DIRECTIONS IN CAPITAL MARKETS 2018 - Minter Ellison
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
DIRECTIONS IN CAPITAL MARKETS 2018
INTRODUCTION FY18 AT A GLANCE
Welcome to the fourth edition
of MinterEllison’s Directions
A$33.9B 2018
DEAL
IN EQUITY CAPITAL RAISED COUNT
in Capital Markets report, part (DOWN 34.6% FROM 2017) JAN 2018-
of our annual Deals Trilogy. OCT 2018
We are pleased to present our observations
on trends in equity and debt capital markets
A$25.7B
IN IPOs BY MARKET CAP TOTAL
(ECM and DCM, respectively) in FY18 and our (UP 80.4% FROM 2017) DEAL
predictions for FY19.
COUNT
A$9.8B
Our observations are primarily based on our
analysis of market data for the financial year
ended 30 June 2018. In ECM we analysed data IN SHARE PLACEMENTS
477
sourced from the Australian Securities Exchange (DOWN 52.2% FROM 2017)
(ASX). In DCM, we focused on analysing credit
data from the Reserve Bank of Australia,
specifically growth in loans from non-bank
financial institutions as non-bank lending and
A$6.8B
non-bank M&A rise. We also looked at global
IN RIGHTS ISSUES TOTAL
DCM activity over the past five years to get an (DOWN 20% FROM 2017) SECONDARY
overall picture on current trends that will affect RAISINGS
local markets.
Our report:
2
MEGADEALS (IPOs OVER
415
∞ identifies six key ECM trends and A VALUE OF $1 BILLION)
two key DCM trends in FY18;
∞ discusses the role played by key Australian
regulators; 110
MID-MARKET DEALS TOTAL
∞ makes nine predictions for FY19; and
(INCLUDING SECONDARY FLOATS
∞ provides a list of five hot sectors to watch. RAISINGS) BETWEEN THE
MinterEllison played a central role advising VALUE OF A$50M AND A$500M
on many of the capital markets transactions
profiled in this report. We trust that our report
62
provides some interesting perspectives and is a
useful resource for you.
Source: ASX
2AUSTRALIAN ECM CASH ISSUE ($M) FY18 DCM AT A GLANCE
40,000
GLOBAL DCM - VOLUME (US$B)
30,000
Global DCM markets had a 4000
relatively strong start to the year. 3500
20,000
First quarter volumes showed
3000
their second strongest initial
quarter since 2013, and the third 2500
10,000
largest in total for the past 10
2000
years. Despite hefty volume,
0 Jul-Dec Jan-Jun Jul-Dec Jan-Jun more recent bond activity has 1500
2016 2017 2017 2018 been affected by interest rate 1000
hikes in the US and instability
500
FLOATS SECONDARY RAISINGS in global stock markets. These
Source: ASX
sentiments have also been felt in 0
Australia, where DCM activity has
2014 H1
2014 H2
2015 H1
2015 H2
2016 H1
2016 H2
2017 H1
2017 H2
2018 H1
slowed down considerably as
AUSTRALIAN ECM DEAL COUNT credit spreads have widened.
250
200
GLOBAL DCM - NUMBER OF DEALS
150 15,000
12,500
100
10,000
50 7,500
5,000
0
2,500
Mar 16
Jun 16
Sep 16
Dec 16
Mar 17
Jun 17
Sep 17
Dec 17
Mar 18
Jun 18
Sep 18
Dec 18
0
2014 H1
2014 H2
2015 H1
2015 H2
2016 H1
2016 H2
2017 H1
2017 H2
2018 H1
FLOATS SECONDARY RAISINGS
Source: CapitalIQ Source: dealogic
3KEY ECM TRENDS IN FY18
1. Deals that 2. Flavoured REITS continue
$ keep on giving –
equity raising
Case study:
oOh!media’s capital raising
to be palatable –
particularly in food and agri
to fund M&A to fund the acquisition of Adshel
As predicted in our previous Directions in
Equity capital and secondary oOh!media acquired street furniture advertising business Adshel from Capital Markets, both real estate investment
raisings fell for a second H&TE Limited for $570 million. The acquisition was part funded by trusts (REIT) with sectoral exposures and
consecutive year in a cooling way of a fully underwritten $330m accelerated non-renounceable also the agribusiness and food sectors
market. While Australian ECM entitlement offer. continue to come forward as
activity was subdued, there was quality IPO candidates.
still some movement with many Adshel’s business complements oOh!media’s existing portfolio. oOh!media
ASX-listed acquirers raising funds to announced that it expected the digitisation opportunity in the Adshel
pay cash consideration for targets. business to provide a significant avenue for further growth.
