What do Issuers think?
In 2019 Hembury Associates undertook a survey on corporate Issuers’ views on the continuing value of a Stock Exchange Listing.
The context to this question lay in the steady decrease in the number of stock exchange listings reported in the US and other Western Markets, together with a rise in alternative funding sources such as private equity and other non-traditional channels of capital supply.
At the same time, market observers are concerned that stock exchanges are more focused on secondary trading and the emerging “casino capital” practices of pure traders where the character and operation of the companies issuing shares, they briefly hold, are irrelevant to the objectives of the market. This has led to practices such as algorithmic and high-frequency trading where the price differential between share movements creates all the risk required by the trading models to generate profit.
1. Domestic exchanges are now the centre of market liquidity
Traditional assumptions over stock exchange listings are changing with investors coming onto domestic registers, instead of foreign secondary listings, to benefit from the liquidity. Many global companies have, in the past, listed on local stock exchanges to support investors or in furtherance of commercial objectives. Some companies inherited foreign listings through acquisitions.
1.1. Formal exchanges are playing a less relevant role in the sense that people can buy shares everywhere on platforms etc. Nothing stops and Indian or Chinese investor to do the same thing.
1.2. A globalised listing regime would be incredibly helpful but likely to be resisted by vested interests.
1.3. We are OK in using the UK register to bring global investors on board.
2. Trend away from multiple listings
The current trend is against multiple listings as on one hand brokers’ use of technology enables investors to trade on a company’s domestic stock exchange where liquidity tends to be greatest; on the other hand, multiple listings involve compliance obligations not just to the exchange but other regulators as well. These requirements seem to have little co-ordination with each other and appear on the whole to be diverging.
2.1. Anybody can buy our stock on the Swiss Stock Exchange you do not need foreign listings. We need access to capital markets to finance ourselves so we need at least one listing. I am not sure that we could finance ourselves. We probably could not get out of the listing. We benefit from having access to unlimited financial resources. The benefit is that you remain independent from Private Equity, Sovereign Wealth funds etc. A public listing enables us to maintain our independence.
2.2. Managing announcements between various exchanges - such as US, UK, HK, Singapore, Switzerland, for example is a nightmare with a window of only 30 minutes a day for getting them done. HK is the worst with related party issues as well.
2.3. Many traditional listings on different stock exchanges was about liquidity which changed. Another factor leading us to delist was the growing burden of domestic regulation. We had to comply with seven or eight sets of compliance rules which each had a special finish and the liquidity was no longer there.
2.4. An additional formal listing in a country is adding nothing because the capital of that country can seek access to other platforms. In a controlled currency market where you can't move the money out of the country it may be different but typically the wealthier folk seem to be able to do this. There is no evidence of continual structural benefit to the shareholders at large going forward. While creating extra pain for decades to come.
3. Bureaucratic overload
Experienced company secretaries report that when listed across the globe, the time window to enable time-sensitive documents to be successfully filed can be very slim, risking inadvertent missing of exchange deadlines.
3.1. Need to cut-back on listing bureaucracy. Cost of advisors, law firms, sponsors all adds to cost. Only advisors that win. Timeliness needs to be improved.
3.2. We are over-disclosing and are being over regulated. The disclosures are becoming so complex that I am not sure that the people receiving the reports understand them.
3.3. Being an international firm there are so many regulations to follow - our disclosures are very complex and the regulations are diverging which is another trend we see.
3.4. If you are a company that is doing well and your price and market capital is increasing the fees are just sky-rocketing. I can see for many companies that it is just too expensive and onerous. There is so much disclosure you have to do and we are just single listed. If you were multiple listed it would be a nightmare. I can see why many companies choose not to go down that route. At the moment the focus is on building Trust and Transparency - I totally understand why the government thinks that's important, from an Issuer point of view we are looking at the same things but from a different angle. As a result, there is an overlap of policies. E.g. Corporate Governance Code says one thing, but the legal definitions say another in the same regulation. It is that which can be frustrating.
3.5. However, the counter to that is the governance and regulation associated with a listing is extreme and gets more extreme every year. There are very big private companies. The largest public companies are probably too big for private ownership. Better would be more thoughtful governance and regulation, Boards spend a disproportionately high amount of time on governance and regulation when they should be overseeing the business. If it has not tipped over the line it is almost there. The UK is as bad as anywhere.
4. Capital raising no longer the prime purpose
One observation that was repeatedly made by several companies was that whereas the assumed and traditional purpose of an exchange listing was to raise capital, for a number of years they have been returning capital to investors through share buy-backs. And when a strategic need for additional capital might arise there seemed to be plenty of alternative sources other than exchanges.
