past generation, and we are confident that they will continue
to do so in the future. Anyone hoping to raise substantial
amounts of capital these days should have at least some understanding
of these changes and the trends behind them. The
most important trends include globalization, technological advances,
financial innovations, changes in savings and investment,
and dominance of institutional investors.
Globalization
Capital markets are now global. This trend has been spurred by
a number of events and circumstances, beginning with the gradual
disappearance of exchange controls in the 1970s. Throughout
the 1980s and 1990s, deregulation was the major
contributing factor. Today, capital tends to flow to countries
where the risk-return trade-offs are attractive and restrictions on
inflows and outflows are small. As countries have opened up
their markets to foreign issuers seeking capital and to foreign investors
seeking outlets for their investment dollars (or euros or
yen), companies and investors have responded with massive
capital flows. In turn, countries now find it hard to maintain
highly restricted capital markets because the key players can
avoid these restrictions simply by doing business elsewhere.
In one important area, however, regulation has actually increased.
Where previously regulation was designed primarily
to stifle markets, more recently policy makers have striven to
make securities trading a fairer game. As a result, insider trading
rules have been strengthened, especially in Europe where,
until recently, insider trading prosecutions were extremely
rare. Also, recent accounting scandals notwithstanding, corporate
disclosure requirements have increased, making it easier
for investors to track and compare the performances of publicly
traded companies.
Large multinational corporations routinely raise debt and
equity capital outside their home countries, but these days
even smaller companies are moving beyond their home country
borders to lure investors. This trend is largely a positive
one because it gives companies access to much broader pools
of capital, and it also allows companies to take advantage of
differences in taxes and regulations across countries, thereby
lowering their cost of capital. However, globalization also
means that companies compete for capital not just against industry
or national rivals, but also against investment opportunities
outside their home markets. The increased fluidity of
capital can be both a benefit and a curse.
Advances in Technology
The most important reality of today’s capital markets is that
huge amounts of capital can flow from one company to another,
from one instrument to another, and from one country to
another, practically in the blink of an eye. These capital flows
would not be possible without the processing power offered by
today’s computer technologies. These technologies make it possible
to simultaneously issue billions of dollars of securities in
several countries around the world, to trade trillions of dollars
of securities on stock exchanges and other trading platforms,
and to efficiently price new instruments as they reach the market.
We are now converging to a truly continuous, 24-hour
global trading regime, at least for the equity of the world’s
largest, best-known companies. Eventually, such trading opportunities
will extend to a much broader range of securities.
Financial Innovation
Globalization, deregulation, and information technology have
spurred the creation of innovative financial instruments. Investment
bankers have designed new instruments that allow
companies to (1) tailor securities that appeal to a well-defined
set of investors, (2) reduce the effects of fluctuating interest
and exchange rates, and (3) convert illiquid assets into highly
liquid financial instruments. The result is an astonishing array
of financial instruments available in global capital markets.
An important example of such innovation is the growth of
securitization, a trend that began to accelerate in the 1980s.
This is the process of combining assets or financial instruments
that are not securities, registering the combined, or bundled,
units as securities, and selling them directly to the public. Securitization
practically revolutionized the mortgage market in the
United States by creating publicly traded mortgage instruments.
The practice was later extended to cover a broad range of assets,
leading to a whole new market in asset-backed securities.
For example, companies can now sell their trade receivables,
and raise much needed capital, at lower cost than before.
An interesting consequence of financial innovation is that
it has helped to blur the lines that distinguish one type of financial
institution from the others. For example, as we explore
in Chapter 5, commercial banks aren’t the only institutions
providing commercial loans. Insurance companies, pension
funds, and other investor types are in the business, too. Simi-
larly, securitization and similar innovations have allowed other
institutions to compete on turf that previously belonged exclusively
to investment banks.
Changes in Attitudes toward Savings and Investment
While all of these developments took shape, a new generation of
investors emerged, flush with cash and possessed as well of
more favorable attitudes toward capital market investing than
earlier generations. Aided by a seemingly endless bull market
(interrupted by the odd crash, such as in 1987 or in 2000 with
the collapse of technology stocks) and solid evidence that with a
long enough investment horizon a person is almost certainly
better off investing in equities than in government bonds or
bank accounts, millions of people whose parents never even
thought about buying stocks have taken the plunge and become
shareholders. This trend was accelerated in Europe by privatization
campaigns that sought to ensure the permanence of private
ownership by encouraging dispersion of the shares of newly privatized
companies among a large cross section of citizens.
Growing Dominance of Institutional Investors
Interest in stocks, and in investing generally, has grown in
ways unimaginable to finance professionals as recently as the
1970s. The result is a veritable worldwide explosion in mutual
funds, unit trusts, and other forms of institutional investment.
Not only do many more people have a financial stake in companies,
typically through mutual funds or pension funds, but
of particular importance to corporate managers is that these
funds are run by professional managers who care only about
performance and delivering the highest returns possible to the
people who hired them. There is little doubt that the explosion
in pension fund investing over the past generation, and the
growth of professional money management that came with it,
is the single greatest factor behind the emphasis on shareholder
value creation in U.S. companies.
This trend is beginning to intensify in Europe, too, thanks
in part to its own mutual fund industry but also because of the
growth of pension funds. With aging populations and an unsustainable
safety net, a growing number of Europeans now
recognize that underfunded social security programs will be
unable to serve the retirement needs of today’s workforce. To
provide for the needs of an aging population, and to stimulate
savings and corporate investment, many countries have implemented
or are planning to implement pension and savings
plans that will channel unprecedented amounts of equity capital
to European companies.
Read More : Trends In Raising Capital