The bulk of these offerings took the Key to success of the acquisition was the capital raising, which helped
Case Study:
form of rights issues and were well oOh!media to successfully secure this avenue for further growth and receive Vitalharvest
supported by existing shareholders full financial backing by way of full underwriting by Macquarie Capital.
looking for a level of growth Vitalharvest’s objective is to provide
beyond the organic. While the cost The capital raising was successful despite the uncertainty associated
investors with exposure to real agricultural
of debt funding remains low due to with the acquisition. The Adshel deal was conditional to receipt of ACCC
property assets whose earnings profile
historically low interest rates, the approval. The process was complicated by ACCC’s earlier rejection of a
and underlying value are exposed to the
success of these equity offerings proposed merger between oOh!media and competitor APN Outdoor, and
growing global agricultural demand for
may be reflective of investors by the announcement of a merger transaction between APN Outdoor and
nutritious, healthy food. The initial assets
rewarding companies for not JCDecaux SA one day after the announcement of the Adshel deal. Ultimately,
comprise one of the largest aggregations
repeating the mistakes of the global the oOh!media / AdShel transaction received approval and was completed.
of berry and citrus farms in Australia
financial crisis and maintaining MinterEllison advised oOh!media on this deal. which are split over approximately 3,700
gearing at moderate levels. hectares and 130 property titles located
Notable equity raises to fund across New South Wales, Tasmania and
M&A activity included: South Australia. The assets are leased to
Costa Group. Vitalharvest’s properties
were independently valued at $238.4
Issuer Target Acquisition value Equity raising value million by CBRE and provide agricultural
diversification by way of crop type,
oOh!media Limited Adshel A$570 million A$329.9 million climatic region, water source and product
Bellamy's Australia Limited Camperdown Powder A$28.5 million A$60.4 million end markets.
Reliance Worldwide Corporation Limited John Guest Holdings A$1.22 billion A$1.10 billion Vitalharvest achieved a $185 million IPO
of the Vitalharvest Freehold Trust on ASX.
Link Administration Holdings Limited Capita Asset Services A$1.49 billion A$883 million This IPO is unique in representing the
first standalone agricultural REIT of major
Woodside Petroleum Limited 50% interest in Scarborough Gas approx. US$1.2 billion A$2.5 billion
citrus and berries properties across a
Yancoal Australia Limited Coal & Allied US$2.69 billion US$2.5 billion number of Australian states.
4KEY ECM TRENDS IN FY18
3. Hot or not? The ups and downs The good The bad and
of listed investment vehicles the ugly
As discussed in our Directions in Private There was also a good number of more The managers whose IPOs met with LITs and LICs flopped where
Equity report, the 2018 financial year saw the traditional listed investment vehicle IPOs, success were those who offered innovative the offering was not sufficiently
greatest amount of alternative funding raised including some of the largest ever by Magellan structures or products. LICs and LITs differentiated from other alternatives
by Australian and foreign managers operating Global Trust and L1 Long Short Fund. However, face the perennial issue of how to attract (including unlisted retail funds). With
in Australia. This included funding raised in the FY18 also saw a reasonable number of investors into a product whose fees are the liquidity features of unlisted
listed market, including around $800 million by proposed listed investment vehicles fail to higher simply by reason of the listing. funds steadily being improved (see
MCP Master Income Trust (managed by Metrics execute their IPOs. Products issuers like Magellan broke new our Directions in Private Equity
Credit Partners) and $175 million by Gryphon ground to not only absorb the initial listing report), only listed funds with
What drove the success or failure of these
Capital Income Trust (managed by Gryphon costs (ensuring that the net asset value on truly novel features, or asset class
listings? It was a case of the good, the bad
Capital Investments). listing equated to the total IPO raise), but exposures or transparent pricing
and the ugly.
also to offer loyalty units without affecting found favour with investors and
the net asset value of the vehicle. Issuers advisor networks. In addition, some
like Metrics offered exposure to asset issuers struggled to overcome the
Case Study: classes which are normally reserved for challenge of tapping into the optimal
MCP Master Income Trust institutional investors, while also enabling a
longer investment horizon than comparable
distribution channels for these
products.
Metric Credit Partners established MCP Master Income Trust, a listed investment trust unlisted products. Finally, LITs generally
holding a diversified portfolio of credit investments. The Trust listed on the ASX in October found favour over LICs due to favourable tax
2017 by way of a $520 million IPO. In early 2018, significant investor demand saw MCP characteristics.
Master Income Trust back in the market with a capital raising of up to $381 million which
was structured as a 1 for 1.7 pro rata non-renounceable entitlement offer and associated Issuer IPO size Investment strategy
top-up placement. This capital raising was novel in that it involved a back-end placement
to retail investors. Magellan Global Trust A$1.55 billion Global equities
The Trust invests in units in the MCP wholesale investments trust, cash at bank and other VGI Partners Global A$550 million Global equities
assets in accordance with its stated investment strategy. This is the provision of monthly cash Investments Limited
income, low risk of capital loss and portfolio diversification by actively managing diversified L1 Capital Kong Short Fund A$1.3 billion Australian, New Zealand
loan portfolios and participating in Australia’s bank-dominated corporate loan market. Limited and global equities
The IPO was the first of its kind on ASX and has generated a large amount of interest from
investors and other product issuers who have noted the strong success of the MCP Master MCP Master Income Trust A$516 million Australian corporate loans
Income Trust.
