Follow-On Offerings: The New Face of Natural Liquidity
Follow-on offerings of primary issuance from existing publicly listed companies focus on efficiency and cost, but the process is neither significantly more economical nor radically more efficient than five years ago. Viewed holistically, the relationship between issuers and institutional investors appears increasingly out of synch with today’s user community that expects transparency, collaboration and pricing power. This is changing.
On one side, issuers are looking for quality investors who support the growth of their companies. More than a third of the five thousand US exchange-listed companies filed S-3 shelf registrations in 2009-12, giving them the means to come to the market to raise capital when they need funds or market conditions are favorable.
Individual products and providers are extending existing practices or core expertise, which adds pockets of efficiency but do not radically alter workflows. Issuers depend on their investment banks and relationships have deep roots. Big companies with deep pockets raise money easily, file shelf registrations that are effective immediately and have a deep investor reach. Less liquid and less experienced companies that need small amounts of capital are heavily dependent on their banks even if well-known in the investment community.
On the other side, institutional investors bemoan the difficulties of trading in today’s highly fragmented market but lack a method to tap into the primary issues without triggering compliance obligations. Market structure changes over the past five years have radically altered the makeup of participants and liquidity formation. Fragmentation in the secondary trading markets has resulted in the high use of algorithms and an explosion of dark pools, creating a daily battle to find liquidity and trade large orders.
The investment world is flattening geographically, and investors expect transparency, collaboration and control. Strong relationships and often-infrequent corporate activity provide little impetus for change, but the combination of competition for investor capital, demand for natural liquidity and emerging product offerings will fuel an evolution of changing business workflows and business models. An efficient capital formation process will bring more choice, competition and innovation to current methods and enable companies to be more opportunistic about how and when they come to market. In addition to providing a better two-way dialogue between issuers and investors, there will be opportunities for banks, brokers, investor relations firms, transfer agents and vendors to compete across the spectrum of services for issuers.