Accessing Global Capital Markets: Benefits and Challenges

As markets become global, accessing capital is no longer tied to a company’s domestic market or to the location of its headquarters or main business operations. Companies are increasingly considering non-domestic sources for their capital needs and dual listings on exchanges in both their home market and abroad. When accessing broader capital markets, senior management should be aware that in addition to diversifying their capital base, they are also facing conventions and cultural issues for which they may be unprepared. This CEO Topic addresses a few of the issues management should focus on when deciding whether to access cross-border capital markets and as they work to understand the investor mindset in other capital markets.

Cross-border listings can provide real benefit in terms of additional capital, a diverse shareholder base and a potential valuation premium based on comparables. "Companies that meet the highest and broadest standards of disclosure and shareholder communication get a higher durable value for their stock when accessing cross-border capital markets," said Brian Rafferty, Founder and Managing Director of global IR firm Taylor-Rafferty. “However, the reporting, infrastructural and cultural challenges and complexities should not be underestimated,” adds Brian.

The first and most important area to focus on is the regulatory and compliance environment in the financial markets you access. Regulatory requirements are dynamic and vary considerably. They will impact all aspects of accessing markets from what you are required to disclose to how you provide this information. Regulations will shape your financial statements, the accounting standards applied, the required content, the frequency of reporting and the level of disclosure. The most important decision to help guide you through regulatory and compliance requirements is selecting the right advisors including accountants, bankers, legal counsel and IR professionals. It is essential that these advisors not only understand domestic markets regulations but also have sensitivity to the many differences between a company’s home market and targeted capital market.

The registration or listing process also varies greatly by market and it is critical to understand what the expectations and requirements are for investors by region. The accounting differential is becoming easier to manage as global companies are increasingly adopting IFRS, and IFRS and U.S. GAAP standards with few exceptions are now equivalent.. The regulatory system governs the way in which a company provides materials to analysts and potential investors, how information is disseminated, and what future expectations for disclosure will be. Even the way initial share pricing is determined varies by market. For example, in German IPOs over the last five to six years it has become more common not to include the pricing range in the first filing of the prospectus and, therefore, an indication of the initial share price is not provided until the point of book building. This so-called de-coupled process is not applicable in U.S. and U.K. IPOs.

The local investment community is quite different by region in terms of their size, focus, criteria and investment horizon. The priority placed on financial statements, guidance, and even management experience and background will vary by market. The role of analysts will differ by region both in preparation for an initial offering and afterward. It is very important to understand the expectations of potential investors and the influence of analysts.

The final consideration is how you most effectively and efficiently operate as a public company with dual listings. Perhaps the most nettlesome area is disclosure of information and how you communicate/interact with analysts, institutions and retail investors. The expectations in your domestic market may be very different than those required by law in your non-domestic market. Time zone differences will also become an issue in terms of what is disclosed, when it is disclosed and to whom. U.S. Reg. FD necessitates consistency of disclosure without any favoritism which may be countercultural to certain non-U.S. based companies. The U.S. markets provide grace periods for the filing of financials statements by foreign registrants. However, even though requirements are more lenient for foreign registrants, unless they act like their U.S. peers they will not receive the same attention as comparables if their information is off-cycle. Whatever the technical rule, we find it is important to act and provide information as other do in the capital market in which you are active.

In addition to these reporting/communications infrastructural challenges, there are cultural considerations such as the role of the Board in encouraging management to focus on shareholder value creation, the ways in which management communicates their strategy and skill sets, language and presentation convention differences, and other customs more specific to locale.

Effectively accessing cross-border markets requires considerable thought and attention to a variety of key issues. Even more importantly, it requires acting like others operating in the same markets. To further discuss cultural issues in global capital markets and to get references to knowledgeable advisors, feel free to contact your GA team.