After a solid start to 2007, the ECM market has been thrown into disarray as the sub-prime meltdown hit equity markets hard through August. With most markets taking their usual holiday breather, the true impact of increased volatility and investor nervousness will not become apparent until later in the year. Pipelines remain in tact, although ECM bankers who were quick to shrug off the wider impact of the late February correction, are facing what should be their busiest time of year with some trepidation.
Global equity issuance volumes were heading for record volumes in most regions with EMEA hitting more than US$150bn at the end of the first half, while US volumes surpassed US$100bn and Asia pushed past US$115bn, aided by a buoyant Chinese ECM market. In spite of the market concerns, issuance could still close the year at record levels as fundamentals remain strong with corporates delivering strong earnings numbers.
One of the biggest stories in Europe has been the growth of ECM activity in Russia, making it the second most active market in the region in EMEA. But as the market has developed in terms of volume and diversity, the emerging market premium, which attracted so many new investors, is fast being eroded. That is pushing emerging market specialists to new regions with Sub-Saharan Africa reaping most of the benefits, as bankers pen it as the next Russia.
Permanent capital for closed-end funds has been at the top of the agenda for many ECM teams and volumes have increased dramatically. Performance, however, has been lacklustre with many funds trading below NAV and IPOs struggling to attract appropriate demand. But certain characteristics for success are beginning to emerge, and with investors becoming increasingly selective about what they will buy, bankers have high hopes that a market for the 'best in class' funds will develop and flourish. Real estate funds have also suffered as investors finally became fatigued with one of Europe's fastest growing sectors for equity issuance, and investors finally shunned the UK's most ambitious REIT listing amid concerns that property prices had already peaked.
In the US, the summer correction forced many houses to put their pipelines on hold, but the primary concern has been in the equity-linked world. Bifurcation of convertible bonds into their separate debt and equity parts is likely to have a significant impact on issuance levels, which have been riding at record highs. Corporates have found the CB market to be a great source of EPS accretive financing as proceeds are used to finance share buybacks. That driver looks set to disappear, but many bankers remain optimistic given that economic drivers remain strong, particularly against a backdrop of increased volatility and a more expensive straight debt market.
Exchange consolidation continues unabated with the latest round of acquisitions including Nasdaq's attempts to secure the OMX after its bid for the LSE failed. One area where London has dominated in 2006 and 2007 is in small to mid-cap listings with AIM becoming one of the most successful platforms for new listings. The US is offering some alternatives too. Nasdaq has brought centralised trading to its Portal private trading platform, while Goldman Sachs' had attracted the first listings to GSTrUE.
Asian ECM has been driven by China's ongoing economic boom. First half volumes hit US$34bn, just under half of that seen in the US. The market has already proven to be remarkably immune to wider credit issues that have hit global equities, although it is not without its own problems. Intense regulatory intervention has made for some bizarre pricing and execution decisions, and ongoing tussles between Shanghai and Hong Kong continue, as they compete to become the main Asian listing hub.
Japan represents one of the few markets where primary equity volumes have come to a virtual standstill. Corporates have become particularly sensitive to dilutive share sales as activist hedge funds aim to gain a greater influence on the corporate decision-making process. Instead, they are turning to highly structured private financing solutions, which might address their current needs, but hand a huge portion of value over to the advising banks.