WAM Global Limited A$465.5 million Undervalued international
The Trust’s structure is innovative and it has disrupted the retail credit space by providing growth entities
retail investors with exposure to investments which are normally illiquid and/or reserved
Gryphon Capital Income Trust A$175.3 million Residential mortgage
for institutional investors. In an environment where investors are struggling to find stable backed securities and asset
and reliable income sources, the MCP Master Income Trust provides long term surety of backed securities with
income for investors. Australian domiciled issuers
MinterEllison advised Metric Credit Partners and the responsible entity for the MCP Master
Income Trust in relation to all aspects of the IPO and ASX listing and capital raising.
5KEY ECM TRENDS IN FY18
4. IPOs –
from little things…?
While FY18 saw a healthy overall number of At the smaller end, however, companies with
new listings by way of IPO on ASX, they were strong growth prospects, innovative business
overwhelmingly at the small cap to lower mid- models or good industry tailwinds met with Case Study:
market end of the spectrum. Of the 113 IPOs success. In this segment, investor appetite Johns Lyng Group
in FY18, only four had market capitalisations of extended to a range of industries, including
over $500 million. financial services (Evans Dixon, Netwealth and The Johns Lyng Group Limited IPO was a pertinent
Selfwealth), resources (Jupiter Mines, Bounty example of a successful mid-market business IPO with
A number of proposed very large IPOs
Mining), renewables (Windlab and Pyrolyx) and strong earnings and prevailing industry tailwinds.
ultimately did not proceed, with the vendors
tech and fin tech (Credible Labs, P2P Transport
electing to sell to trade or spin the entity off. Johns Lyng Group is a leading integrated buildings
and Trimantium GrowthOps).
For example, Origin sold Lattice to Beach for services group delivering building and restoration
$1.6 billion, Brookfield, Macquarie and their This success came despite several disclosure- services across Australia.
co-owners sold Quadrant Energy to Santos for related scandals involving small, recently listed
Johns Lyng Group raised $96 million at IPO, with around
$2.9 billion, while the Commonwealth Bank of companies. The allegations of non-transparency
50% of the total amount raised used to fund a partial exit of
Australia is spinning off its wealth management levelled at the likes of Get Swift and BigUn had
the company’s pre-IPO investor base. As is common with
and mortgage broking business, Colonial First the potential to put a chill on the market for new
private mid-market businesses, the structure of Johns Lyng
State Global Asset Management. issuers at the small end. However, it appears
Group prior to IPO was unsuitable for a listed environment.
that greater regulatory scrutiny by ASX (which
The group comprised of a large number of sub-trusts and
stepped in quickly with revised continuous
subsidiary companies, many of which included outside equity
disclosure guidance) reassured the market.
interests. Accordingly, and as part of the IPO, a restructure of
the group occurred, which involved a roll-up of the sub-trusts
and subsidiary companies in which minority or outside equity
interests were held.
MinterEllison advised Johns Lyng Group on all aspects of
Corporate its IPO and restructure.
restructures as
part of an IPO to
make businesses
investment ready
has been an
emerging theme
at the smaller end
of the market.
6KEY ECM TRENDS IN FY18
5. Sticking to the core 6. Tax issues with obtaining
– demergers are apples a demerger relief
After a long hiatus, a spate of During 2018, the Australian Taxation Office
demergers have been announced. (ATO) refused demerger relief applications
For the most part, this reflects
Demergers announced Demergers which were applied for in the context of several
a desire on the part of large or completed: speculated about: public transactions.
companies to focus more on
While the specific reasons for refusing demerger
their most profitable and highest
relief in the context of the transactions are not
growth operations. In financial Coles from Wesfarmers AMP public, it is likely that the reasons are similar to
services, though, the increased (banking or funds management)
regulatory scrutiny (including the MLC from NAB those expressed by the Commissioner in the
Rio (aluminium) ATO’s class ruling, CR 2018/31 (related to the
Royal Commission into Misconduct Colonial First State demerger of OneMarket Limited from Westfield
in the Banking, Superannuation from Commonwealth BHP (petroleum) Corporation Limited prior to acquisition of
and Financial Services Industry Bank Westfield by Unibail-Rodamco).
- the Financial Services Royal Caltex (infrastructure)
Commission) has prompted IFCO plastic containers It appears that the ATO views on the “nothing
disposals and spin-offs in part, from Brambles CSL (Behring or Seqirus) else” requirement for the roll-over relief to
to effect the much discussed Petrol stations from Wesfarmers divesting be available for shareholders have evolved.
objective of ‘separating product Woolworths Bunnings or Officeworks Broadly, transactions contemplating a demerger
and advice’. of a business in which there is a third party
Telco infrastructure Premier Investments wishing to acquire either the demerged business
from Telstra to separate international (or the demerger business) from shareholders risk
franchises (Peter Alexander, falling foul of the roll-over relief requirement.
Smiggle) This says that when shareholders acquire shares
Fairfax (Domain spin off, in the new company (that acquired the demerged
subsequently abandoned due to business), they receive nothing else (such as cash
Channel Nine’s bid for Fairfax) or something of value).
