IFR US ECM Roundtable 2018: Part 2

IFR US Equity Capital Markets Roundtable 2018
17 min read

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 also seen some European companies list in the US, but not that much. The European stock markets have gotten stronger, so a lot of the new listings are remaining there. You look at a company like Adyen, the Dutch fintech payments company that listed on Euronext in June. In the past, they would have listed on NYSE. But there was enough liquidity [on Euronext], Adyen is a big enough company, and there were enough investors that wanted to invest. Investors were going to buy the IPO whether the listing was in Europe or in the US, so why not keep it in the home market?

We were hoping to see a lot more deals from Latin America this year. We started off the year really strong, with another fintech company [PagSeguro Digital] that listed with NYSE in January. Brazil can’t stop getting in its own way, right? We are not seeing as much out of Brazil. And Argentina is having its own problems.

But when companies need to raise capital, they do so here in the US. Hopefully, we are going to continue to see that for some time longer.

IFR: To be fair, the IPO market has been quite active in Asia as well.

Carolyn Saacke: Oh, absolutely.

IFR: Akram, we are hoping to call upon your international experience, given that you have had stints in Asia-Pacific, EMEA and the US. How does syndication of Asian deals differ from US deals?

Akram Zaman: Both regions have their pros and cons. In all honesty, it is really interesting. There are a lot of different factors that go into where a company wants to list. We have seen that process evolve over the last couple of years, and we are going to see it continue to evolve over the next couple of years.

I’ll focus on China because Carolyn mentioned it.

Let’s take Tencent, for example. They have been active in monetising stakes. We did a Hong Kong IPO last year for China Literature, which was one of their portfolio companies. They decided to list in Hong Kong. Tencent themselves are listed in Hong Kong. Then you would have seen in the press that Tencent Music is a potential IPO that will likely list in the US.

Often, many of these companies gravitate to their home market, but they also think about the peers. So, Spotify could be a potential peer for Tencent Music.

They also think about what the rationale is. Do they want to acquire companies potentially listed in the US? Do they want an even stronger US institutional shareholder base? Investors are becoming more listing-agnostic.

It is also important for companies to consider where their ecosystem resides. Alibaba and JD.com are listed in the US, for example. There are a number of very high-quality Chinese companies listed in the US, both on NYSE and Nasdaq.

There are a lot of different factors that determine where a company lists.

One final point I would make, and it’s arguably the most important, is where a company can get the best valuation. At various times, valuation arbitrage can vary between regions. We have seen take-privates of US-listed Chinese companies, and we have seen Chinese companies list in the US.

Every situation is very different, and the decision is very personal and based on a company’s chairman and its backers. Honestly, I don’t think we’ve really seen a trend established. We have seen really good companies list over here and perform and trade well, and others that have not traded as well. We have seen exactly the same thing in Hong Kong.

It will be interesting to see how the new regulations in Hong Kong impact whether those companies stay at home or whether they come here.

We still think that the highest quality buyside institutions in the world are here in the US. I’m obviously saying that because I work at Bank of America Merrill Lynch, but we really truly think that [US institutions] are the highest quality capital, and generally believe US listings allow for the best, overall global institutional participation.

The final thing I would talk about is retail. Obviously, you have US retail that participate in US stock listings, and then you have Hong Kong retail. There is a clawback mechanism in Hong Kong that has to be taken into consideration by issuers and investment banks in the pricing and syndication of a new deal. How that retail behaves in the aftermarket; how much they do contribute to the process?

The short answer is that there are a lot of different factors that need to be considered as to when and where a company gets listed.

IFR: Moving onto one of our favourite topics: cannabis. Tilray went public in July and is the top performing IPO of the year [up 605% from offer at the time of the roundtable]. Canopy Growth is another Canadian grower that listed on NYSE in February and followed up with a convertible bond in June.

Steven, do you see anything in common here in terms of those financings?

