The Importance of IPO to the Growth of the Economy
The entrance of new companies onto a country’s domestic exchange is usually viewed as a good indication of the general health of the economy. If that logic were to be extended then we could conclude that we are suffering from poor health within the region. Within the last ten years the listing of ordinary shares via IPO from Barbados, Trinidad and Jamaica are as follows:
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New Listings
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2006
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2007
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2008
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2009
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2010
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JSE
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2
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0
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1
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1
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8
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TTSE
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1
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0
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2
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1
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0
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BSE
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1
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0
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0
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0
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2
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Especially within Jamaica, a major factor that affects Initial Public Offerings is the demand side: the investors. At double-digit, largely risk-free interest rates, investors have been more inclined to invest in government paper than in companies seeking to raise capital. The owners of potentially listable companies and brokers were aware of this; and both understood that companies would probably not realize the price they would seek for their shares.
There has however been a game changer caused by the global financial meltdown, as in the case of Jamaica with actions taken by Government through the JDX to reduce interest rate on Government debt and also incentivize companies who chose to list on the Junior Exchange via Initial Public Offering.
While the global melt down has affected stock markets worldwide and investors’ confidence has been shaken, there is none-the-less a rebound in the Equities market due to decisive actions taken by governments, regulators and companies listed on the Exchanges to increase governance, improve risk management strategies and procedures and pay more attention to details. The latter leading to companies listed and unlisted seeking to recalibrate their balance sheets, reducing high dependence on loans and looking at more long term, low cost capital.
Initial Public Offerings which saw a decline in 2008 and 2009 are now on the rebound world-wide but most predominantly so in the developing countries. By extension these countries are rebounding from the economic fall-out at a greater pace than the developed countries worldwide. In the USA, the number of domestic listed companies has dropped by 45% since 1997.
The world’s leading exchange for fund raising through IPO in 2010 was the Shenzhen Stock Exchange which has set the record for most capital raised on an Exchange. For the first ten (10) months of 2010, this Exchange admitted 261 companies to its Exchange and still has over 400 applications in the pipeline. Comments from the Shenzhen Stock Exchange on their success of Companies funding their operations via IPO are as follows: ‘It not only channeled necessary funds and created value for listed SMEs, but also erected a beacon of hope for the vast number of ambitious SMEs.’ Based on the success of the SME market and to cushion hits experienced by the global financial crisis, China’s State Council launched a new market known as ChiNext with the mission of helping to transform the nation’s economic growth model, by encouraging innovative industries to raise capital via IPO. In one year, that is from October 2009 – October 2010, 134 “innovative growth companies” offered shares and raised US$ 14.8 billion. Examples of innovative industries for ChiNext were classified as :
ØChain Services – ( Standardization for cost cutting)
ØGreen Industries ( Recycling and environmental technology)
ØCultural Ventures ( TV series and box office movies)
ØBiotechnology ( R&D efforts & mass production of medical products)
ØEquipment manufacturing
This market which is dedicated to small companies has been providing the necessary fuel for the growth and sustainability of small companies. In general the Chinese government had a vested interested in encouraging family owned business to expand by raising funds via the market as they believe that once these businesses grow to a certain size they are no longer merely family businesses but ‘become the heart and soul of the national economy, an essential constituent of the national wealth and a valuable engine of employment.’
The trend that has been noted by the World Federation of Exchanges is that more small and medium sized companies are seeking to raise funds through IPOs, which translates to economic growth, new jobs and new opportunities. This is manifested mainly in the developing countries. As SMEs are the cornerstones for the nation economic growth and social well being, then local and regional efforts should be made to encourage companies to raise capital through this medium.
While IPOs power growth in an economy on a sustainable track, they can clearly be also used as a means of encouraging investors to be responsive to business opportunities and less dependent in non-productive investments. Since the beginning of 2010, though Investors have not totally recovered from the Ponzi schemes of the late-2000s, they are becoming less skittish and are embracing companies by participating in the IPO’s and have aided in unlocking other values for listed companies. These include post IPO access to other forms of capital such a Rights Issues, private equity and venture capital investment. Other value-added aspects are the many market intermediaries that must be prepared to assist these companies in being listed and remaining listed, such as the brokers, lawyers, underwriters, registrars and company secretarial service providers. Normally called the ‘financial chain’, growth in the number of successful IPOs would fuel this industry.
The other offshoots that are both important to successful IPOs and the overall growth of an economy are:
ØInvestor Education Programme which helps to mature the investing public in different forms of investments; increases the need for analysts to be more equipped to advise and understand the market and provides advertising and public relations spin-off for advertising agencies and media companies
ØIncrease in the crop of mentors and investment advisors and brokers seeking to develop more products based on the underlying securities
ØStrengthened information disclosure for many companies on which the economy is dependent. Improvement in corporate governance practices and strategies generally and greater investor access to information.
Support Structure
The emergence of IPO as a critical pillar of our economy’s growth will only be truly successful with supportive regulatory framework, a proper understanding by businesses of the power of equity and an educated ‘new breed’ of investors.
I will close with some thoughts on the potential of IPOs.
When Bill Gates took Microsoft public via IPO in 1986, the ensuing rise in the stock price made 4 billionaires and 12,000 millionaires of Microsoft employees.
Google’s CEO Eric Smidth, in reflecting on the 6th year of going public stated, ‘An initial public offering can change a company. Many in the market felt certain that if we went public Google’s ethos would not survive. We would be divided by haves and have nots and that talent would cash out and quit. A new focus in pleasing Wall Street would cause us to lose our prized objectivity and independence…Ultimately people feared that as Google transitioned from a bright young start up to a mature company it would lose its quirky spirit that made it innovative. None of that happened and I firmly believe we are the same company that we were then- just a lot bigger.’
In conclusion there are tremendous benefits to a company and the economy from a company raising funds via IPO:
ØMobilization of flexible funding for expansion, growth and sustainability, without fixed service cost
ØManaging investors’ financial risk by diversifying their investment portfolios
ØDeleveraging of the capital structure of the company
ØUnlocking of value within and external to an organization
ØInstitutionalization
ØInternational and local visibility
ØLiquidity for shareholders and credibility
As regional exchanges and member-dealers we must find new and innovative ways to impart the message and encourage
