The report identifies six key ECM trends and two key DCM trends in FY18, discusses the role played by Australian regulators, makes nine predictions for FY19 and provides a list of five hot sectors to watch.
The Ups & Downs of 2018
- The volume of equity capital markets (ECM) deals fell for a second consecutive year in a cooling market
- Global debt capital markets (DCM) had a relatively strong start to FY18, but activity slowed down in Australia
- A$33.9 billion equity capital raised (down 34.6% from 2017)
- 2 ECM megadeals (raising over $1 billion)
- 110 mid-market ECM deals (including secondary raisings) between the value of A$50 million and A$500 million
- M&A bull market could now be entering a final phase characterised by desires to execute increasingly ambitious deals within high-pressured timelines
- Strongest annual growth rate in non-bank lending in a decade
Equity Capital Markets
While Australian ECM activity was subdued, there were still some positives with many ASX-listed acquirers raising funds to pay cash consideration for acquisition targets. Both real estate investment trusts (REIT) with sectoral exposures and also the agribusiness and food sectors continue to come forward as quality IPO candidates.
Daniel Scotti, MinterEllison Equity Capital Markets Partner, said that while there had been less equity capital markets volume this year, the environment for transactions had remained reasonably positive until the period of market volatility in October and November.
Mr Scotti said “As we predicted last year, activity in secondary raising continued to be driven by the buoyant M&A market, while listed investment vehicles offering unique asset classes and novel and transparent fee structures did well.”
He noted that new listings by way of IPO on ASX were overwhelmingly at the small cap to lower mid-market end of the spectrum.
“Of the 113 IPOs in FY18, only four had market capitalisations of over A$500 million,” said Mr Scotti.
According to the report, in this segment, investor appetite for IPOs extended to a range of industries, including financial services (Evans Dixon, Netwealth and Selfwealth), resources (Jupiter Mines, Bounty Mining), renewables (Windlab and Pyrolyx) and tech and fin tech (Credible Labs, P2P Transport and Trimantium GrowthOps).
Mr Scotti said that, even before the recent period of volatility, a number of proposed very large IPOs ultimately did not proceed, with the vendors electing to sell to trade or spin the entity off. For example, Origin sold Lattice to Beach for A$1.6 billion, Brookfield, Macquarie and their co-owners sold Quadrant Energy to Santos for A$2.9 billion, while the Commonwealth Bank of Australia is spinning off its wealth management and mortgage broking business, Colonial First State Global Asset Management.
Debt Capital Markets
Turning to the debt capital side, John Elias, MinterEllison Debt Capital Partner said that global DCM markets had experienced a relatively strong start to the year but tapered off more recently.
“First quarter volumes showed their second strongest initial quarter since 2013, and the third largest in total for the past 10 years,” he said. “Yet despite hefty volume, more recent bond activity has been affected by interest rate hikes in the US and instability in global stock markets. These sentiments have also been felt in Australia, where DCM activity has slowed down considerably as credit spreads have widened.”
The MinterEllison report also said that key trends in debt markets were being driven by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
“The Royal Commission has had a dramatic impact on the debt funding landscape, with two clear effects – strong growth in non-bank lending, and extensive non-bank M&A,” said Mr Elias. “As an example, 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.”
He said this was the strongest annual growth rate in non-bank lending in a decade.
“What this suggests is that non-bank financial institutions have stepped into markets where the banks have otherwise started to pull back,” said Mr Elias. “It’s a sector of the market that isn’t just emerging – it has emerged. Non-bank lenders are not constrained by prudential regulation, so are able to remain active in markets that are becoming subject to regulatory focus. They are therefore able to react solely on the basis of market forces.”
Key Capital Markets Predictions for 2019
- Despite recent volatility, MinterEllison expects that elevated equity market valuations will remain for FY19.
- While investor interest in certain REIT offerings may have peaked, MinterEllison expects to see continued demand in the specialist REIT sector (for example, health REITs) over the next 12 months as investors seek to obtain exposure to high quality assets which have attractive yields which they are not able to access through direct investment.
- Despite the M&A bull market possibly entering a final phase, MinterEllison expects to see, at least in the short term, continued appetite to fund accretive M&A transactions.
- Off the back of trends in the global equity markets, MinterEllison expects to see an increase in the level of buy-backs in Australia.
Hot Sectors 2019
MinterEllison predicts the following sectors are likely to remain hotspots in 2019:
- Financial services (including fintech).
Hot Sector Insights 2019
Given the continuing trend of the Australian economy being bifurcated along broad lines such as health, commercial and financial services (in the services economy) and the continuing major pipeline of players in energy and resources and agribusiness (in the commodities economy), MinterEllison expects to see most or all of these areas being dominant in both the IPO and secondary (entitlement / placement) markets. This has played out across Australian equity capital markets during 2018 and is predicted to continue for the foreseeable future.
For the broader health sector, the Capital Markets Directions report sees this as continuing to evolve and diversify, capturing transactions by the large physical healthcare players (e.g. hospital and diagnostic players), through to the middle market (medical service roll ups) as well as the continuation of a relatively steady stream of drug discovery and medical device IPOs.
Commercial and financial services will be expected to provide a pipeline of capital market transactions at IPO and secondary levels whether as part of dual track strategy or straight to IPO transactions.
The intergenerational ownership and wealth transfer that Australia is presently undergoing will continue to see the number of private and family owned businesses strongly considering capital markets transactions as a means of either growing and diversifying their businesses or providing a future pathway to sell down and/or exit.Similarly, energy and resources cannot be discounted as an underlying driver of capital markets based on the secondary market activity during the year.
MinterEllison’s Directions in Capital Markets 2018 report can be accessed on the firm’s website.