By Myles Milston CEO of Globacap
Initial Public Offerings (IPO) have been around since 1971 but, as a way of raising finance for companies, they are beginning to fall out of favour.
In fact, earlier this year the Wall Street Journal declared Small Cap IPOs dead, suggesting venture capital financing had become the preferred method of securing funding for small to medium-sized enterprises (SME) in recent years.
It’s certainly true that since the Financial Crisis SMEs,in particular,have looked for alternative ways to raise funds. But they are not alone. The decision earlier this year of music streaming app, Spotify to opt for a direct stock market listing skipping the traditional IPO model made headlines around the world.
With a market cap of around $27bn Spotify can hardly be described as a small company. But by opting for the direct listing approach, the music streaming app exposed many of the failings of the existing IPO model. It illustratesthat companies don’t need to rely on the legion of brokers and advisers in the marketplace to successfully list on the stock exchange and create liquidity for their investors.
The seeds for this rebellion were sown during the Financial Crisis a decade ago. The immediate aftermath of the Financial Crisis saw banks being forced to stabilise their balance sheets. That led banks to withdraw funding to each other, with companies requiring funding being caught in the crossfire.
In the immediate aftermath, the resulting nervousness of investors meant the chances of any company launching a successful IPO reduced considerably, at least until markets and investors had calmed down, which didn’t occur until 2010.
Coupled with reduced access to bank funding (at the smaller end of the market, a European Central Bank task force recently estimated 36% of European SMEs still cannot get a bank loan), it should hardly come as a surprise that we have seen the rise of various fintech platforms attempting to bridge the funding gap in the last decade – from peer-to-peer lending, to crowdfunding, asset-based lending, and invoice factoring.
Spotify’s reasoning for not pursuing the typical IPO route will resonate with many business owners.
Spotify’s chief finance officer, Barry McCarthy, laid it out bluntly in the Financial Times: “The US public offer market is broken.”
He went on to comment that IPOs were financially draining, with a requirement that “money is left on the table” to keep participants, and particularly underwriters, happy. For many firms, especially SMEs, IPOs are inaccessible and prohibitively expensive, and this out-dated model is desperately in need of a makeover.
Advisory firms, on average, charge small businesses 10-15% of capital raised to list their equity on a small cap exchange, due to the high costs associated with each bespoke IPO. Larger businesses are charged less, usually 2-5% of capital raised, since the deal sizes are bigger. However,even that is excessive. Spotify’s direct listing of its shares – rather than going the traditional market IPO route – was a direct rebuke of these excessively high advisory costs.
Many alternative funding routes have their drawbacks too. Recently, for example, the Financial Conduct Authority (FCA) announced a crack-down on peer-to-peer lending and crowdfunding, for potentially mis-selling the level of risk to various investors. Conversely, while invoice factoring has had some success, it is still only a tiny portion of the lending market.
Another alternative funding route, the Initial Coin Offering (ICO), has exploded in popularity this year. In the first three months of 2018 alone, ICO’s raised $6.3bn, more than during the whole of 2017.The largest ICO, blockchain project EOS’s, raised a record-breaking $4.1billion in its token sale. However, while ICOs can be useful for tech-friendly businesses, they are not applicable to a lot of businesses and there have been a number of reputational issues and regulatory soundings in recent months which have stifled ICO activity.
A better alternative is Digital Security Offerings (DSOs), which harnesses blockchain technology in a regulated way, to offer a more transparent and cost effective form of funding. These are not ICOs, nor ‘token sales’ but use blockchain to issue securities in entirely digital form – for a significantly lower cost – something revolutionary in the financial services industry.In addition, those regulated equity or debt “tokens” can be more easily listed on and accessed through multiple trading venues globally, providing issuers with greater access to liquidity at a more cost-effective price, and with greater transparency and security.
Applied to the right areas, Blockchain and automation can potentially reduce issuance fees to as little as 3% and 0.5% for small and large companies respectively. Creating a security in blockchain form also provides a more efficient mechanism to administer that security on an ongoing basis, and also improves the entire workflow of clearing and settling in the secondary market.