Given the evolving view of the ATO, for
transactions which contemplate a demerger
followed by a subsequent sale it will be difficult to
obtain demerger roll-over relief for shareholders.
Accordingly, if such transactions are being
contemplated, and would otherwise be expected
to receive roll-over relief for shareholders, early
engagement with the ATO to assess prospects of
relief being available is a good idea. The ATO has
indicated that it will provide guidance on its new
positions in December 2018 and in early next year.
The market awaits this guidance with
great anticipation
7KEY DCM TRENDS IN FY18
While global DCM markets had a This has an impact at both the This disintermediation reflects a trend $320 billion of the annual residential brands, their increasing presence in the
relatively strong start to the year with institutional and the consumer level. that has been evident in the offshore mortgage loan market in Australia. market as a result of traditional lenders
first quarter volumes showing their At the institutional level, there has markets for many years. ceasing to focus on from some sectors
The recently announced Australian
second strongest initial quarter since been the growth of debt funds – that (as noted earlier), and the opportunity
At the consumer level, the Australian Business Securitisation Fund – a $2
2013, DCM activity in Australia has is, funds established for the purpose for investors to diversify financial
market has for many years had a billion funding programme to support
slowed down considerably as credit of lending to specific market sectors. service offerings more competitively.
strong non-bank sector, usually securitised lending to small business
spreads have widened. These are often those that the banks In addition to the access to additional
funded through the warehouse or – will further support this market.
have indicated a reluctance to fund sources of capital, these investments
Looking more broadly across the debt term securitisation market. The
in the current market environment. Growth in Non-Bank M&A also give rise to synergies for these
markets, it is clear that key trends are volume provided by these non-bank
(Residential construction facilities are non-bank financial institutions,
being driven by the Financial Services lenders has increased substantially in The last few years have seen a number
an obvious example). Further, there including the expansion of distribution
Royal Commission. This is having a the past few years – a trend which is of non-bank financial institutions
are many examples of superannuation channels and additional growth
dramatic impact on the debt funding expected to accelerate as the banks the subject of acquisition – such as
funds participating directly in lending opportunities in key market segments.
landscape, with two clear effects – seek to reduce exposure to specific the acquisition of La Trobe Financial
syndicates. In each of these situations,
strong growth in non-bank lending, sectors. The Australian Securitisation by Blackstone, the acquisition of It is likely that these institutions will
the funding would traditionally have
and extensive non-bank M&A. Forum (ASF) estimates aggregate Pepper by KKR, and the acquisition of continue to primarily source their
been deposited with a bank, which in
funding of residential mortgages Bluestone by Cerberus. funding through the private and
turn would on-lend the funds to the
by non-ADI lenders amounts to public securitisation markets, leading
ultimate borrower. Here however, Offshore interest in Australian non-
Growth in Non-Bank approximately $12 -$15 billion per year. to an increased volume of issuance
the funding is being provided bank financial institutions is driven
Lending This represents around 4.5% of the into these markets.
directly by the fund to the borrower. by the strength and reputation of the
Recent credit data released by the
Reserve Bank has shown loans and
advances by non-bank financial
institutions in Australia rose by 10.3%
year to year to August. This is the
Banks
strongest annual growth rate in non- Loans & advances, annual change, (%) Other lenders
bank lending in a decade. What this
suggests is that non-bank financial
institutions have stepped into markets 25 25
where the banks have otherwise 20 20
started to pull back.
15 15
Non-bank lenders are not constrained 10 10
by prudential regulation, so are able
5 5
to remain active in markets that are
becoming subject to regulatory focus. 0 0
They are therefore able to react solely -5 -5
on the basis of market forces.
-10 -10
Jan 08 Jan 11 Jan 18 Jan 17
8KEY DCM TRENDS IN FY18
Case Study: Case Study: Case Study:
Debt Funds Essendon Non-bank
on the rise Fields M&A in Australia
An offshore pension fund established a new In October 2018, Essendon Fields – the airport and business Blackstone, one of the largest private equity
real estate debt fund to invest in middle-market park in Melbourne – replaced short term bank debt with a $100 funds and the largest property investor in the
real estate loans in Australia and New Zealand. million 10 year facility provided by IFM Investors, supported by world, acquired La Trobe Financial in 2017. La
AustralianSuper and Cbus. Trobe Financial is a privately owned, leading
A new record for the amount of alternative debt
Australian credit and investment firm that
funds raised in Australia was set during FY18 and While Australia lacks a substantive corporate debt market per se, this
specialises in funding and management of
we believe this type of activity will continue to is the second material private debt origination transaction in the past
both residential and commercial mortgage
grow in FY19, as debt funds fill gaps in the market. couple of years, with both transactions featuring AustralianSuper,
assets. La Trobe Financial also manages one
IFM Investors providing long term debt and Westpac, who have
An Australian fund manager will source and of Australia’s largest retail investment credit
arranged these transactions. Much of the attraction of private debt
manage investments on behalf of the fund funds with over $1.7 billion assets under
investing is the higher yield accessible compared to corporate
under an Investment Management Agreement. management covering approximately 22,000
bonds, and the diversification benefits it can offer.
retail investors.
