Primary navigation:

QFINANCE Quick Links
QFINANCE Topics
QFINANCE Reference
Add the QFINANCE search widget to your website

Home > Financing Best Practice > Raising Capital in Global Financial Markets

Financing Best Practice

Raising Capital in Global Financial Markets

by Reena Aggarwal

Executive Summary

The major changes occurring in the capital-raising process in global financial markets are being impacted by:

  • New regions and countries emerging as financial powers.

  • The growth of alternative investments as an asset class.

  • The role of sovereign wealth funds.

  • The globalization and consolidation of stock exchanges.

Introduction

During the last decade global financial markets have grown tremendously, becoming large and liquid, and with substantial depth. At the same time demand for capital has increased significantly, with capital markets continuing to play a dominant role in the allocation of capital. However, some major shifts are occurring in the roles of suppliers and users of capital. These shifts became even more apparent during the recent financial crisis. This chapter focuses on four such shifts that impact both global firms that are looking to raise funds and institutional investors that are suppliers of the capital. The four areas that are accounting for the major shifts are: the emergence of new countries and regions as financial powers; the growth of alternative investments as an asset class; the role of sovereign wealth funds as a source of capital; and the globalization and consolidation of stock exchanges.

The recent global financial crisis has clearly highlighted the challenges that companies worldwide face in raising capital. Either funding is simply not available or the cost has gone up considerably. The combination of the global economic slowdown and challenges in raising funds in the capital markets has meant that companies are cutting costs, capital investments, and jobs. The financial markets and financial institutions collapsed in a variety of ways, and this has resulted in structural and regulatory changes that will impact the raising of capital in global financial markets.

Emerging Financial Powers

Historically, New York, London, and Tokyo have been the global financial centers, but now a number of new regions and countries are catching up and emerging as dominant players. During the period May 2007 to May 2008, the McKinsey Quarterly reports that 35 European companies, including Air France, Bayer, British Airways, and Fiat, delisted from the New York Stock Exchange as it became easier to delist.1 European markets have integrated and the euro has proven itself to be a strong currency, and the region has increased its market share in this decade. At the same time, the BRIC countries (Brazil, Russia, India, and China) have become new economic powers as their economies have grown at rates that are much higher than those of developed countries. As seen in Figure 1, BRIC’s equity markets have also outperformed Europe and the United States since 2003. This growth has resulted in the formation of large companies that are competing globally and have a need for large amounts of global capital. Private wealth in these countries has grown, and this also becomes a source of capital.

For a period of time oil-exporting countries benefited tremendously from the high oil prices. These countries or regions, which include Indonesia, the Middle East, Nigeria, Norway, Russia, and Venezuela, became the world’s largest source of global capital flows. The McKinsey Quarterly estimates that in 2008 $5 trillion of petrodollars went to foreign assets. It is estimated that even with oil averaging $50/barrel, net capital outflows of $7.4 trillion a year through 2013 from the oil-exporting countries is likely to occur. The future of the wealth from some of these countries will depend on oil prices.2

Growth of Alternative Investments

During the last decade alternative investments have attracted a significant portion of allocation by institutional investors. Within alternative investments, private equity has become a major source of funds for small and large companies, for firms seeking buyout financing, and for firms in distress. The ten largest private equity firms ranked by amount of capital raised for direct private equity investment between 2003 and 2008 are shown in Table 1. Private equity is an investment in the assets of a company in which the equity does not trade in the public markets. Therefore, investment in private equity requires a long-term approach. Institutional investors such as pension funds and endowments are major investors in private equity, and private equity has become accepted as a distinct asset class. During the last decade there was considerable allocation by institutions into this asset class; however the current economic crisis brought their capital-raising activities to a halt.

Table 1. Largest private equity firms by capital raised for direct private equity investment between 2003 and 2008. (Source: Private Equity International, May 2009)

FirmAssets (US$ billion)
Texas Pacific Group52.35
Goldman Sachs Principal Investment Area48.99
Carlyle Group47.73
Kohlberg Kravis Roberts40.46
Apollo Global Management35.18
Bain Capital34.95
CVC Capital Partners33.73
Blackstone Group30.80
Warburg Pincus23.00
Apax Partners21.33

The funds differ in their investment philosophy. For example, the Blackstone Group was founded in 1985, went public in 2007, and is listed on the New York Stock Exchange. It is diversified into several lines of business, including corporate private equity, real estate, hedge funds, credit, and advisory. In contrast, Apax Partners is a “pure play” global private equity firm that focuses only on specific sectors. Until recently, private equity activity was focused on investing in the United States and Europe, but now there is an increased focus on the emerging markets of Asia-Pacific as a destination for private equity funds. There has been a significant rise in the amount of private equity investment flowing to China, Singapore, South Korea, and India. Private equity will continue to become a major source of capital for companies around the world. In addition to private equity, alternative investments also include hedge funds, commodities, real estate, and venture capital.

Back to Table of contents

Further reading

Books:

  • Harris, Larry. Trading and Exchanges: Market Microstructure for Practitioners. Oxford: Oxford University Press, 2003.
  • Ineichen, Alexander M. Absolute Returns: The Risk and Opportunities of Hedge Fund Investing. Hoboken, NJ: Wiley, 2003.

Article:

  • Fenn, George W., Nellie Liang, and Stephen Prowse. “The private equity market: An overview.” Financial Markets, Institutions and Instruments 6:4 (November 1997): 1–106. Online at: dx.doi.org/10.1111/1468-0416.00012

Report:

  • World Economic Forum. Globalization of Alternative Investments Working Papers Volume 1: The Global Economic Impact of Private Equity Report 2008. Geneva and New York: World Economic Forum, 2008. Online at: www.weforum.org/pdf/cgi/pe/Full_Report.pdf

Websites:

Back to top

Share this page

  • Facebook
  • Twitter
  • LinkedIn
  • Bookmark and Share