There are already a number of initiatives underway that are designed to enable the trading of blockchain securities.The Gibraltar Stock Exchange has set up a blockchain exchange for digital assets.The Swiss Stock Exchange recently announced the formation of a Digital Exchange for the trading and settlement of purely digital assets.The US Securities and Exchange Commission (SEC) is considering applications for blockchain-based securities exchanges.Here in the UK, the Financial Conduct Authority (FCA) is also looking closely at this area, inviting a number of blockchain companies into its current Sandbox cohort
Globacap is one of the companies in the FCA Sanbox Cohort 4. The full platform, launching in late 2018, will allow companies to issue debt and equity in blockchain form, with FCA regulatory oversight. Tokens issued on the platform will comply with all relevant company law and FCA regulations, including Know Your Customer (KYC) and Anti Money Laundering (AML) rules.
It is firms like Globacap that will be at the forefront of a new wave of innovation in the financial services industry. Working in partnership with regulators to tokenize traditional securities, we will bring to companies raising funds the benefits of digitalisation, including 24/7 trading, real-time settlement, and chain-of-title.
We are entering a new era, where old-style capital raising methods such as the IPO, characterised by high fees, opaqueness, and favouritism, are being displaced by more efficient, cost-effective, and transparent processes. Blockchain technology, with regulatory oversight, is ushering in a new framework through which all market participants can benefit.
UK might need negative rates if recovery disappoints – BoE’s Vlieghe
By David Milliken and William Schomberg
LONDON (Reuters) – The Bank of England might need to cut interest rates below zero later this year or in 2022 if a recovery in the economy disappoints, especially if there is persistent unemployment, policymaker Gertjan Vlieghe said on Friday.
Vlieghe said he thought the likeliest scenario was that the economy would recover strongly as forecast by the central bank earlier this month, meaning a further loosening of monetary policy would not be needed.
Data published on Friday suggested the economy had stabilised after a new COVID-19 lockdown hit retailers last month, while businesses and consumers are hopeful a fast vaccination campaign will spur a recovery.
Vlieghe said in a speech published by the BoE that there was a risk of lasting job market weakness hurting wages and prices.
“In such a scenario, I judge more monetary stimulus would be appropriate, and I would favour a negative Bank Rate as the tool to implement the stimulus,” he said.
“The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year,” he added.
Vlieghe’s comments are similar to those of fellow policymaker Michael Saunders, who said on Thursday negative rates could be the BoE’s best tool in future.
Earlier this month the BoE gave British financial institutions six months to get ready for the possible introduction of negative interest rates, though it stressed that no decision had been taken on whether to implement them.
Investors saw the move as reducing the likelihood of the BoE following other central banks and adopting negative rates.
Some senior BoE policymakers, such as Deputy Governor Dave Ramsden, believe that adding to the central bank’s 875 billion pounds ($1.22 trillion) of government bond purchases remains the best way of boosting the economy if needed.
Vlieghe underscored the scale of the hit to Britain’s economy and said it was clear the country was not experiencing a V-shaped recovery, adding it was more like “something between a swoosh-shaped recovery and a W-shaped recovery.”
“I want to emphasise how far we still have to travel in this recovery,” he said, adding that it was “highly uncertain” how much of the pent-up savings amassed by households during the lockdowns would be spent.
By contrast, last week the BoE’s chief economist, Andy Haldane, likened the economy to a “coiled spring.”
Vlieghe also warned against raising interest rates if the economy appeared to be outperforming expectations.
“It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
Higher interest rates were unlikely to be appropriate until 2023 or 2024, he said.
($1 = 0.7146 pounds)
(Reporting by David Milliken; Editing by William Schomberg)
UK economy shows signs of stabilisation after new lockdown hit
By William Schomberg and David Milliken
LONDON (Reuters) – Britain’s economy has stabilised after a new COVID-19 lockdown last month hit retailers, and business and consumers are hopeful the vaccination campaign will spur a recovery, data showed on Friday.
The IHS Markit/CIPS flash composite Purchasing Managers’ Index, a survey of businesses, suggested the economy was barely shrinking in the first half of February as companies adjusted to the latest restrictions.
A separate survey of households showed consumers at their most confident since the pandemic began.
Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.
