U.S. capital market competitiveness showed even greater signs of weakness in the first quarter of 2014, when measures of aversion to U.S. public equity markets remained at levels not seen since the 2007-2008 financial crisis.
“The competitive landscape of U.S. equity capital markets has started 2014 with a thud,” said Prof. Hal S. Scott, Director of the Committee on Capital Markets Regulation. “Foreign companies are choosing to raise capital outside U.S. public markets at rates not seen since the financial crisis.”
While the overall U.S. IPO market did see renewed signs of strength in the first quarter, increasing 41%in volume over the first quarter of 2013 ($11 billion versus $7.8 billion), foreign issuers accounted for relatively little of that activity. In fact, a number of key measures of market competitiveness showed dramatic declines over previous years, including:
U.S. share of global IPOs by foreign companies decreased to 5.4%, the lowest level since 2008 and a substantial decline from the 11.4% recorded in 2012. This measure remains far below the historical average of 26.8% (1996-2007).
Foreign companies that did raise equity capital in the United States in the first quarter of 2014 did so overwhelmingly via private rather than public markets. Over 91% of initial offerings of foreign equity in the United States were conducted through private Rule 144A offerings rather than public offerings. This measure of aversion to U.S. public equity markets is at its highest level since 2008 and stands significantly higher than the historical average of 66.1% (1996-2007).
U.S. share of equity globally raised in public markets sits at the lowest level since 2010. Equity markets in the U.S. captured only 30.3% of primary and secondary offerings so far this year, down from a recent high of 49% in 2012. This reflects a continued preference by issuers to avoid the United States equity capital markets.
Cross-listing activity in the U.S. by foreign companies remained low. Activity in the first quarter of 2014 suggests only 8 foreign companies will cross-list in the U.S. this year, fewer than in any year since 2010, and well below the historical average of 17 cross-listings per year. The low number of companies seeking to list in the U.S. without raising capital provides further evidence that the regulatory climate is not attractive to companies wishing to associate themselves with more rigorous standards of conduct.
The selection of the U.S. equity markets by the Chinese firm, Alibaba, for its impending IPO illustrates an important point in U.S. competitiveness. Technology firms typically seek to issue dual-class stock, which is permitted in the U.S., but prohibited in other jurisdictions such as Hong Kong. If the U.S. did not have the more favorable regulatory environment, Alibaba would likely have selected Hong Kong for its IPO. Clearly, the competitive landscape of U.S. public equity markets will only improve with regulatory reform that is more attractive to issuers.
The CCMR believes that the policy recommendations in its 2006 Interim Report remain essential to the restoration of U.S. competitiveness. “We urge regulators implementing the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act to minimize the adverse competitive effects of new regulations, particularly in areas where the U.S. regulatory approach differs significantly from competitor markets,” said Scott.
Data for the first quarter of 2014 are available here.
A PDF of this release is available here.
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Director, Committee on Capital Markets Regulation