The future of capital raising: exchanges, IPOs and the new world of listing
The interconnection of the world today has resulted in the freer flow of capital across borders as new centres of economic strength and innovation emerge globally. Supported by an effectively regulated and market-oriented regime, exchanges are striving to build a niche for themselves as choice destinations for listing, together with instituting forward-looking differentiation strategies in their business operations with an aim of shaping the future direction of capital raising.
Against this background and in order to foster effective capital raising, exchanges have a significant role to play in: enhancing transparency and performance on Environmental, Social and Corporate Governance (ESG) issues, upgrading trading systems to align to current market needs, and instituting strong and tailored cyber security practices. The implementation of these, among other strategies, can help escalate capital raising through the capital markets in many ways including:
1. First, the intense focus on global sustainability issues has been prompted by growth in innovative sustainability-themed capital market products, such as renewable energy investments, green bonds, social-impact bonds, and sustainable funds. This has been fuelled by investors increasingly demonstrating a desire to align with major global frameworks, particularly the United Nations (UN) Sustainable Development Goals (SDGs) and the Paris Agreement on Climate Change. Research has established that ESG factors are material to long-term financial performance, hence more investors are making investments with a focus on generating a positive impact not only for the planet but people as well, alongside traditional financial returns. Thus, the role of exchanges in advocating for ESG initiatives and ensuring integrated reporting cannot be overemphasised.
2. Second, the upgrade of the trading, clearing and settlement systems is extremely pertinent in boosting the liquidity of capital markets as it allows investors to realise the value of their investments more freely. With improved systems, the effective installation of strong cyber security strategies is critical in cementing the role of market infrastructure institutions in serving the overarching objective of: enhancing market integrity, transparency, and operation of an efficient and resilient trading, clearing and settlement system. Accordingly, the successful implementation of robust industry-wide cyber-security is central to the maintenance of confidence in the market ecosystem.
The successful implementation of the above serves to ensure that exchanges stay ahead of the curve in terms of triggering increased market activity, thereby attracting both domestic and foreign capital to catalyse economic growth and development of respective countries.
Systems and sustainability aside, exchanges are about listings. A survey conducted by Baker McKenzie in 2019 revealed a promising IPO pipeline for the future and increased volumes of direct listings. Out of the 353 senior executives surveyed from public and private entities across industries globally, 83% of 200 executives from private companies indicated that their company was considering either a partial or full IPO, with most of them (65%) giving an indication that this could happen sometime in the next three to five years. Notably, according to the Baker McKenzie report, despite the fact that most companies wait longer before coming to market, this is expected to rebound in the near future, a testament to the long term value proposition of coming to market.
In order to address the anxieties of some potential issuers, some exchanges have opted to introduce listing segments with less onerous eligibility requirements to broaden the catchment of potential issuers willing to step into the public markets. Kenya’s Nairobi Securities Exchange for one, established a Growth and Enterprise Market segment (GEMs) with a particular focus on attracting the small and medium enterprises (SMEs) and venture companies that account for 70% of national GDP. The accommodations granted have been targeted to find an appropriate balance to retain emphasis on sound corporate governance to enhance investor protection and confidence.
As proper valuation and pricing practices aligned to global standards are implemented and the quality of the institutional investors at the bourse scales up, this is expected to have a catalytic effect on future listings creating a vibrant pipeline of companies looking to step up to the main board, or to simply broaden investor options while remaining on the GEMs Board. Strong and transparent valuation practices are further expected to provide attractive exit options to private equity firms, with East Africa being the largest destination for private FDI on the continent.
The commitment of the World Federation of Exchanges to consistently empower its members with high quality research together with actively contributing to the regulatory agenda of IOSCO will no doubt only further cement the role of listed capital markets as an indispensable source of long-term financing.