IFR US ECM Roundtable 2018

Akram Zaman Bank of America Merrill Lynch Akram Zaman is head of AMRS ECM syndicate at Bank of America Merrill Lynch. He was previously the bank’s head of ECM syndicate for APAC and EMEA, helping clients such as corporates, sponsors and governments raise more than US$300bn through his relationships with global institutional investors. Steven Tuch BMO Capital Markets Steven Tuch joined BMO in March 2012 as a managing director in equity capital markets. Tuch is responsible for the firm’s healthcare equity capital markets business and food, consumer and retail equity capital markets business. He is a 25-year industry veteran, including senior roles at Deutsche Bank and Thomas Weisel. James Dunning J Goldman & Co James Dunning has worked at J Goldman & Co for five years as director of capital markets. His primary role is to review all deal-related situations for the firm. He is also responsible for helping manage the firm’s relationships with the sellside. Prior to working at JG&C, James was a senior vice president at Lazard Capital Markets. He started his career on Wall Street in 2005 at Citigroup where he worked for seven years. Anna Pinedo Mayer Brown Anna Pinedo has concentrated her practice on securities and derivatives. She represents issuers, investment banks/financial intermediaries, and investors in financing transactions, including public offerings and private placements of equity and debt securities, as well as structured notes and other hybrid and structured products. Pinedo has particular financing expertise in certain industries, including technology, telecommunications, healthcare, financial institutions, REITs and consumer finance companies. She is the co-author of JOBS Act Quick Start, among other publications. Carolyn Saacke New York Stock Exchange Carolyn Saacke is chief operating officer, capital markets at NYSE, responsible for developing and maintaining the firm’s relationships with the private equity, venture capital, investment banking, legal, professional services and advisory communities. She also oversees key IPO transactions and special projects at the exchange. Prior to the NYSE, Carolyn was in the investment banking units of Bear Stearns, Citigroup and Deloitte. Matthew Sperling Rothschild Matthew Sperling is a managing director and head of North American equity advisory for Rothschild. Sperling has 20 years of capital markets and investment banking experience, including previous senior leadership roles at Jefferies, UBS and Credit Suisse, in the origination and structuring of equity transactions across a variety of industry verticals. Craig DeDomenico Stifel Craig DeDomenico is a managing director in equity capital markets origination for Stifel with responsibilities in industrial, consumer-related sectors and select growth verticals. He also leads the convertible capital markets business. Stephen Lacey IFR 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@refinitiv.com

IFR: Welcome everyone to IFR’s ECM Roundtable. We have heard a lot of discussion from the SEC, and elsewhere, about how access to private capital negatively affects IPO activity. Anna, with IPO issuance up more than 20% for the year on volume, and by one-third on number of listings, do you think the pendulum has finally swung from private capital into public equity markets? Anna Pinedo: Oh no, not by any stretch. We are certainly seeing a healthy IPO market, and while that’s something that all of the panellists are very happy about, there is no shortage of private capital. We’re seeing enormous amounts of private capital being raised, particularly for tech companies. The dynamic that has caused so much consternation for the SEC, regarding the overall decline in the number of US public companies, I don’t think that that’s changed or that it’s changing anytime soon. So long as there’s private capital available, at attractive valuations, a lot of household names are going to stay private for as long as they can. IFR: Thinking about how private market valuations extend into the public markets, software companies have been an important source of outperformance in the public markets. Craig, can provide some perspective on valuations for technology and software companies? Craig DeDomenico: Obviously, investors want to buy IPOs at an attractive valuation. They’re hoping to get performance in the aftermarket. If we look at the IPO asset class year-to-date, it’s up around 20% and we are on pace for something like US$60bn and potentially as many as 200 IPOs. That is obviously a pretty healthy market. But in order for that to be sustainable, the asset class needs to outperform the broader markets. Nasdaq is up 17%. A good portion of that performance is coming from the technology universe. Ultimately, a portion of that universe that is driving performance has been software. Four to five-time revenue multiples on software deals feels like a tough entry point. But the reality is the quality of the software IPOs that have come to the market this year is very high, and deals have performed well. It reminds me of what we saw in 2014, where you had a very high-quality group of software companies become public. Again, similar valuations, and investors ultimately made a lot of money. Whenever you’re buying an IPO, you’re taking risk on those projections and meeting expectations, as is the case with all newly public companies. Software companies help de-risk some of that volatility because they have predictable business models. There is also an M&A floor underpinning software and that provides some downside protection to operational missteps. A larger average deal size [for software] also results in improved trading liquidity. Overall, the IPO market has benefited from a wider variety of industries going public. The only industry that is tracking down year-over-year, in terms of number of IPOs, is consumer. We all realise why that is. So it is a pretty good backdrop overall. As long as the asset class continues to outperform, we will continue to see a pretty healthy IPO market moving forward. IFR: There are times when companies fail to achieve a valuation on their IPOs that they did on their last private raise, a so-called down-round. Akram, how challenging are down-round IPOs? Akram Zaman: If a company is simply looking to raise capital, the private markets are obviously there, and very accessible, particularly for the higher quality companies. But it’s important to consider that there are other reasons to go public: creating currency for acquisitions, incentivising employees, raising the company’s profile. Maybe the management team just wants to go public. There are a number of different factors. Having said all that, generally there is a valuation concession required to go public, an IPO discount. Nevertheless, there have not been too many IPOs of late that have been a down-round [to their last private valuation]. We’ve had