MinterEllison acted as a deal counsel to the
The low level of private debt held by superannuation funds in
pension fund and advised on and documented all This acquisition is a good example of an
Australia is well below that held by pension funds overseas. In
Fund establishment, debt capital and investment offshore investor recognising the opportunity
Europe, the proportion of pension plans allocating to private debt
management documents, which include an and potential for growth of non-banks in a
(akin to the Essendon Fields transaction) increased from 7% to
initial $500 million secured senior loan note rapidly growing market.
11% over the past year according to Mercer. Similar trends were
subscription facility.
observed in the US, by others, three years earlier.
The RBA highlighted in a recent speech that despite growing
quickly, debt financing by the non-ADI sector is only around 7%
of total financial assets in Australia. This is not much changed
over the past few years and significantly lower than the 12% that
occurred prior to the GFC.
With 9.5% of employee earnings flowing into superannuation (and
set to rise to 10% in 2021), the potential for superannuation funds
to support continued long term debt facilities remains largely
untapped. Most companies in the ASX200 may benefit from
accessing private debt markets, along with a wide range of unlisted
and private companies who are looking for long term debt finance.
9REGULATORY LANDSCAPE
ASIC guidance on Enforcement action ACCC action alleging cartel
sell side research on bookbuilds behaviour in an ECM transaction
ASIC issued Regulatory Guide 264 ASIC has continued the scrutiny on ASIC is now enforcing these The ACCC (via the Commonwealth For transactions going forward, there
Sell-side research in December 2017, bookbuilds which commenced during statements. It accepted an enforceable Director of Public Prosecutions) has are a number of options (ranging from
following an industry review in 2016 the industry review for Regulatory undertaking from Goldman Sachs brought criminal charges against Citi, protocols around communications
and a period of consultation in 2017. Guide 264. In its report on that review, Australia to improve controls Deutsche Bank and ANZ (as well as to attempting to take advantage of
The regulatory guide sets out ASIC’s ASIC noted that some underwriters: relating to bookbuild messaging in a number of individual employees exceptions to the cartel offence), but
■
views on the processes and procedures transactions after an investigation of those organisations) in respect some of these have implications under
provided larger allocations to large
issuing companies, investment banks, into the November 2015 Healthscope of alleged cartel conduct in relation other laws and so advice should be
institutional clients of the firm; to
corporate advisers and research firms transaction. ASIC had concerns to the ANZ institutional placement taken to navigate these issues.
investors who commit to engage
should put in place to address: about certain representations made in 2015.
in buying in the after-market; to
■
by GS to potential investors about
risks around the handling of inside investors in compensation for Citi, DB and JP Morgan were the joint
the minimum fixed demand. As
information; and losses on earlier deals; and to
a result of the investigation and
lead managers of the placement. JPM Initial coin
offerings
■ conflicts of interest (whether
senior management or directors of
other companies that the firm was
undertaking, GS implemented
has been granted immunity and is co-
operating with the ACCC (and so
between an investment bank’s changes to its processes including
seeking to secure as a client; and is not the subject of charges). While initial coin offerings (ICOs) are
corporate advisory clients and to require:
its investing clients or between ■ scaled back allocations depending
■ legal or compliance approval of all
The allegation relates to conduct
continuing to increase in popularity
both globally and within Australia,
an investment bank’s corporate on investor status (eg scaling associated with the disposal of the
bookbuild messages to be provided they remain an enigma for regulators
advisory clients and its staff). back hedge funds) or in favour of shortfall under the placement. The
to potential investors in equity who are seeking to regulate ICOs in a
allocations to themselves or their ACCC alleges that once the JLMs
In particular, the regulatory guide: capital market transactions; and continually evolving cryptocurrency
staff. received the shortfall shares, they
■ provides guidelines for non-deal
ASIC also noted in that report
■ compliance attendance at any sales became competitors with respect
space.
meetings, including such matters as calls at the launch of equity capital to the disposal of those shares. During the first quarter of 2018, it was
instances where inconsistent and
not committing to provide research, market transactions to provide The discussion and co-ordination reported that capital raised from ICOs
misleading information was provided
not discussing views on valuation oversight of messaging to potential (including in relation to price) on a global basis had exceeded the
to potential investors during a
and analysts needing to be wall- investors. which occurred is alleged to have total amount raised during the 2017
bookbuild. It said that that firms
crossed if inside information (eg contravened the cartel laws. The calendar year, with approximately
should take care not to engage in
about a transaction) is discussed; charges against ANZ are essentially $6.3 billion being raised (an increase
misleading and deceptive conduct
■ mandates prescriptive expectations when advising potential investors that
that they aided and abetted the JLMs.
The cartel laws are ‘per se’ offences –
of 118% from 2017). The staggering
increase in investor appetite in the
in relation to the nature and content a book has been covered.
ie no damage or gain needs to cryptocurrency space is likely to
of interactions between analysts
be proved. continue to draw the attention of
and the company and between
regulators as they seek to balance the
analysts and the investment bank’s The outcome of the case won’t be
need to protect investor interest with
corporate advisory team. Different known for some time (likely years).
the competing tension of providing
requirements apply depending Accordingly, investment banks should
flexibility for capital raising in the new
on the stage of the transaction – proceed with caution and consider
digital world.
pre-solicitation, pitching or post- the nature of any joint undertaking in
appointment; and which they are engaged.