The central bank expects a strong subsequent recovery because of the COVID-19 vaccination programme – though policymaker Gertjan Vlieghe said in a speech on Friday that the BoE could need to cut interest rates below zero later this year if unemployment stayed high.
Prime Minister Boris Johnson is due on Monday to announce the next steps in England’s lockdown but has said any easing of restrictions will be gradual.
Official data for January underscored the impact of the latest lockdown on retailers.
Retail sales volumes slumped by 8.2% from December, a much bigger fall than the 2.5% decrease forecast in a Reuters poll of economists, and the second largest on record.
“The only good thing about the current lockdown is that it’s no way near as bad for the economy as the first one,” Paul Dales, an economist at Capital Economics, said.
The smaller fall in retail sales than last April’s 18% plunge reflected growth in online shopping.
BORROWING SURGE SLOWED IN JANUARY
There was some better news for finance minister Rishi Sunak as he prepares to announce Britain’s next annual budget on March 3.
Though public sector borrowing of 8.8 billion pounds ($12.3 billion) was the first January deficit in a decade, it was much less than the 24.5 billion pounds forecast in a Reuters poll.
That took borrowing since the start of the financial year in April to 270.6 billion pounds, reflecting a surge in spending and tax cuts ordered by Sunak.
The figure does not count losses on government-backed loans which could add 30 billion pounds to the shortfall this year, but the deficit is likely to be smaller than official forecasts, the Institute for Fiscal Studies think tank said.
Sunak is expected to extend a costly wage subsidy programme, at least for the hardest-hit sectors, but he said the time for a reckoning would come.
“It’s right that once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this,” he said.
Some economists expect higher taxes sooner rather than later.
“Big tax rises eventually will have to be announced, with 2022 likely to be the worst year, so that they will be far from voters’ minds by the time of the next general election in May 2024,” Samuel Tombs, at Pantheon Macroeconomics, said.
Public debt rose to 2.115 trillion pounds, or 97.9% of gross domestic product – a percentage not seen since the early 1960s.
The PMI survey and a separate measure of manufacturing from the Confederation of British Industry, showing factory orders suffering the smallest hit in a year, gave Sunak some cause for optimism.
IHS Markit’s chief business economist, Chris Williamson, said the improvement in business expectations suggested the economy was “poised for recovery.”
However the PMI survey showed factory output in February grew at its slowest rate in nine months. Many firms reported extra costs and disruption to supply chains from new post-Brexit barriers to trade with the European Union since Jan. 1.
Vlieghe warned against over-interpreting any early signs of growth. “It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
“We are experiencing something between a swoosh-shaped recovery and a W-shaped recovery. We are clearly not experiencing a V-shaped recovery.”
($1 = 0.7160 pounds)
(Editing by Angus MacSwan and Timothy Heritage)
Oil extends losses as Texas prepares to ramp up output
By Devika Krishna Kumar
NEW YORK (Reuters) – Oil prices fell for a second day on Friday, retreating further from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.
Brent crude futures were down 33 cents, or 0.5%, at $63.60 a barrel by 11:06 a.m. (1606 GMT) U.S. West Texas Intermediate (WTI) crude futures fell 60 cents, or 1%, to $59.92.
This week, both benchmarks had climbed to the highest in more than a year.
“Price pullback thus far appears corrective and is slight within the context of this month’s major upside price acceleration,” said Jim Ritterbusch, president of Ritterbusch and Associates.
Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude production and 21 billion cubic feet of natural gas, analysts estimated.
Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.
Companies were expected to prepare for production restarts on Friday as electric power and water services slowly resume, sources said.
“While much of the selling relates to a gradual resumption of power in the Gulf coast region ahead of a significant temperature warmup, the magnitude of this week’s loss of supply may require further discounting given much uncertainty regarding the extent and possible duration of lost output,” Ritterbusch said.
Oil fell despite a surprise drop in U.S. crude stockpiles in the week to Feb. 12, before the big freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]
The United States on Thursday said it was ready to talk to Iran about returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons. Still, analysts did not expect near-term reversal of sanctions on Iran that were imposed by the previous U.S. administration.
“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” said StoneX analyst Kevin Solomon.
(Additional reporting by Ahmad Ghaddar in London and Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; Editing by Jason Neely, David Goodman and David Gregorio)
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