IFR US ECM Roundtable 2014

IFR: Ed, you might have the best perspective as a starting point for what the process might be like and how you employ blocks.   LAW, KKR: The topic of blocks is clearly an interesting one, and it’s been interesting to watch the evolution in the US market in recent years in that regard as well. There are so many areas for debate around that topic. One, is the block trade naturally the right route to monetise your equity through? Sometimes it is, sometimes it isn’t. If you’re seeking to build a long term register of high-quality investors then selling your equity on the basis of the equity story and actually having control as to who that stock ends up with is logically a more appropriate route, and clearly that’s the way the US equity markets functioned for many years. Having come from, and spent a reasonable amount of time in, Europe as well though, I’ve also seen and worked in a market whereby block trades have become really the default method of monetising equity, and banks have become increasingly aggressive around bidding for stock. I’ve experienced it at KKR as well within the US around some of our portfolio companies where we’ve executed a follow-on. The friction cost of going through the traditional follow-on route is actually pretty high by the time you bake in gross spread plus discount, and the uncertainty as to where the pricing is going to end up. When you’re looking to sell a block of stock and you’ve been in front of the investment committee and you’ve got authorisation to sell above a certain level and not go below it, then that’s going to be very much in the back of your mind. Not surprising banks are aggressive on use of balance sheet around buying stock off you. It’s an easy choice to make. Coming back to is it the right choice, and the right choice for the long term development of the shareholder register? It kind of depends where you are in the monetisation phase. So, we kind of give that preamble as a way of thinking about how we approach the process. Generally if we’re going into execution around a block, it’s a pretty straightforward process, as everybody knows. I think to Matt’s point, it’s important clearly to run a process that is an efficient one. There’s clearly nothing worse than requesting banks to bid and then keeping them hanging on the phone for an hour whilst you decide who you’re going to go with, which means they miss that immediate quick-to-market window. Generally we tend to focus in on not going too wide in terms of the number of banks we call around these opportunities. You’ll focus in on the banks you know are in the flow on the stock, you know have been thinking about it, or are close to the situation. Again, we’ll decide whether we want to go for joint or sole bids dependent, typically, on size of execution. It’s not our choice, but if our portfolio companies are in the middle of buyback programmes, [another consideration is] whether we want to offer them the ability to participate in the trade. That typically creates an interesting dynamic around execution. But I’d say as a seller when you think about blocks, when you come back to comparing it as a method of execution between a follow-on offering versus an underwritten block trade, the thing that’s extremely hard to prove, and I would love to see some analysis if anybody’s got it, is whether there’s an extra hidden discount in a block trade. In reality I think everyone suspects that there is, but it’s impossible to identify that. What I mean by that is – and John, you should comment – the availability of lock-up expiries, the availability of [information on] who’s sitting on big blocks of stock that are likely to come onto market as people like ourselves are transitioning ownership from private to public, is so widely available that there’s huge speculation as to what blocks are going to come out – not only from banks, but also from investors and particularly from those that play the new issue calendar. Naturally you can see the perf

IFR: Just to switch gears a little bit, Matt, one of the big trends we’ve seen this year has been the increasingly prominent role of independent advisers in some high-profile ECM deals. It’s a concept that isn’t always entirely embraced by the Wall Street banks. Can you explain to us the role that independent advisers play and why there has been a bigger role for them to play, it seems, in the US recently?   MATTHEW SPERLING, ROTHSCHILD: Rothschild has had a full service platform on the ground in the US now for three years. But Rothschild has effectively been doing advisory services for seven or eight years globally, in part because the product really did develop outside of the US initially in the form of advisers such as ourselves sitting next to issuers like the British government taking British Gas public. Those markets internationally were formed through privatisations in the first instance. So I think the broader set of market participants were more used to the notion of Rothschild or Lazard or folks like that sitting at the table advising the issuer, and the leap from privatisations to IPOs was not a leap, so to speak. It was, to some degree, inevitable that as market barriers break down and capital formation converges in many ways that the role of an independent adviser would come to the US. There are a number of reasons why this is a logical evolution of the market. But it’s not obvious that every situation is a perfect one for advisers to be involved; nor do we and others like us try to be involved in every situation. In the US, we have the presence of a range of very sophisticated owners in terms of the financial sponsors and VCs who are responsible for much of the new issue product in this market. In the first instance, the advisory role was used I think to make things more efficient for such owners accessing the market with their portfolio companies, however, some then built up their own capital markets capacities. Even with this audience though, we continue to see situations where even sophisticated owners look to advisers for very specific types of improved outcomes, to run processes and keep them tight. For example, in a block bidding process, our counterparts on the other side [the Wall Street banks] are happy if everything’s tight if they’re bidding on a block in a matter of minutes or hours. If you talk to some of the lawyers in the room, here, if you remember the block process a number of years ago, it was often times a complete mess, with people going out to get bids and not even having yet called their lawyers. So there’s an element whereby everything is made a little bit more sophisticated and smooth for parties on both sides of the table, and partly because of advisers. Also the broad acceleration of the capital markets has brought a lot of types of issuers into the markets. Some of them may be less traditional, less frequent issuers, where as owners they may be experts in building businesses, but they aren’t experts in capital markets. In addition, there are a lot of trends that have driven all of us to a spot where there are now multiple bookrunners involved, economics are sliced and diced so many times, even though folks when pitching would love to be the guy who ends up sole book and running everything. Sole-book mandates have virtually disappeared – 7% of all IPOs these days are sole books; whereas if you go back 10 years ago it was the inverse. In those types of situations where the capital market process is more complicated, we’ve seen a natural need for our services from non-traditional infrequent issuers – families bringing businesses public, companies doing cross-border deals, trusts that end up with stock positions they need to monetise, or even some of the more regular folks including sponsors and VCs who just aren’t at the level of a KKR or an Apollo – although actually we’ve done work for Apollo too – but who aren’t in the markets that frequently. In such situations, the owner or issuer may

