While many companies have tapped the equity markets for money since the start of the pandemic, the process of recapitalisation has only just begun. The needs of most are currently unmet and, as at September 2020, it is far from clear that supply will match demand over the next six to 18 months.
The rate of equity capital raises in Europe has fallen by nearly 50% in the last decade. In the US, the average number of IPOs has halved from 300 annually 20 years ago. There has also been a 31.5% year-on-year decline in private equity sector activity in Q220.
There is, therefore, significant risk of a capital chasm – a deep gap between the legitimate need for capital and its available supply. This brings with it the potential to rupture both the US and UK economies. Fidelity has already warned that institutions do not have sufficient capital for the task at hand and, with other sources at a low ebb, the risk of a chasm must be deemed significant.
Given investors’ likely flight to safety with any further volatility, small- and mid-cap companies (SMIDs) are most at risk – as well as up to a third of all employment.
Although quantitative easing (QE) has inflated asset valuations, it has, so far, provided an effective ‘crumple zone’ for the US and UK economies. However, due to diminishing returns, QE is unlikely to be sufficient to prevent the emergence of a capital chasm.
THERE IS MUCH WE CANNOT CHANGE,
INFLUENCE OR EVEN KNOW
global uncertainty ahead
WE CAN INFLUENCE THE FLOW OF CAPITAL
current 3.9% to 7.5%.
chasm goes unbridged will
determine economic outcomes
after a company lists
Yet we also know that this resilient potential for future job growth is strongly linked to the need for capital and the health of the IPO market. Data from the US from IHS Global Insight show that 92% of job growth occurs after a company lists. As the extreme circumstances imposed by lockdowns ease in the UK and across much of the US, many SMIDs are in a race to cross their own capital chasms. The most fortunate are not just hoping to weather the pandemic, but to position themselves and exploit the growth opportunities the crisis has created.
No obvious way across the capital chasm
However, there have been significant recent changes. One of the most significant capital market impacts of the GFC was its challenge to the reliance of corporates on bank-based financing. With collective opinion having lost faith in banks, policy makers and businesses spent more than a decade seeking alternative sources.
financing structures will be severely tested
up a not inconsiderable $109bn
not debt to secure jobs and promote growth
There are other reasons to be concerned about capacity more generally – US small-cap capital raising is up year to date, but the public capital-raising sector focus for US small-cap companies is predominantly biotech and special purpose acquisition company’s (SPACs) dominant, with little activity outside these two areas.
- Anne Richards, Fidelity International’s CEO, flagged that the asset management industry would struggle to provide sufficient capital to fix the solvency issues which public businesses face as they emerge from lockdown. She expressed concern that the scale of the cash required to repay the public funding businesses have received will be so large that it would depress recovery, and emphasised that as businesses recapitalise it is important they are able to access as many pools of capital as possible.
- Peter Harrison, CEO of Schroders, has stated that companies need more equity, not debt to secure jobs and promote growth. He has pushed for the UK government to create a £20–30bn patient capital fund to allow companies to maintain investment plans and protect jobs.
SEEK AND (SO FAR) YOU SHALL FIND
% of total
Source: London Stock Exchange
In the US, the dominant sectors by far were financials and healthcare, with the weight towards follow-on activity. Together they represented 87% of total capital raised and 94% of IPO capital raised by smaller companies – the financials component being heavily driven by SPAC and investment fund IPOs.
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