The Jumpstart Our Business Startups Act (JOBS Act) - enacted in 2012 for implementation in 2013 - is in the midst of transforming the capital markets with a series of fundraising and disclosure changes. At the center of the issues is David A. Ethridge, senior vice president and head of the capital markets group at NYSE Euronext. In his position, Ethridge is responsible for NYSE Euronext's capital markets business, including the coordination of initial public offerings (IPOs). Ethridge also is responsible for the Big Board?s listed companies in China. Much of his career focused on advising companies on their IPO plans, Prior to joining NYSE Euronext, he worked for 20 years in global banking firms developing strategic and capital-raising plans for corporate clients across industries.
Ethridge talks with Financial Executive's Editor-in-Chief about aspects of the JOBS Act and its potential to transform U.S. capital raising and the capital markets.
Financial Executive: This seems to be a busy time for capital raising. What is currently dominating your time?
David Ethridge: Most of my time is spent running around the country and the world talking to management teams about why they should list their IPO on the New York Stock Exchange versus our competitors in the U.S. and abroad. Also, as part of my responsibilities, I spend a lot of time with the venture capital and private equity communities. That includes the banking, accounting, legal community and anyone around the IPO process. I also get involved in some of our work in Washington, D.C., where we're helping our listed companies in areas related to the administration and policy.
That's how I got involved with the JOBS Act and worked to shape the legislation that got put in place. The NYSE advised the task force that had come out of the work in Washington regarding the JOBS Act and we are very happy about seeing that legislation get put in place. So, as a bit of a disclaimer for questions about the JOBS Act: Obviously, I'm going to be positively biased.
FE: How would you describe the IPO pipeline this year and what do you expect in 2014?
Ethridge: So far this year we?ve had what I'm calling a kind of "Goldilocks market," where it has not been too hot and it has not been too cold. It has just been kind of just right. Earlier this year there were no big macro issues that could interrupt activity. Everybody wants to play the wait-and see game of "Well, let's not launch. Let's wait and see what happens.? If that had continued, we then run into the challenges of seasonal windows. There's Thanksgiving and the holidays at the end of the year. So, what I saw as consistent strength in the capital markets for the first nine months could have unraveled pretty quickly in the last three months.
FE: Based on your experience, are there any sectors that are sort of immune to these macro threats?
Ethridge: Everybody is subject to it. They're macro and it changes people's risk appetite. Everybody bears some brunt of that burden.
FE: How do you think the JOBS Act has influenced the IPO market.
Ethridge: Let's first frame what the JOBS Act was put in place for, because I think a lot of people get that wrong. It was not put in place to bring us back to 400 IPOs a year, like we had in the '90s. It was put in place to lower the costs and the legal and regulatory challenges around going public and, hopefully, allow younger, high-growth companies to go public that might not have otherwise chosen that path. They might just choose to sell.
Some will portray it as, "Oh, well, who cares about the JOBS Act because we haven?t seen this explosion of IPOs." I think they?re getting it wrong, because it will never result in a perfect case study of "here's the experiment and here's the control set." We don?t know what it would have been without the JOBS Act, so that's never going to be perfect.
But I think we've got enough time under our belt now where we can point to some of the things that have been working within the JOBS Act. One -- and this was immediately visible as soon as it was put in place -- is that companies chose to file confidentially. That has been a real positive. Previously, international companies could file confidentially and U.S. companies couldn't. Now we made it possible for every company to do that, and that?s a real benefit for the companies.
They don't have to show all of their competitors what they're doing strategically and how they're doing financially before they're really certain that the market is there. When we do a look-back on 2013, I am sure that over 90 percent of eligible companies will be using that provision.
There are many other benefits. For example, being able to talk to investors before you go public and find out, "Did they like my story, And do I really have an IPO market?"
There are two groups of companies that are today using that element of the law with some success. One would be the biotech companies. This year we've seen 35-plus IPOs from biotech/pharma as an industry, and it makes a ton of sense. You're talking to people about science and sometimes there is nothing to show for that science other than a pipeline of regulatory process. They don't have revenue. They don't have a product. You are talking about a really difficult business to turn to a set of bankers and say, "Do you think I can go public?"
The bankers respond, 'I think so." Now they can go meet with investors, and they're not just meeting with some 25-year-old kid who is a history major when they go meet with the buy-side analysts. They're meeting with a Ph.D. in health care who is assessing their science and then giving them a much better read on whether they like the company given where it is.
Now, though I think that's been a benefit to the biotech market, I can?t draw a dotted line that says the IPO market for biotech took off in 201 because of the JOBS Act; but I know it is helping.
Another group that has benefited is non-U.S. issuers that are coming to the U.S. and saying: "Let's go there, let's see what they think about our story before we actually launch."
I think that is helpful to our overall capital markets as we compete globally for these deals.
FE: How much of a learning curve do you have to go through with the companies that are planning to do an IPO about the benefits and strategies behind JOBS Act implementation?
Ethridge: When we meet companies we?re generally getting involved about 12-18 months before they go public. Around that same time they're hiring bankers and they generally have a legal team and accountants in place. Those advisers are generally going to answer questions around what the JOBS Act is going to specifically allow them to do. But if they haven't, we can certainly give them our vantage point because we were involved in the legislation itself.
The question I get most often is: "What do you think is the one thing we need to be able to do to be a public company?" That?s an easy answer, well easy to say, and hard to do. The answer is simply, "Can you project your results confidently? " Which means, "quarter to quarter and annually, how you are going to perform" Can you tell "The Street" what you are going to do and then go do it?"
That sounds easy, and it's really hard. It actually means having systems and sales processes to aggregate all the things in the company, and then being able to pop those out in earnings with a number that you can tell analysts and investors. That?s not an easy thing to do. We see companies -- non-U.S. and U.S. -- that get this wrong every year. Then they miss their first quarter and get put in the penalty box by investors, and it is a real struggle for them.
FE: You talked about international companies coming to the capital markets in the U.S. What are your expectations for that market?
Ethridge: We've got at least 20 countries represented in our filings, and they're all in different states of preparedness. Some are ready to launch and others are just kicking off, but we're talking about companies from South America, Europe and Asia, all looking to come here. That's exciting. These people view the U.S. capital markets as open, attractive places where they can raise capital. And that makes sense because we have the deepest capital markets in the world. We have the best set of peer groups, generally speaking, for companies. Because, for example, if you are a tech company and want to go public on the Hong Kong exchange, you're going to struggle to find the same number of peers.
Those elements are still making the U.S. capital markets the leading place to go public. Today we ? NYSE and NASDAQ ? account for roughly 50 percent of all equity trading in the world in North America. Today, the New York Stock Exchange has raised more capital than the next four exchanges combined.
We've raised roughly $50 billion in IPO capital this year on the NYSE, which is approximately 50 percent more than last year. So we're having a really solid year. We're north of 200 IPOS this year in the U.S., the most since 2007.
FE: What about on the governance side? What do you do to coach companies to focus on governance issues?
Ethridge: It's a very important dynamic that's getting more and more attention from our companies. We own two companies -- Corpedia and Corporate Board Member -- which, as a part of NYSE Governance Services, focus on the governance aspects of company needs. Today, investors are increasingly looking at governance issues and asking: "What are you seeing there? What is happening in these companies?"
They're going to the companies; websites, and one of the first things they?ll download is the code of conduct, as well as the corporate governance policies. I think it will continue to get more and more focus by our newly-listing companies, not just the big global companies that are already listed.