Equity capital markets applying the lessons of 2019 to navigate the challenges of 2020

Allen & Overy LLP

Allen & Overy LLP

2019 was a challenging year for equity capital markets. Proceeds from IPOs fell by over 25% in the UK, and by more than 30% across Europe. A number of political and economic factors, which contributed to pricing uncertainty and market volatility, undoubtedly contributed to this reduction in activity.

While the decisive outcome of the UK general election has brought clarity to the deliverability of Boris Johnson’s Brexit strategy, there are still many unanswered questions over the timing and form of a deal with the European Union, as well as the United Kingdom’s relationship with the rest of the world. Such uncertainty will continue to impact markets. Brexit is not the only challenge facing European markets – global headwinds such as US trade tensions, China’s economic growth, social unrest in Hong Kong, economic conditions in Europe, and the US presidential election could also continue to impact the global IPO market in 2020.

Despite these challenges the companies that weathered the tough market conditions in 2019 had compelling equity stories that convinced investors of their growth potential. Post-IPO performance of such companies has generally been positive. IPOs serve a purpose on an exit, particularly when run alongside a sale process, to achieve the best price and valuation for selling shareholders. We therefore expect private equity firms and other sectors to continue to explore IPO exits in 2020 for high quality businesses with realistic pricing expectations.

The opening of the Shanghai-London Stock Connect provided a boost to the London market in 2019, with Huatai Securities being the first Chinese company to list global depositary receipts in London to raise US$1.5 billion. A number of other Chinese companies are looking to use the Stock Connect to raise money outside China to reduce debt and fund global expansion and acquisition opportunities. However, the Stock Connect is still in its early stages. We have also yet to see an eastbound listing of CDRs on the Shanghai Stock Exchange which may impact the flow of westbound listings which are important to the success of the initiative. We are continuing to monitor developments in this nascent market closely, while looking for ways to guide both Shanghai-listed and FTSE companies looking to take advantage of cross-border listing opportunities.

Beyond IPOs, we have seen strategic moves being made in the secondary market as companies look to shore up their balance sheets or restructure, which is indicative of the current economic cycle. A number of listed companies are looking to restructure their balance sheet, re-domicile and/or refocus their strategic initiatives. 2019 witnessed a number of high profile restructurings, notably Interserve and Thomas Cook. In addition, in 2019 we saw an increase in public-to-private takeover deals, particularly in the United Kingdom, and other M&A opportunities taking advantage of the continuing availability of private equity ‘dry powder’. However, this has created a pipeline of potential future IPO exits, although companies should be mindful of planning ahead as market windows can be tight.

The trend for companies to stay private for longer is continuing, especially in certain sectors such as tech. A motivating factor for these companies to stay private is the fact that growth capital has access to funding it didn’t before – UK tech companies raised over £10bn in 2019, a figure which is expected to be exceeded in 2020. A deterring factor to public listings is the high governance standards set for listed companies, the increasing cost of compliance (including growing focus on environmental, social and governance commitments and reporting), and the greater level of public scrutiny. The costs/benefits of any new rules need to be carefully assessed, including the impact on the UK’s competitive position and the standards relative to those applicable to large private companies.

While there is no doubt that the US has provided a route to market for tech companies such as Slack and Pinterest, there have been some notable casualties including Peloton, Lyft and WeWork. Investors have been more discerning and we have seen greater scrutiny of valuations, including due to weak after-market performance of some recently listed stocks. Direct listings – rarely seen outside the US market, and not commonly seen there – are generating growing interest in the UK and other European markets as a potential route to market. However direct listings come with challenges, including the ability to meet minimum free float and independence and control requirements, and such a route is most suited to better known companies with a broader investor base which support trading and liquidity. The scope for direct listings (referred to as “introductions” in the UK) has yet to be tested. While European markets (including a standard listing in London) permit dual class share structures, tech companies in particular have not yet embraced this greater flexibility in the same way as in the US and, more recently, Hong Kong.

Overall, we believe there are opportunities in the European ECM market in 2020, but it will not be without its difficulties given the headwinds discussed above. We are seeing a pick-up of IPO activity – albeit on longer timeframes or maintaining flexibility on target windows – as well as potential issuers seeking alternative funding routes. We note with interest the fact that London did not cede ground to other European exchanges in 2019 (in fact, according to the London Stock Exchange, it outperformed all other European exchanges in 2019), and deep liquidity pools in Europe remain attractive to both domestic and overseas issuers. As we gain greater clarity on Brexit and other macro-economic factors, we expect IPO activity to increase and to see a gradual return to more normal levels of activity as the pipeline resumes. The US presidential election is also likely to have some impact on volumes in H2, in particular if the run up to the election witnesses politically driven policy changes (such as increased trade tariffs); this might result in greater IPO activity in Q2 as companies seek to get ahead of the US election. In industrial, retail and consumer sectors, challenges remain across Europe with a manufacturing recession in the eurozone becoming apparent and sluggish growth predicted in 2020. This may prolong the ‘wait-and-see’ attitude of 2019, but may also galvanise some listed companies to take strategic action and drive commercial innovation. The focus on governance and compliance – in particular, diversity of board appointees and environmental and social responsibility – will also increase, and IPO candidates will need to consider these issues early on in the process.

Despite a tough market, A&O has maintained a leading position in the ECM market and advised on numerous market-leading transactions. We are an established UK Tier 1 practice across all legal directories, combining local ECM expertise in all key European markets with a leading London-based US Securities team and a diverse corporate, structuring, governance and compliance, and employee benefits and incentives offering.

A selection of our recent and current credentials includes:

Network International Holdings
On its GBP2.2bn IPO on the London Stock Exchange. A&O concurrently advised on a USD300m cornerstone investment by Mastercard and on the strategic commercial arrangement between Network International and Mastercard.

On its IPO on the premium segment of the London Stock Exchange. DWF is the first law firm to list on the premium listing segment of the Official List and on the main market of the London Stock Exchange.

Marks & Spencer
On its GBP601.3m rights issue, to fund its GBP750m 50/50 joint venture with Ocado Group.

Advising Credit Suisse International on an equity collar transaction with SIX Group for approximately EUR500m, and a related block trade sale of 7,924,528 shares in Worldline and sale of 14,725,472 shares in Worldline by Atos, for a combined consideration of EUR1.2bn.

Man Group
On its corporate reorganisation and re-admission to listing on the London Stock Exchange, including a TopCo scheme of arrangement.

On the listing of Prosus on Euronext Amsterdam (primary listing) and the Johannesburg Stock Exchange (secondary listing).

Advising the underwriters, Goldman Sachs International and Morgan Stanley on Astrazeneca’s USD3.5bn placing of shares through an accelerated book build.

Sirius Minerals
Sirius Minerals on its USD3.8bn proposed stage 2 financing plan to fund its North Yorkshire polyhalite project, including a GBP400m firm placing and placing and open offer on the London Stock Exchange.

Investec Asset Management
Acting for the banks on the demerger and IPO of Investec’s GBP109bn asset management division on the London Stock Exchange (primary listing) and Johannesburg Stock Exchange (secondary listing).

On its proposed corporate reorganisation and re-admission to listing on the London Stock Exchange, including a TopCo scheme of arrangement.

On its EUR2.82bn IPO on Amsterdam Euronext. The strategic dual listing attracted a broad range of investors, including environmental, social and governance funds.

Acting for the lenders in connection with the refinancing, reorganisation and deleveraging of Interserve. The transaction included a GBP435m debt to equity swap, in the form of a fully underwritten placing and open offer.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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