■ sets out guidelines for content and
processes around research reportsPREDICTIONS FOR FY19
1. Equity market valuation levels
A sell-off in global equity markets is very much now in a mature bull- paid (compared to an average of 9x Global PE Median 17x
over the last two months has pushed market phase, and that low interest rates through the years 2010-2015).
valuation levels back to nearer their still prevail in Australia (and are likely to
The stalled IPO candidates (created
long-run averages. Globally, the trailing do so for the foreseeable future).
by the postponement of many IPOs in
price / earnings (PE) ratio currently
Equity issuance has already responded the last two to three months) will be 40 40
sits at around 16x, which represents a
to the softer valuations, with a marked hoping for macro stability on matters 35 35
reasonable step down from the almost
step-back in the pace of IPO’s in Australia like trade and Brexit and for this positive
18x they reached through the middle 30 30
through 2018 versus last year. As long sentiment to seep into equity markets.
of 2018. 25 25
as market volatility remains high and
The chart below shows PE ratios on a global growth fears exists, the current 20 20
geographic basis. Based on these ratios subdued state of the IPO market can be “Despite recent 15 15
the U.S. remains the most ‘expensive expected to remain. At the same time, volatility, we 10 10
equity market, while emerging markets
are the cheapest. In Australia, trailing
the still positive ‘late-cycle’ sentiments
have remained through certain market
expect that 5 5
PE ratios are around 15x, which is also segments. The clearest example of these elevated 0 0
within the range of its long run average. this would be the high valuations that valuations 70 75 80 85 90 95 00 05 10 15
Despite recent volatility, we expect
that these valuations should remain
have been seen on private equity
transactions, with deal multiples of
will remain
supported through FY19 given the cycle approximately 12x EV/EBITDA now being for FY19.”
2. Impact of Financial Services Royal Commission Trailing PE Long Run Median
25 25
The Financial Services Royal Commission ■ the specific regulatory risks that We consider that financial
could have a chilling impact on businesses the business may encounter, services businesses that 20 20
in the financial services industry including risks relating to are able to distinguish their
looking to go public. Indeed, ASIC, in treatment of consumers. business models from those of
Report 589 ASIC regulation of corporate the incumbents will have the 15 15
The impact of this unprecedented
finance: January to June 2018 states that most success in ensuring that
level of scrutiny has already been
prospectuses for such businesses should the Financial Services Royal 10 10
seen, with the very late withdrawal of
include candid information about how Commission does not derail the
the Prospa IPO for reasons relating to
the business may be affected by the issues prospects of the success of their
concerns raised by ASIC. In addition, 5 5
being raised in the Financial Services Royal IPOs.
Latitude Financial (a sizeable credit card
Commission. Depending on the business
and personal lender and formerly GE
model, this may include: 0 0
Money Australia) has delayed its IPO
■ relevant historical and current several times, as it struggles to achieve
US
DM
LATAM
UK
EUR X UK
AUSTRALIA
JAPAN
EM
EM ASIA
CEEMEA
interaction with regulators and an earnings multiple valuation above
possible outcomes; that of the major banks.
11PREDICTIONS FOR FY19
3. Listed investment 4. Will real-estate 5. Proposed tax law 6. The popularity 7. Investors to
vehicles – will the investment trusts (REITs) changes to stapled of dual tracks to continue to
trend continue? continue in popularity? structures and REITs continue fund M&A
The market has been saturated Recent years have seen growth in the Notwithstanding the observations earlier, We expect to see continued Mergers and acquisitions activity
with listed investment vehicles number of REITs who have successfully the proposed reforms to the taxation stapled popularity with dual track is booming. In fact the first six
undertaking IPOs in the last 12 – 18 achieved and maintained a listing in ASX. securities in which REITs are commonly processes as these processes months of 2018 saw $2.5 trillion
months (with many offering similar This growth has partly occurred as a structured will affect their use going forward. are more likely to elicit greater of global M&A deals (which
investment strategies). However result of corporate restructures as well Broadly, the availability of the concessional strategic tension and therefore represents a record amount for
we consider that while the ability as a result of the establishment of quasi managed investment trust (MIT) withholding more optimal financial outcomes. the first six months of a year).
of the ‘vanilla’ listed investment / non-traditional REITs which provide rate of 15% for distributions to non-resident They can also act as a real hedge But valuations in certain sectors
company to pull-off a successful investors with exposure to storage investors may not be available for those REITs against any unforeseen downturn are now stretched, and although
IPO is likely to decline, the window facilities (for example, Iron Mountain in which active business income of a stapled in capital markets. interest rates are still low, they are
for managers whose investment and National Storage) data centres (for operating company (which would otherwise heading higher. What this means
We also consider that companies
strategies are novel or whose fee example, Australia Pacific Data Centres), be taxed at the corporate tax rate) is is that this M&A bull market could
undertaking a demerger will give
structures ‘break the mould’ or healthcare property assets (for example, converted into passive rental income derived now be entering a final phase,
thought to running a dual track
offer good transparency is likely to Generation Healthcare) and petrol by the stapled MIT which owns the land the that is characterised by desires to
process, particularly given the
remain open. stations (for example VIVA Energy). business is carried on. execute increasingly ambitious
strong demand coming from
deals before the cycle ends. With
While investor interest in certain REIT Under the proposed reforms, a stapled cashed-up private equity funds.
