The success of private equity placements on the international markets – Barrocas Sarmento Neves
The internationalisation of financial markets has grown considerably over the past decades, with increased cross-border capital flows, tighter links between financial markets, and a greater commercial presence of foreign financial entities around the world. As international capital markets became more integrated, companies started enjoying not only a tremendous amount of flexibility in deciding which type of security to issue to raise funds, but also in which location to issue these securities. An element of this globalisation trend has been, consequently, the access to global equity markets through the issuing, listing or placement of shares outside a company´s domestic market.
There are a number of reasons behind this growth in global equity issuances, including: issuers access to an expanded pool of investors; targeting shares sales in markets where the demand is strong enhances liquidity; global offers lower capital costs and increase shareholder wealth; cross-listing can reduce market segmentation by enabling risk sharing and international listings increase a company’s visibility.
With the globalisation of financial markets a new dynamic to the securities markets, based on two main matrices which, although distinct, are also interlinked, has been introduced. In short, if, on the one hand, the Regulators of the various markets need to have adequate powers to supervise and oversee all financial operations transacted under their control (a hot topic in both the US and EU given the current financial market crisis), thereby assuring the transparency of the same and observance of best practice, all those who operate on the markets need also to be afforded the necessary tools and freedom to stimulate competition between participants and continued interest.
Accordingly, the applicable market rules of the various financial markets limit not only the profile of participants and their respective target public but also the types of operations and financial instruments suited to responding to market circumstances.
Recourse to international securities markets as a form of funding a company can be achieved in two ways – public offer or private placement – with the decision on which to opt for varying depending, essentially, upon, inter alia: a) investor profile (sophisticated or traditional); b) operation value, c) available legal market safeguards; d) market access purpose and urgency; e) market participation requirements; f) its international liquidity and standing; g) costs and capital-raising time; h) currency; i) market type (regulated or not), j) spreads; and l) location and geographical exposure.
It is through the consolidation, analysis and evaluation of these various aspects that a company in need of capital, in conjunction with its advisers, decides on the most suitable technique to follow. It should be noted, however, that the recent tendency of international financial markets demonstrates a preference for private placements over public offers. This is explained by the private placements lower transaction costs, shorter ‘time to market’ and a better matching of investments to the needs of the parties involved.
This last feature may be determinative of the success of private placements and the techniques for executing them in recent years. The direct contact between the parties under a private equity placement permits the tailoring of products to the needs of a specific investor or group of investors, exemplified well by Goldman Sachs recent sale of preferred shares worth $5 billion to Berkshire Hathaway / Warren Buffett. This also explains the success on international markets of financial products such as GDRs, Euroequity Offerings and Seasoned Equity Offerings.
Indeed, the current economic environment, including the consequences of the US credit crunch, depreciation of the dollar vis-a-vis other currencies such as the Euro and Sterling, increases in oil prices and other commodities, and a fall in the value of share prices on principal exchange markets, clearly illustrate that financing opportunities, by way of tailored private placements through Seasoned Equity Offerings, will be reinforced by an increase in offshore demand for dollar-denominated securities.
In conclusion, the flexibility and the varied techniques available for effecting private placements have been key to its success on the international markets and given our current economic reality, the only one realistic solution for a company in need of urgent funds. The present climate is ripe for increased reliance on equity placement techniques and the continuing sophistication of related financial instruments, limited only by the current need to ensure best practice and transparent regulation.
