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You are here: Home > Financing Best Practice > Raising Capital in Global Financial Markets
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Raising Capital in Global Financial Markets

by Reena Aggarwal
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Table of contents
Current content: Executive Summary
Current content: Introduction
The Globalization of Stock Exchanges1
Growth of Private Equity
Sovereign Wealth Funds as a Source of Capital
Emerging Financial Powers
Conclusion
Notes
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Executive Summary
Major changes are occurring in the capital-raising process in global financial markets. These changes are being
driven by:
the globalization and consolidation of stock exchanges;
the growth of private equity;
sovereign wealth funds;
the emergence of new regions and countries as financial powers.
Introduction
Raising Capital in Global Financial Markets
(aspects)

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 being seen in the roles of the suppliers and users of capital. This article focuses
on four such shifts that impact both those global firms which are looking to raise funds and the institutional
investors that provide the capital. The four developments that underlie these major shifts are: the globalization and
consolidation of stock exchanges; the growth of private equity; the increasing role of sovereign wealth funds as a
source of capital; and the emergence of new countries and regions as major financial players.
The recent global financial crisis has clearly highlighted the challenges that companies worldwide face in raising
capital. Either funding is just 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 investment, and jobs. The financial markets and financial institutions collapsed in a variety of ways,
and this will result in structural and regulatory changes that will impact the raising of capital in global financial
markets.

The Globalization of Stock Exchanges1

Stock exchanges play a critical role in the capital-raising process. In January 2007 the total market capitalization of
all publicly traded companies in the world was US$51.2 trillion and reached US$57.5 trillion in May 2008 before
dropping below US$36.6 trillion in October 2008.2 However, exchanges across the world have undergone major
structural changes in the last few years. Starting with the demutualization of the Stockholm Stock Exchange in
1993, the number of financial exchanges that have adopted a for-profit, publicly listed organizational form has
grown steadily. This trend can be seen both in the stock exchanges of different countries and in financial
exchanges that trade different types of securities.

The rapid organizational transformation of exchanges from member-owned mutual companies to joint-stock
companies is unparalleled, and this process is the manifestation of a number of innovations and deregulatory
events that have occurred in the last decade. The for-profit structure has allowed exchanges to raise capital and
invest in technology that is essential if they are to compete. As public companies, exchanges have needed to
increase market share and develop additional sources of revenue. There has been considerable consolidation
among the large global exchanges. The New York Stock Exchange acquired Euronext, forming NYSE Euronext;
Nasdaq gained control of OMX; and the Chicago Mercantile Exchange merged with its rival, the Chicago Board of
Trade.

The globalization of stock exchanges beyond the authority of a single national regulator has meant a rethinking of
the regulatory framework. It can be argued that regulatory policy rarely leads, but more often follows, market
innovations. As such, the challenge for regulators will be to develop regulatory programs that respond to globalized
markets.3 National regulators are moving in the direction of increased coordination and convergence of regulation
in accordance with generally accepted principles. IOSCO, the international organization of securities regulators,
has played a key role in promoting greater cooperation and the development of commonly accepted regulatory
principles. The financial crisis of 2008 has given added emphasis to the need for global coordination in an
environment where capital has no national boundary.

The global consolidation of some of the largest exchanges has been beneficial both for companies raising capital
and for investors/traders. This consolidation has made it easier for companies worldwide to raise large sums of
capital through public offerings and cheaper for market participants to conduct transactions in deep, liquid markets.
In addition to public capital, there has been a tremendous increase in the use of private capital.
Growth of Private Equity
During the last decade private equity firms have 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 the
amount of capital raised for direct private equity investment between 2002 and 2007, 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 has been considerable allocation by institutions into this asset class, although
the current economic crisis has caused them to reevaluate their strategy.

