At Accenture’s capital markets team, we’ve completed a research project into the future of capital raising. We discussed some of the findings at a breakfast during Sibos, and I thought, I would share some of the headlines in this blog.
The results should be of interest for anyone in the industry—for both public and private markets. More so, I suspect people most interested may be small-cap issuers, many of whom currently seem to struggle to raise the capital in the way that best suits their needs and at times when they need it the most. Or capital markets firms who have an interest to see how to better service the small-cap issuers and how digital assets could open new business opportunities in the space. Why I think that? Let me begin my answer with some background to provide the context.
A divergence at the macro level …
A couple of years ago, I was working with some colleagues and our research team on our Capital Markets Vision 2025 report. We were keen to develop some insights into the evolving landscape of financial market infrastructure. And as we explored this area, one of the aspects we looked into was the total amount of capital being raised versus the amount being publicly issued.
Looking at those numbers, a significant macro divergence leapt out. On the one hand, with tech innovation exploding, a host of startups in sectors like Fintech were raising huge amounts of funding. But on the other, there was no corresponding increase in the number of net new listings on the “mainstream” exchanges. In fact, the number of company listings has remained relatively flat between 2015 and 2020. For example, we saw only a small overall 1.1% increase in the number of global listings in 2020 versus the previous year. And while new listings increased in 2021, they declined (as did investment flows) again in 2022¹.
… meriting deeper investigation
This insight raised many questions. What’s actually going on with capital raising? Where is all of the funding being raised by smaller companies coming from? And how exactly is it raised? As we couldn’t find much data on the subject, we wanted to establish some kind of baseline and statistical metrics around questions like how fast alternative funding options—like crowdfunding; peer-to-peer; emerging distributed ledger technologies (DLT); tokenization and DeFi models—are growing, whether they’re just a blip or here to stay, and how capital providers and issuers are navigating the regulatory and legal requirements.
A more granular analysis points to an opportunity in digital assets
Our research results, combining the views of more than 130 respondents across issuers, investors and banks, suggest that today’s global capital markets infrastructure does not necessarily service the needs of small issuers well. While the listed equity markets have a higher “appeal rating” (86 percent) for raising capital over private issuance (68 percent), only a minority of the small cap issuers are using it today.
But our research also points to a potential way to strike more of a balance—namely digital assets. In the context of raising capital, tokenised securities have an average appeal rating of 86 percent, indicating that those instruments are potentially a highly desirable mechanism for small cap firms to raise capital in the future. They are perceived to have a significant impact on reducing issuance time and resourcing required for issuance.
Small cap issuers see digital issuance primarily as facilitating a network effect: enabling a single shareholder registry across the industry and hence triggering greater market liquidity. In creating this network effect, digital issuance could also address the #1 concern of investors today in the private markets—notably liquidity and transferability.
While some progress has already been made, there are still a number of challenges to be addressed before digital assets could become the key instrument for smaller issuers raising capital: areas like small cap issuers’ typically higher risk curve. Verifying suitability criteria for listing/issuance. Accreditation of investors, especially retail ones. And how to further widen choice and accessibility for issuers, including in the private markets. The good news? I believe that all of these barriers could be overcome and in fact are being or will be addressed over time. More insights to this maturity are around the corner.
In this blog I’ve quickly highlighted the opportunity that our research suggests digital assets present to small-cap issuers currently struggling to raise capital via the global markets. In a follow-up post coming soon, I’ll broaden the perspective and share more of the results, in terms of e.g., what are the perceived benefits from using DLT shared across the investment cycle and where are the roadblocks to the widespread use of DLT to drive efficiencies in capital raising. Thanks for reading and watch this space.
¹ Source: World Federation of Exchanges, FY 2022 Market Highlights Report, 17 March 2023