Shining a light on capital markets

Last week Innovate Finance hosted the latest in their Fintech spotlight series titled: Shining a light on capital markets. This panel, chaired by Outward VC’s Andi Kazeroonian brought together industry experts to discuss the technological and regulatory tailwinds disrupting the equity capital markets landscape. Here’s a sum up of the key themes and insights.

Link to the full discussion here.

How is technology impacting capital markets?

There was a consensus across the panel that innovation in capital markets has predominantly come from the secondary market, with Charlie Walker – Head of Equity Primary Markets at the London Stock Exchange – pointing to a number of developments including: high touch phone broking moving to algorithmic trading; the rise of high frequency trading; the cost of transactions coming down; platforms offering free trading alongside a raft of new products. Whereas the primary market, as Anand Sambasivan – Founder and CEO of PrimaryBid – puts it “remains strangely familiar to the way it was when I started as an investment banker almost 20 years ago”.

Covid has however played an important role in unraveling and modernising these ‘familiar’ processes, forcing players in the primary market to rethink the status quo. Suneel Hargunani – Head of ECM at Citi Bank – referenced the recent EUR2.6bn JDE Peet’s IPO which took 10 days to complete (down from 4 weeks) as an example of the positive impact technology could have on making processes more efficient. The pandemic, as Walker notes, has thus “given people the ability to do things in a different way without the normal perceived risk of it”.

 

Is technology opening up the market for retail investors?

It is difficult to argue against the fact that technology has drastically opened up the market for retail. Walker notes that before PrimaryBid, the idea of “accessing tens of thousands of investors over a 3-4 hour book build was logistically impossible.” Technology according to Sambasivan, has been used to target the “specific [administrative and logistical] road-blocks” in the capital raising process, helping to open up high quality capital to companies, and a new asset class to small investors that had previously been excluded. 

Hargunani whilst in favor of retail inclusion, highlighted two areas that require additional consideration. First, the information advantage that institutional investors have over retail investors needs to be addressed. Second, there should be a tranch allocated to retail investors (5-10%) in order to balance the uneven playing field that current regulation creates.

 

‘Old guard’ (Incumbents) –partner or challenge?                               

Sambasivan, who orchestrated partnerships with Euronext and LSE early on in PrimaryBid’s life stage, is an advocate for collaborative business models. In fact, due to the large number of participants involved in a capital markets transaction, a broad degree of ecosystem buy-in is absolutely critical. Sambaisvan went on to say “we know the companies are eager to enfranchise this space [by including retail investors in capital raises] but it is the stock exchanges, the investment banks, the syndicate desks, the advisors, regulators – all of whom play a part in promoting this agenda.”

Lucinda Hedley – Partner at Deloitte who works closely with clients on partnering with technology start-ups – warns that whilst promising, these relationships don’t come easily. Partnering with incumbents requires a huge amount of time and capital to formalise – two things a start-up has very little of.

Question of the day:

Audience: “As technology improves access and information flow, is the €8mn resale limit for EU secondary public offerings still appropriate? How should the UK take the lead in reforming this?”

Sambasivan is of the view that this figure is arbitrary. Noting that due to limited data it is hard to gauge what it should be – if anything. As the volume of retail deals increase, PrimaryBid will be able to provide data on the levels of participation retail investors are interested in, which can be used to inform the new resale limit. Hargunani echoes Sambasivan, noting that more data will lead to “a fully functioning primary market and healthy aftermarket”.

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