this current M&A cycle having yet
offerings may have peaked, we expect to structure should only be able to benefit from
to reach the levels of exuberance
see continued demand in the specialist the concessionary MIT withholding tax where
seen in early 2000 and late 2007,
REIT sector (for example, health REITs) the operating entity is undertaking a business
history would suggest that deal-
over the next 12 months as investors that derives rental income from third parties.
making sentiments have not
seek to obtain exposure to high quality
There are complex transitional measures peaked yet!
assets which have attractive yields which
applicable to existing stapled structures, which
they are not able to access through
are broadly dependent on whether the stapled
direct investment.
structures holds non-economic infrastructure
assets or economic infrastructure assets (i.e.
certain infrastructure assets that are used for
public purposes).
“While investor Given ATO guidance and the proposed “The first
interest in certain changes to the taxation of stapled structures,
it is clear any secondary market transactions
six months
REIT offerings which seek to retain the stapled security of 2018 saw $2.5
may have peaked, structure are likely to be subject to scrutiny, trillion of global
we expect to see particularly where the transaction is subject
to the Foreign Investment Review Board
M&A deals - a
continued demand (FIRB) application process. Accordingly, record amount
in the specialist careful consideration and due diligence for the first six
REIT sector over the should be undertaken in connection with
the acquisition of a REIT featuring stapled months of
12
next 12 months.” securities in the secondary market. a year”PREDICTIONS FOR FY19
8. Global appetite for 9. Tax –
buy-backs rises – will the future
Australia follow suit? foretold
The global equity market is shrinking at Recent tax reforms
Case Study:
the fastest pace in decades, as a wave of FY18 has been a year of a significant tax
buy-backs is outpacing the amount of reform both globally and in Australia. Australia Resource Capital Fund IV LP
equity being raised (whether by way of has been a leading adopter of the numerous v Commissioner of Taxation
IPO or secondary raising). In particular, measures recommended by the Organisation
US companies have been aggressive for Economic Cooperation and Development’s The RCF Case is expected to provide further guidance on how foreign limited partnerships
in this space, largely as a result of the (OECD) as part of the Base Erosion and Profit (which are otherwise taxed as companies under Australian tax law) and limited partners
earnings boost delivered by tax cuts and Shifting (BEPS) project. The impact of these (particularly those resident in a treaty jurisdiction) are to be taxed going forward. The case
the robust US economy. With investment amendments on global and domestic capital has had a long history and it would seem that both investors and the ATO require clarity
banks forecasting that the overall volume markets are as yet to be fully observed. on the position at law. Foreign investors structured into Australia should, in the interim
of US buybacks will reach a record- In addition to these reforms, the United States continue to consider whether the ATO’s concessional treatment is available, and if so,
breaking $1 trillion in 2018, we consider of America has lowered their Federal corporate seek to liaise with the ATO prior to any exit to secure certainty.
that buy-back phenomenon may take income tax rate dramatically from 35% to 21%
hold in the Australian market over the which, as expected, will modify the behaviour of
next 12 months. We see the theme also US corporate investors. Critically, the decrease in
playing a part through certain sectors the US corporate tax rate has resulted in a greater
of the Australian equity market over the focus from the ATO on the transfer pricing Case Study:
coming 12 months. arrangements for related party services and debt
between US and Australian entities.
Placer Dome Inc
v Commissioner of State Revenue
Domestically, Australia has implemented
the Hybrid Mismatch rules to reform the
The Placer Dome case involves important principles regarding how Australian land rich entities
treatment of hybrid instruments. The objective
and the assets of these entities to are to be valued. Although a stamp duty case, the approaches
of the Hybrid Mismatch rules is to prevent
to valuation have a significant application in determining whether shares in company are taxable
multinational companies from gaining an
Australian property for capital gains tax (CGT) purposes and therefore any gains made by foreign
unfair competitive advantage by avoiding
residents on the sale of the shares are subject to Australian income tax.
tax or obtaining double tax benefits through
hybrid mismatch arrangements which result in On 5 December 2018, the High Court held that the “top down” valuation methodology adopted by
asymmetric taxation outcomes. As a result of the Commissioner of State Revenue was reasonable in determining whether a company was land
the Hybrid Mismatch rules, it has become more rich. This valuation methodology could potentially be adopted by the ATO in valuing assets for
problematic to implement hybrid instruments taxable Australian property purposes. It remains to be seen what the ATO’s views are on the impact
as a means of structuring and financing capital of a case which was directed to specific (and now repealed) stamp duty legislation, particularly
markets transactions. in relation to goodwill. This has consequences both for vendors and purchasers alike in terms of
exposure to Australian taxation on exit for non-residents and compliance with non-resident vendor
Important tax cases for foreign investors
CGT withholding rules for purchasers.