Table 1. Ten largest private equity firms ranked by capital raised for direct private equity investment
between 2002 and 2007. (Source: Private Equity International, 2008)
Firm Assets (US$ billion)
The Carlyle Group 52.0
Goldman Sachs Principal Investment Area 49.1
Texas Pacific Group 48.8
Kohlberg Kravis Roberts 40.0
CVC Capital Partners 36.9
Apollo Management 32.8
Bain Capital 31.7
Permira 25.4
Apax Partners 25.2
The Blackstone Group 23.2
The funds differ with respect to 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 that include corporate private equity, real estate, hedge funds, credit, and advisory services. 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 investment in the United States and Europe, but now there is increased interest in
the emerging markets of Asia-Pacific as a destination for private equity funds. For example, there has been a
significant rise in the amount of private equity investment flowing to China, Singapore, South Korea, and India. As
seen in Figure 1, global buyout investment has seen considerable expansion in the last few years. Private equity
has now become a major source of capital for companies around the world.

Figure 1. Global leveraged buyout volume has risen significantly since 1995.(Source: Dealogic)

Sovereign Wealth Funds as a Source of Capital

Another newcomer on the global financial scene is sovereign wealth funds (SWFs). SWFs are government
investment funds that invest in foreign companies to earn profits and increase the wealth of the state. These funds
have existed for a long time, but the increase in their scope and magnitude has recently made them a major
financial player. The source of funding for SWFs varies from export revenues to foreign exchange reserves. In
early 2008 the assets controlled by SWFs were estimated to be $3 trillion, and they are expected to rise to $12
trillion by 2012. For comparison, the assets managed by institutional investors like pension funds and endowments
amount to $53 trillion. The assets of SWFs are expected to grow at a tremendous rate and become a major
provider of funding for companies in both developed and developing markets.4,5
Some of these funds have already taken significant positions in a number of foreign companies. As shown in Table
2, the largest sovereign fund is the Abu Dhabi Investment Authority, the investment arm of Abu Dhabi, with $875
billion under management. The fund grew due to the sharp rise in oil prices in early 2008. The fund made an
investment of $7.5 billion in Citigroup, has a 4.5% ownership in the home builder Toll Brothers, and also has
positions in companies such as EFG Hermes, one of the leading investment banks in the Arab world, and Banque
de Tunisie et des Emirats, a Tunisian bank.6 Similarly, the China Investment Corporation is estimated to have a
size of $200 billion, funded by Chinese foreign exchange reserves. The fund has large positions in the private
equity firm Blackstone Group ($3 billion) and in the investment bank Morgan Stanley ($5 billion). Other large SWFs
include those of Norway, Saudi Arabia, Singapore, and Kuwait.

Table 2. Top ten sovereign wealth funds ranked by assets under management. (Source: Sovereign Wealth
Fund Institute, October 2008)
Country Sovereign wealth fund Assets ($ billion)
UAE: Abu Dhabi Abu Dhabi Investment 875
Authority
Saudi Arabia SAMA Foreign Holdings 433
Singapore Government of Singapore 330
Investment Corporation
China SAFE Investment Company 311.6
Norway Government Pension 301
Fund—Global
Kuwait Kuwait Investment Authority 264.4
China China Investment Corporation 200
China: Hong Kong Hong Kong Monetary 173
Authority Investment Portfolio
Russia National Welfare Fund 189.7
Singapore Temasek Holdings 134
The growth and size of these funds has attracted considerable attention and discussion. Typically, SWFs make
decisions based on sound, long-term investment strategies. Unlike hedge funds, they do not use leverage. Overall,
the impact of SWFs is positive in that they invest the resources of a country efficiently. Their investment in
companies such as Citigroup, Morgan Stanley, and Barclays has been particularly welcomed, as other sources of
capital were unavailable to these companies. For the future, there is concern in some circles whether these funds
will remain simply vehicles for financial investment or if they will take an activist role in companies with the
objective of gaining political clout for their countries. There is also concern about the lack of transparency and
regulation of SWFs.

Following are the international sources of finance:

1. Foreign Direct Investment
2. GDR/ADR
3. FII
4. IMF
5. ADB