• Strategy
  • CFO Magazine

The Champ Feels Some Heat

Stock exchanges in Asia and Europe have made tremendous strides in raising equity capital for companies over the past three years. Is U.S. superiority at an end?

The health of U.S. banks, of course, is key. They still dominate global equity dealmaking. Of the 10 banks handling the greatest volume of equity deals in the first half of 2008, 7 are based in the United States, including leader Citigroup. U.S. financial institutions handled a greater volume of equity and debt issuance in the first half of 2008 than the banks of any other nation, and in debt transactions outpaced Europe, the Middle East, and Africa combined. Why? As Peter Morici, a business professor at the University of Maryland, notes, U.S. banks have built up product and market expertise and technical capabilities that are difficult for newer competitors in developing economies to quickly replicate. Despite their sizzling economic growth, China, India, and the Middle East aren’t yet fielding world-class banks that can siphon business away.

Still, regulators are under pressure to make the United States’s capital markets more attractive. “Very high on our list is a need for tort reform,” says Noreen Culhane, executive vice president, global corporate client group, for the NYSE Euronext. “One of the reasons companies resist listing on the U.S. exchanges has to do with concerns about frivolous lawsuits and liabilities that would not occur in other markets.” The other action item: restructuring banking regulation to promote greater collaboration between various bodies that oversee U.S. financial markets.

But a new banking regulatory infrastructure will take years to create, if it happens at all. Tort reform is far from a shoo-in. The ability to sue for investment fraud under U.S. law is what draws capital from foreign investors into the United States, greatly boosting liquidity, notes former SEC commissioner Roel Campos. While down by more than half year-over-year, net foreign purchases of long-term U.S. securities totaled $62.7 billion in June alone, including $47.8 billion from private investors, reports the U.S. Treasury.

Liquidity is all important. U.S. exchanges were still the busiest market for raising equity this year (see “Run for the Money” at the end of this article). While London’s AIM may be an accommodating platform, it offers virtually none of the liquidity that U.S. markets offer, a critical concern for companies interested in continually attracting new money, says Titanium Asset Management’s Sauickie. That’s one reason why Sauickie’s firm, having just gone public in London last year, recently filed with the SEC to list shares in the United States, too, most likely on Nasdaq. “Our investors are 100 percent U.S. institutions and would like the liquidity that’s available here in the U.S.,” Sauickie explains. “Valuations in the U.S. and UK are comparable if you use an apples-to-apples comparison of long-only managers, but there are many more asset managers participating in a larger market here; thus, the marketplace for transactions is greater.”

Great Expectations?

The growing number of companies looking to tap those U.S. investors poses an issue for finance chiefs. Research firm Renaissance Capital says the total IPO backlog in the United States, excluding SPACs, was 129 as of last August, compared with just 50 at the IPO market’s trough in mid-2003.


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