The decisions in the following two cases
which will likely be handed down in the In carrying out valuations, it is clear from the High Court decision that specific instructions for
coming months are likely to impact the tax particular legislative circumstances should be provided to the valuers to ensure that the findings of
consequences for foreign investors exiting any valuation can withstand scrutiny from either the ATO or any other revenue authority.
an Australian investment.
13SECTORS TO WATCH
The following areas are likely to remain sector hotspots into FY19:
Healthcare Resources Agribusiness Technology Financial Services
(including fintech)
Given the continuing trend of the year and we expect this to continue and financial services will be businesses or providing a future example, from United States, Israeli
Australian economy being bifurcated for the foreseeable future. expected to provide a pipeline of pathway to sell down and/or exit. (especially in technology) or New
along broad lines such as health, capital market transactions at IPO Zealand companies which have also
In respect of the broader health Similarly, energy and resources
commercial and financial services and secondary levels whether as part made a steady stream of enquiries to
sector, we see this as continuing cannot be discounted as an
(in the services economy) and of a dual track strategy or straight to examine the feasibility of entry into
to evolve and diversify capturing underlying driver of capital markets
the continuing major pipeline of IPO transactions. the Australian capital markets.
transactions from the large physical based on the secondary market
players in energy and resources and
healthcare players (eg hospital and The intergenerational ownership activity during the year. Off shore entrants will need to be
agribusiness (in the commodities
diagnostic players), through to the and wealth transfer that Australia is mindful of the challenges posed
economy), we expect to see most Finally, we expect to see a continuing
middle market (medical service roll presently undergoing will continue by the Financial Services Royal
or all of these areas being dominant small but steady stream of foreign
ups) as well as the continuation of to see the number of private and Commission (refer page 11), however
in both the IPO and secondary – listed companies seeking to
a relatively steady stream of drug family owned businesses strongly those who can demonstrate the
(entitlement / placement) markets. raise capital in Australian markets,
discovery and medical device IPOs. considering capital markets right business model and approach
This has played out across Australian whether businesses from our Asian
transactions as a means of either to regulatory issues are likely to find
equity capital markets during the The broader category of commercial neighbouring counties or, for
growing and diversifying their opportunities.
14SPOTLIGHT ON HONG KONG AND
SINGAPORE EQUITY CAPITAL MARKETS
Hong Kong
In April 2018, The Stock Exchange of Hong Kong Limited (SEHK)
amended the Rules Governing the Listing of Securities on the SEHK
(Main Board Listing Rules) with an aim to attract well-established high
growth companies from emerging and innovative sectors to list on the
Main Board of the SEHK. Such amendments:
■ permit listings of biotech issuers that do not meet any of the
financial eligibility tests under the Main Board Listing Rules;
■ permit listings of high growth and innovative companies with
a weighted voting right (WVR) structure; and
Singapore ■ establish a new concessionary route for Greater China and
international companies with primary listing on a qualifying
In the first half of 2018, some planned IPOs on the exchange to apply for a secondary listing in Hong Kong.
Singapore Stock Exchange (SGX) were shelved due to
Since the introduction of these amendments to the Main Board Listing
pricing and market volatility. However, listings overall
Rules in April 2018, the market reaction to the new listing regime has
continued at a steady pace including the listing of Sasseur
been very positive. A company with a WVR structure and several
REIT, the first “outlet mall” REIT to be listed in Asia and
biotech companies have already obtained listing in Hong Kong.
Koufu Group Limited, a Singapore-grown operator and
A number of biotech companies have submitted or are considering
manager of food and beverage establishments.
submitting their listing applications under the new regime. Ascletis
The SGX also rolled out several initiatives in 2018 to boost Pharma Inc., a Chinese biotechnology company, was the first biotech
its competitiveness, including: company to list in Hong Kong, and raised approximately HK$3.14
■
billion (equivalent to approximately US$400 million) in its IPO. Xiaomi
Introducing a primary listing framework for the listing of
Corporation, Chinese smartphone giant, became the first company
companies with a dual-class share structure (i.e., a share
with a WVR structure to list in Hong Kong, and raised approximately
structure that gives certain shareholders, including
HK$37 billion (equivalent to approximately US$4.7 billion) in its IPO.
founders, voting rights disproportionate to their
Apart from the above highlighted listings which came about under
shareholding) to attract high growth companies led by
the new regime, there were several high profile listings in 2018,
founder-entrepreneurs;
including the listing of China Tower Corporation Limited, which
■ Updating the listing rules for mineral oil and gas was the world’s largest IPO in two years. China Tower, the world’s
companies so that they remain aligned with industry largest telecommunications tower infrastructure service provider,
developments and to facilitate early-stage companies raised approximately HK$54 billion (equivalent to approximately
listing on the SGX. US$6.9 billion) in its IPO.
15You can also read