IFR: Phil, we’d like to start with you, if I may. What has been driving the phenomenal levels of capital formation we have seen in the IPO market? PHIL DRURY, CITIGROUP: As equity capital markets professionals, we’re pleased to have seen how robust IPO volumes have been in both 2013 and 2014. IPO volumes are up close to 20% year-over-year [pre-Alibaba]. It helps to have the S&P 500 setting new highs and breaching 2,000. Generally speaking, a lot of issuers, whether they be corporate issuers or sponsor issuers, are much more prone to issue equity when they see valuations are robust. The healing process post-crisis is not just one that impacts equity valuations and our issuers. It obviously has an impact on investors as well. We’ve seen positive equity fund flows now in quite robust fashion over the last two years. So we see a very healthy market with very efficient pricing. About 75% of IPOs [in the year to date] have priced within or above their marketing range. All of those factors help produce the robust environment that we’re operating in today. IFR: JD, it has been a great year for ECM, but on the other hand we did have a significant sell off from March to May in the momentum names, many of which were recent IPOs. What sort of impact has that had on the IPO market? JD MORIARTY, BANK OF AMERICA MERRILL LYNCH: In order to understand what’s happened this year, you have to think about what went on last year. Last year was really the first year [since the financial crisis] that the IPO market diversified. It wasn’t just high growth companies going public. We suddenly saw industrial companies going public. There were also some very successful lower growth companies being well valued, which was probably a reflection of economic views here in the US. You saw that in the back half of 2012, and that powered us through 2013. Notably, last year was the first year with 200-plus IPOs since that 2004 to 2007 period that we’d all love to get back to. Interestingly though, with the way the indices finished 2013, investors were chasing performance into year-end. That continued in the beginning of 2014. Pricing conditions were materially better in the first three months of this year than they have been since that time, and a disproportionate amount of the issuance was in technology and in healthcare. Somewhere on the order of 50% of the IPOs that came out were technology and healthcare in that period. Then you saw a massive reversal in not just the healthcare performance, but also in one sector that had been among the most prominent. That was software. You saw this correction from, call it March 5, when the Russell peaked, to May 7. In that period, it became really challenging to price a technology IPO, and actually if you look at pricings since April 1, about 44% of deals have priced below their range. You’ve seen the buyside extract a pound of flesh in pricings. Now the encouraging thing is, as Phil points out, we’ve actually seen a relatively meagre slate of technology companies come forward. One of the companies mentioned earlier was Zendesk. While that performance has been extraordinary most investors did not participate in the IPO. Only a very narrow set of investors did. That’s true of most of the technology companies, or high-growth companies that went forward in that period. Interestingly, we’ve had a somewhat challenged market since, call it April 1, for technology companies – companies like Mobileye proving the exception to that. The encouraging thing is that other sectors continue to chug along and get public successfully. So that’s really a continuation of 2013 and the reason we can be excited about 20% higher volumes overall. It’s just a healthier overall capital market environment. IFR: Joe, maybe you can elaborate a little bit on some of some of the sectors that have been active in the second half of the year and filled the gap? JOE REECE, CREDIT SUISSE: You know it’s funny, I feel like whenever I do these things I realis

Andrew ApthorpeRBC Capital MarketsAndrew Apthorne is a managing director and global co-head of equity-linked origination at RBC Capital Markets, responsible for pioneering the bank’s convertible and corporate equity derivative franchise. Over 18 years, Apthorpe has developed equity-linked product and marketing solutions for corporate and buy-side clients across the globe. Philip DruryCitigroupPhilip Drury is a managing director and head of equity capital markets origination for the Americas at Citigroup. Mr. Drury, an 18-year veteran of the firm, is responsible for product development, origination, underwriting and syndication of equity and equity-linked products. Edward LawKKR Capital MarketsEdward Law is a managing director and head of equity capital markets at KKR Capital Markets, focused on providing equity capital markets advice to corporates in both Europe and the Americas. Prior to joining KKR, he was head of Western European ECM at Deutsche Bank. JD MoriartyBank of America Merrill LynchJD Moriarty is a managing director and head of equity capital markets Americas at Bank of America Merrill Lynch. Prior to his recent promotion to run the group, JD was responsible for all equity issuance in technology, services & financial technology. Joe ReeceCredit SuisseJoe Reece is a managing director and global head of equity capital markets and a member of the investment banking management committee, the global equities management committee, the corporate bank oversight committee and the emerging markets management council. Jonathan RossBlackRockJonathan Ross is a managing director and member of the global capital markets team within BlackRock’s trading and liquidity strategies group. He focuses on the equity and equity-linked markets in the Americas Prior to joining BlackRock in 2012, Ross was a managing director in ECM at Morgan Stanley, most recently covering financial institutions. Matt SperlingRothschildMatt Sperling is a managing director and head of North American equity advisory for Rothschild. He has 17 years of capital markets and investment banking experience, including prior senior leadership roles at Jefferies, UBS and Credit Suisse both in the origination and structuring of equity transactions across a variety of industry verticals. Stephen LaceyUS Editor, IFR Anthony HughesSenior reporter, IFR To continue reading this roundtable, click the relevant section. Introduction - Participants - Part 1 - Part 2 - Part 3 To see the digital version of this roundtable, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com.