IFR: Akram, how does the participation of crossover investors impact syndication of biotech IPOs? Are you seeing generalist investors participate? Akram Zaman: We have talked a lot about biotechs, but crossover investment extends to tech, fintech, and high-growth consumer retail as part of a broader investor bid for growth. Those are the industries where we see most of the pre-IPO crossover investments, much more so than industrial, and energy and power. That could change if there were a rotation out of growth and into value or if there were a greater emphasis on cashflow and total return. But for now, it is all about growth. Once an investor knows that there’s a strong growth profile, the second question is: “Who are their pre-IPO investors?’” A lot more traditional, public market institutions are moving into earlier stages of investment. That pre-IPO investment comes six to 12 months prior to an IPO. They are taking on more liquidity risk by investing earlier in a company’s lifecycle in an effort to generate alpha. Any time you have a number of these pre-IPO investors on the cover, whether they are household brand names, specialist healthcare or specialist tech, that are willing to add to their positions is extremely powerful. First of all, these investors are some of the smartest in a particular space, so their endorsement is important. Rather than selling at the IPO, they are adding to positions and are willing to own for a longer period of time. Also, crossover participation takes away some of the supply being sold on a deal. If you have a US$200m deal and US$75-$100m is spoken for, there is just a lot less to go around. That is going to help out pricing. We always try to have some of these pre-IPO investors involved in the IPO to provide support. Then we try to right-size the float, because one of things from an investor standpoint is the liquidity profile after the IPO listing and how will that grow. Institutional investors want to know how much a stock will trade after an IPO. Obviously there are smaller, biotech and tech deals where there are limitations, but in general you want to right-size the deal to have a decent size float so that there is a good amount of stock being traded down the road. IFR: We have seen a large number of foreign companies listing on US stock exchanges this year, despite trade tensions and tariffs. Carolyn, can you help us understand what is driving that deal flow? Carolyn Saacke: Traffic has been particularly strong from China. We are seeing so many deals coming out of Asia. In 2017, we had 17 IPOs in the US out of China, raising US$3.3bn. So far this year, we have had 19 IPOs raising US$6.7bn. There have been three US$1bn-plus IPOs this year, including [electric carmaker] Nio, the Tesla of China, which listed on NYSE yesterday [September 12]. You would not have seen this pace of foreign listings in the past. One of the big reasons we are seeing companies from China list in the US is liquidity. There is more trading liquidity on US exchanges than anywhere else in the world. Some of that may be going to change that a little bit. The Hong Kong stock exchange recently passed rules to allow listings by companies with dual-class stock, which was part of the reason Alibaba chose to list on the NYSE in 2014. We have already seen companies like Xiaomi take advantage of that rule change to list in Hong Kong. Another recent change implemented by the Hong Kong exchange is to allow listings by biotechs that are not yet profitable. That wasn’t possible before. We are going to see a lot more companies, including biotechs, list simultaneously in both the US and Asia. There has been some news about one of the largest US biotechs doing just that at some point this year. So there are some changes in the market for international listings. I still think from a liquidity perspective, because the US markets are so deep, US exchanges will continue to get their fair share of Chinese IPOs. We have

IFR: I would like to move on to Spotify and its direct listing in April. Carolyn, can you walk us through the direct listing process and the regulatory approvals that it made it possible? Carolyn Saacke: The process actually started a couple of years ago with three bulge-bracket investment banks calling me within 48 hours, asking “can we do a direct listing of a really cool company without any IPO?” On the first call, you tell them what the rules are and you’re like, okay. The second call hits and you’re like, interesting. Then by the third call, you realise something is up. It took a couple of years for us to work through the regulatory process. We worked with both the SEC and Spotify for quite a long time. We looked at the rules that we had in place: you can list an IPO this way, you can transfer a listing this way, and this is how other types of securities can be listed. But we didn’t have anything in place that would allow a direct listing like Spotify. We spent many, many months working through multiple drafts before the SEC approved the direct listing processes in February 2018. The rule allows a company with a market cap greater than US$250m, with at least 400 shareholders, and 1.1m shares outstanding to directly list. A company also is required to have an independent financial adviser. The direct listing rules are very similar to what are required for a traditional IPO, with similar protections such as for retail investors. Just looking at the public filings and the media coverage, it appeared that there was a clear track being followed once the direct listing process was approved. But there was a lot of work being done behind the scenes. There were three financial advisers that were working with Spotify. Citadel Securities was hired as the designated market maker and floor specialist. Spotify was working with its financial advisers for three months. There were a lot of complexities. Multiple shareholders, both institutional and retail, that did not actually own a tradable security, so all of them needed to be set up with accounts. You need to make sure that there are enough shares that you can actually short the stock, if investors wanted to, after the listing. There were so many steps along the way that made this possible. The good news is that all of the regulatory steps for a direct listing are in place. The next one is going to be much easier. As a side note, the SEC direct listing rules can be used on both NYSE and Nasdaq. James Dunning: Carolyn, a quick question. How much of the success do you believe was based on the fact that it was Spotify? I mean everyone knows Spotify, even my parents. I can walk through Times Square and ask who knows Spotify, and every single hand will go up. Some of the unicorns, even the tech unicorns, are not as well-known as Spotify. The plumbing and infrastructure for a direct listing are in place, I get that. But how easy will it really be for the next company to directly list? Carolyn Saacke: You are absolutely right. There are a few things that made Spotify special and that made its direct listing work. They had breadth of investors, many of whom had been there for a long time. There was a lot of marketing by the financial advisers to gauge interest from those investors; whether they were going to stay put and that not everyone would sell on day one. That everyone was able to sell was a big concern. On the other hand, you do want some selling by existing investors to create liquidity, because there is not an actual offering [of new stock]. From a research perspective, Spotify already had coverage before their listing; they are such a big company that has been around for a while. They also provided a lot of financial forecasts as part of the direct listing. You also have to remember that there was an active grey market in Spotify shares ahead of the direct listing on NYSE. In the first 10 days of March, the average daily trading volume in the grey market was 500,