Steven Tuch: We can add cannabis to the list of growth industries. I find myself in a unique situation here, because BMO is a bank. In the US, cannabis is still illegal under federal law.

BMO did a deal in Canada for a cannabis company that I was not involved with, I could not be involved with, nor could anybody in the US. Any institution that has a banking licence in the US, could not be involved. While I work on BMO’s US equity capital markets desk, I could not even tell you when the roadshow was. The process was completely ring-fenced out of Canada.

And by the way, one of my lawyers is in the room so I am waiting for her to shake her head violently one way or the other!

But cannabis is a growth industry. And it’s becoming legal state by state. But until federal laws change, investment banks that are chartered with the Federal Reserve cannot participate in underwriting securities for cannabis companies. There are investment banks that are not regulated as banks in the US that can.

Do I think cannabis is a good industry? In countries where it’s legal, such as Uruguay and Canada, it is a very good business. In the US, it is a business that US banks cannot participate in today, until the laws change. So ring-fenced is the only word I can use.

IFR: Carolyn, can you talk a little bit about the NYSE’s listing rules as they relate to cannabis?

Carolyn Saacke: Absolutely. We get calls every day from cannabis companies that want to list. They want to know how the rules have changed and how our approach has changed.

In 2017 we listed a company called Innovative Industrial Properties, a triple-net lease REIT that has customers that grow cannabis in states where it is legal to buy and sell cannabis for medicinal purposes.

There was something known as the “Cole Memo” [issued in 2013 by US deputy AG James Cole] that basically said that the US attorney general would not get involved in matters if cannabis is legal within a state and as long as it is not distributed. Even though cannabis is illegal on a federal level, we were able to get comfortable on very select situations where companies are not buying, selling or marketing in jurisdictions where cannabis is illegal.

Jeff Sessions [appointed as US attorney general in January 2017] later came in and said the Cole Memo no longer applies, so we are now a little bit more concerned. NYSE is very much on the same path as Nasdaq, by the way. You’re not going to see one exchange go one way legally and another exchange go the other.

Right now, if a company is doing business in the US, where cannabis is illegal, we will not list you. Full stop. Canadian companies [the federal government legalises cannabis on October 17 2018] are absolutely fine. Each of the exchanges then looks at it from a reputational perspective and what that really means. All exchanges have some discretion whether or not they are going to list a company for any reason. We are just looking at it day by day.

We are getting a lot of calls from clients in the US talking about how they believe cannabis is going to become more legal within 12 months, 18 months, depending on how aggressive that particular management team is. We are also hearing from more institutional investors and investment banks in the US that are taking meetings with these companies.

It is going to be a really interesting to watch how cannabis evolves as an industry.

Matthew Sperling: Just to back you up on that, since Labor Day [September 3], we have been inundated from investors looking for cannabis opportunities, whether that is in the private market, companies that are listed in Canada that are considering a potential US listing, or even just conferences to educate themselves on the industry.

It is interesting. From the buyside, cannabis is a sector that has never been covered. Where does it fall? Is it a special situation? Is the asset class here to stay? Maybe it falls into consumer staples.

There are a lot consumer staples companies at conferences talking about the effect of cannabis to their industry, their bottom line, and whether they are trying to partner with the industry. There is a view that cannabis is definitely here to stay and I can tell, just from the opportunities I have seen over the last year and a half, that there are a lot more investment opportunities than there’s ever been.

The breadth of investors that are looking at the industry now is not only hedge funds and not only high-net-worth private individuals. Cannabis has definitely become topical among mutual funds, if not already an investment.

James Dunning: Obviously, Tilray has garnered an unbelievable amount of attention from investors. But I would point out that Charlotte’s Web, a Canadian company, went public before Labor Day and has been well received by the investment community.

I believe the cannabis industry definitely has legs to it, despite the comparisons to cryptocurrency. I can’t make that connection.

I agree with the others, it will be interesting to see how cannabis is covered from the perspective of research and trading.

To see the digital version of this roundtable, please click here .

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