4.1. The market has changed - for large corporations raising capital on Stock Exchanges you only do in extreme events - like a major acquisition - but normal capital expenditure you get for free in this world.
4.2. Debt Issuances and Stock Exchange listing are different but the information is helpful. Financing day-to-day operations is done by the debt market not stock exchanges.
4.3. A Listing is about improving your position in the Credit Market and the obligation and publications go towards the certification of information in which the Debt market is interested.
4.4. Sometimes I sense the securities regulations need to catch up as in the past the stock exchange and CSDs where part of the same organisation. This has radically changed the stock exchanges are just an electronic platform to provide trading. What is more important is the role of CSDs which can tells us who owns our shares such as Crest, DTCC or Euroclear Netherlands. They are less prominent than the exchanges but play a bigger role.
5. The continuing value of a stock exchange listing
Stock exchange listings are claimed to enable a company to operate independently and also serve as a benchmark of quality as they require objective criteria to achieve and maintain listed status. The information provided to stock exchanges is of importance to the Debt markets and complement the function of the Credit Agencies.
5.1. A Listing is about improving your position in the Credit Market and the obligation and publications go towards the certification of Information in which the Debt market is interested. Debt Issuances and Stock Exchange listings are different but the information is helpful. Financing day-to-day operations is done by the debt market not stock exchanges.
5.2. Having access to capital markets is a great advantage it is a balance – the advantages
currently outweigh the disadvantages.
5.3. Public listings and from a governance perspective it adds control, visibility and
transparency – something our society is looking for.
5.4. The Dutch had it right 100 years ago. Stock exchange listing is core element of capitalism. We did the biggest IPO in US 2018. It is a process. Makes the company stand alone. Brings with a lot of responsibility and heavy regulations.
5.5. The Continental European view is that Stock Exchange Listing is about Quality Assurance - a yard-stick. Providing guidance and direction for an entire market. It is also about Public Domain information. The Listed Companies have to follow rules and guidelines. Prices are fixed in a fair and transparent way. Stock Exchanges will need to exist in the future. They provide transparent access to data. For SME's a Stock Exchange listing is necessary to tap certain pools of capital.
6. The “Churn”
Whilst the number of listed companies declines, every year stock exchanges report increased turn-over of equity transactions. The amount of capital raised on these markets continues at a minimal level, in fact with most major companies returning capital to investors. How does this seeming contradiction make sense? The suspicion has to fall on “casino capital” where the trading activity bears no relation to the issuing companies and focuses entirely on small increments in prices trends and price reactions made in response to excessively large, exploratory orders hitting the exchange order-books.
6.1. Equity trading seems to increase more on average one (major global company) of our shares is on average sold/bought once a year which puts the loyal shareholder into perspective some are long-term holders so others must be particularly active. So there is a huge churning in our stock.
6.2. Traders on the secondary markets tell us that the flag-ship listings are playing a diminishing role when it comes to the marketplace where supply and demand meet. This is due to technology. Stock Exchanges are changing with platforms outside the Stock Exchanges like Chi-X and BATS and others focusing on retail holders. When we look at where our stock is trading, we see Frankfurt and Zurich where we are not listed. It depends on the regulations of the exchange; some need a broker to be involved. Investors see these as more convenient, cheaper and more efficient. It does not bother us in the sense that once we have issued the shares, they are owned by somebody else who can decide what they want to do with them
7. Asian Markets
Companies reported a natural and continuing interest in Asian markets both for commercial development and to attract investment. There is interest in providing more effective access to investors in other markets but not at the expense of greater burdens of regulation and compliance.
Some company secretaries interviewed had direct experience of listing in Asian markets and commented on the difficulties they had experienced in comparison with European exchanges.
China is a prime example of both an important commercial market and a source of investment, but currently it presented challenges to Investor Relations initiatives with a lack of clarity as to which institutional investors were cleared to invest internationally, whilst retail investment was completely off the table. Other companies reported having major Chinese investors on their registers who appeared to be happy and unchallenging.
7.1. China has a proper middle class. But what is the appetite for a Chinese investor to buy a western stock which has a lower growth outlook than their own local companies? I have done nothing in Investor marketing in three years in Asia because there is no interest. We are growing slower than their own companies. We can't take demand for granted. In 20 years’ time it may have changed.
7.2. There is an internal debate over China. Some of the Equity capital bankers and brokers are keen to promote further listings with ADR wrappers. Given the fact that we don't issue equity, we could get a listing but there will only be liquidity if somebody moves their shares to that place and start to trade. It is a chicken and egg situation. In the mean-time you are facing all the listing and disclosure requirements and costs