higher than in the same period in 2013. This represented the highest half year volume since the second half of 2010 ($488.8 billion in 1H 2014 as compared to $404.6 billion in 1H 2013 according to the Dealogic's Global ECM Review – First Half 2014). Global equity capital markets' proceeds reached the third highest half year total on record generating $11.4 billion in the first half of 2014 (34% higher as compared to the same period the year before). In the first half of 2014, there were 588 IPO offerings globally, raising $117.7bn in capital (respectively, a 60% and 67% increase as compared to the same period in 2013 according to Ernst & Young's Global IPO Trends – 2014 Q2). For the first time in more than 10 years, the second quarter of 2014 was the third consecutive quarter with more than 70 IPOs on US exchanges, with NYSE and Nasdaq accounting for a combined total of 162 IPOs raising $35.0 billion in proceeds. The Asia Pacific region saw more IPOs in the first half of 2014 than any other region, as its markets were boosted by the return of listings on China's mainland exchanges, following the lift of the 14-month long freeze on new listings in January 2014. In Europe, the second quarter of 2014 saw double the activity of the first, and four times the activity of the second quarter of 2013. This was the best first half since 2007, led by consumer service and financial service issuers (based on volume).
Financial sponsor-backed exits were a critical factor in IPO activity, accounting for 25% of deals by volume and 51% of proceeds raised in the first half of 2014. In the United States, the effect is more significant: sponsor-backed offerings accounted for 64% of IPO activity by number and 81% of proceeds, including nine out of ten of the largest IPOs in the period (according to Ernst & Young's Global IPO Trends – 2014 Q2). US activity was driven by healthcare and internet companies (advertising technology and e-commerce). In analyzing the reasons for the upswing in activity, it is unclear how significant the effect of the JOBS Act reforms has been on IPO activity, though it is noteworthy that close to 90% of IPO issuers are emerging growth companies for purposes of the JOBS Act. At the same time, the US continues to experience attributes that could explain the surge in IPOs – low interest rates, rising equity markets and robust investor confidence.
Global debt capital markets reached $6.10 trillion in 2013, down 7% on 2012, and the lowest annual volume since 2011 (according to Dealogic's Global DCM Review – Full Year 2013). The fourth quarter of 2014 with the volume of $1.37 trillion was the lowest fourth quarter since 2011. While generally global debt capital markets have not performed as well as equity in 2013, high yield debt volume proved to be the exception. Global high yield volume totaled $479.3 billion in 2013, the highest volume on record and up 13% on 2012. In the first half of 2014, global debt capital markets volume totaled $3.46 trillion (up 2% as compared to the same period in 2013) and amounted to the highest first half volume since 2009 (according to Dealogic's Global DCM Review – First Half 2014). The second quarter of 2014 reached volume of $1.72 trillion which was up 10% from $1.56 trillion reached in second quarter of 2013. Global high yield bonds amounted to $288.9 billion in the first half of 2014, accounting for 25% of total leveraged finance volume, up from 22% in the first half of 2013.
For the rest of 2014, the robust IPO pipeline (including the Alibaba IPO, which is expected to be the largest IPO in the United States since Facebook's $16 billion IPO in May 2012) suggests that the level of activity will remain high. Another positive future trend could be greater rebalancing of investment between emerging and developed economies, for example from emerging markets where growth is slowing and costs increasing (for example, China) to crisis-hit developed markets where costs are falling (for example, Spain).
It is important to bear in mind, however, that despite the overall improvement in market performance, the global capital markets continue to operate in an unusual policy environment, with monetary conditions loose and significant fiscal adjustments still required. Unanticipated changes in the timing or direction of monetary policy (in particular in the markets where the post-financial crisis reforms are still ongoing) or unexpected market shocks could result in higher volatility in the second half of 2014. Moreover, geopolitical tensions, including the crisis in Ukraine and the situation in the Middle East, as well as ongoing uncertainty over the pace of economic recovery in Europe, could have a negative impact on investor confidence and, in turn, on market activity. Finally, elections in the United States and elsewhere could impact offering timetables. Elections in the United Kingdom scheduled for 2015 are already putting pressure on London listing timetables to complete by year-end.
In the context of a more robust pipeline of equity offerings, investors are again becoming more discerning. Offerings need a reasonable equity story, and in any event the pressure on pricing is likely to continue. For IPO working groups, this continues to call for a laser-like focus on the equity story, issuer readiness and timetables. On the debt capital markets side, it is all about offering windows and monitoring market conditions