Key takeaways
    • Having experienced a sharp decline IPO and M&A activity at the beginning of the pandemic, markets are now recovering and gradually returning to their pre-COVID levels.
    • With so much volatility in the market, escrows are seen as a valuable tool which can help protect assets ahead of a transaction’s completion.
    • Interest in escrow solutions is being fuelled by the growth in cross-border transactions.

    Introduction

    COVID-19 has unleashed unprecedented levels of volatility and uncertainty across global equity markets. Although some companies – principally those in the technology and e-commerce sectors — are thriving, others have fared less well during the crisis. With so much happening in markets, it is critical that corporates engage with strong counterparties who are well-positioned to handle the disruption.

    The crisis, has accelerated the decision by some companies to list ahead of schedule, especially those in the healthcare, e-commerce and technology sectors. Conversely, there are a lot of companies whose businesses were severely impacted because of COVID-19, who may have intended to list in 2020, but will now push their plans back.

    – Ed Sankey

    IPOs take off again

    As corporates initially digested the wide-reaching implications of COVID-19 in early spring, IPO (initial public offering) activity all but ground to a halt. However, there has since been a significant rebound. Fuelled by the sheer abundance of liquidity in the market, Q3 – a nominally quiet period for public listings – was the most active Q3 on record in the last 20 years by proceeds alone and the second highest Q3 by deal numbers.1 For instance, EY said there was a 14 per cent YTD (year-to-date) increase in the number of IPOs with 872 listings globally.2 Edward Sankey, Global Head of Equity Capital Markets at HSBC, said most of these listings were taking place in the US and APAC, relative to Europe where the IPO market has been more muted. In the case of the US, Sankey said a lot of the IPO volumes were being driven by the meteoric rise of SPACs (special purpose acquisition companies), namely businesses established to raise funds via an IPO to purchase existing companies.

    The crisis, continued Sankey, has also accelerated the decision by some companies to list ahead of schedule, especially those in the healthcare, e-commerce and technology sectors. These are all industries, which in some cases have been net beneficiaries of the pandemic. Similarly, he added fintech and digital payment groups had also seen strong growth during this period. “Conversely, there are a lot of companies whose businesses were severely impacted because of COVID-19, who may have intended to list in 2020, but will now push their plans back,” acknowledged Sankey. In addition to the robust IPO pipeline, Sankey added that corporates were increasingly raising large sums of primary capital through the equity market as they try to shore up their balance sheet strength and weather the pandemic, a trend that is likely to persist following the successful COVID-19 vaccine trials. Elsewhere, other companies are raising equity to finance future acquisitions.

    M&A: Returning to pre-COVID levels

    Having undergone a severe contraction at the beginning of COVID-19, the M&A market is now experiencing a powerful resurgence as the recovery continues, said Karen Lomax, Head of Issuer Services, Europe at HSBC. According to White & Case, an international law firm, M&A deals totalled USD896.3 billion during Q3, a staggering 141 per cent increase from Q2.3 A lot of these transactional volumes were driven by mega deals. For example, White & Case said there were 33 transactions each worth more than USD5 billion — totalling USD456.2 billion in value — marking a return to pre-COVID-19 mega deal activity levels.4 Deal-making has been given a boost by a combination of factors including the historically low interest rates; strong bond market liquidity, renewed willingness of banks and alternative lenders to provide financing, robust cash balances at companies and private capital firms and the rising number of distressed businesses.5

    Since the pandemic, we have noticed demand for supply chain escrows increase significantly. This is driven by the emergence of new commercial relationships built as a result of COVID-19: sellers want assurances that buyers can pay for the goods they are procuring.

    – Anthony Sao

    Supporting equity capital markets

    Escrows play a vital role in helping to support equity market integrity. “Often, there is a regulatory or third-party requirement that an independent escrow provider step in to offer asset safekeeping during a transaction on behalf of the contracting parties. Corporates will look for reputable and well-capitalised third parties to safekeep their funds pending completion of the transaction. As such, escrow accounts provide a crucial risk mitigation role in the process. Since the pandemic, we have noticed demand for supply chain escrows increase significantly. This is driven by the emergence of new commercial relationships built as a result of COVID-19: sellers want assurances that buyers can pay for the goods they are procuring,” said Anthony Sao, Head of Escrow Client Services for Europe at HSBC.

    With cross-border deal volumes spiking, corporates are also seeking out providers who have a global presence and in-depth local market knowledge. Sao highlighted that as a global bank HSBC’s Issuer Services business already had deep rooted operations in London, Hong Kong and New York and was continuing to expand its geographical footprint. This ability to support clients with complex, cross-border transactions is a unique selling point for the Issuer Services business, said Sankey. As a group, HSBC can also provide an assortment of bespoke services (e.g. finance and advisory, escrow solutions, etc) to corporate clients under a single umbrella, making for a more seamless customer experience. “We are part of a strong Capital Markets franchise, working closely with colleagues from Equity and Debt Capital Markets but also broader teams such as Structured Finance. This allows us to provide an end to end solution when clients require it,” commented Lomax.

    Case studies:
    • A global luxury group sought a USD3+ million acquisition of a high end hospitality group that owns luxury hotels in a multi-billion takeover. HSBC Issuer Services supported the luxury company by providing them with a securities account to hold shares in the target company pending their delisting from the New York Stock exchange.
    • An international food company pursued a tender offer to return circa EUR2 billion to shareholders following the sale of one of their businesses. HSBC Issuer Services provided escrow services to hold the share repurchase amount, and release it to shareholders.
    • A European manufacturing electronics company acquired a high tech company in a transaction valued at more than two billion in euros, and financed in part by an equity rights issue. HSBC Equity Capital Markets acted as the global coordinator on the rights issue while HSBC Issuer Services provided account services to hold rights issue proceeds pending regulatory approval.

    There will be beneficiaries from the pandemic, likely from the fintech, health care and private equity sectors. Other industries will be deeply impacted, the auto and oil and gas sectors, for instance. We will support clients no matter where they are in the recovery cycle.

    – Karen Lomax

    Working with clients…regardless

    COVID-19 is a black swan event which nobody could have forecast, but it is critical that banks continue to provide unwavering support to corporate clients irrespective of their situation. “There will be beneficiaries from the pandemic, likely from the fintech, health care and private equity sectors. On the other hand, other industries will be deeply impacted, the auto and oil and gas sectors, for instance. Issuer Services will support clients no matter where they are in the recovery cycle. Our business is about supporting clients during both the good times and difficult times,” said Lomax.

    Related articles:

    To find out more about HSBC Issuer Services:

    1 EY – October 15, 2020 – Global IPO activity rebounds sharply hitting historic highs in Q3 2020
    2 EY – October 15, 2020 – Global IPO activity rebounds sharply hitting historic highs in Q3 2020
    3 White & Case – October 20, 2020 – Global M&A stages rebound in Q3 2020
    4 White & Case – October 20, 2020 – Global M&A stages rebound in Q3 2020
    5 PwC – Global M&A Industry Trends

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