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Brexit's Impact on the U.S. Capital Markets

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  • May 31, 2017

You may have heard by now that the U.K. plans to leave the European Union at some point in the next few years. Since the British voted back on June 23, 2016, there has been no shortage of learned analysis/rank speculation about Brexit’s future impact on the U.K. and EU economies and financial markets. Opinions range from dire to blasé, with reality likely to fall (as it is wont) somewhere in the middle.

One surprising consequence, however, may be Brexit’s impact on U.S. capital markets. In a recent Heard on the Street column in The Wall Street Journal, Paul J. Davies theorizes from London that post-Brexit EU companies may have no choice but to tap the U.S. capital markets to make up for less convenient access to U.K. investors. It’s an intriguing, and believable, hypothesis.

Mr. Davies notes that much of the capital used to fund business expansion comes from savings, mostly in the form of pension funds, insurance companies and investment funds. He cites statistics provided by the Financial Stability Board, Investment Company Institute, European Central Bank and OECD showing that eurozone savings total less than 150% of its total GDP, as compared to more than 250% of GDP in the U.K. and 240% of GDP in the U.S. He notes further that there currently is no single set of capital markets laws and standards within the EU, making it hard to raise capital simultaneously in several eurozone countries. Therefore, frequent or large eurozone issuers often turn to the U.K.’s massive capital markets. Post-Brexit, that may not be feasible. As a result, Mr. Davies says, EU companies may be far more inclined to access the U.S. capital markets, even if that means setting up overseas subsidiaries and satisfying U.S. reporting and other regulatory standards.

This is particularly interesting in light of the SEC’s current push to re-invigorate the U.S. IPO market. In fact, the SEC on May 10 co-hosted the SEC-NYU Dialogue on Securities Market Regulation: Reviving the U.S. IPO Market. In his opening remarks, Commissioner Michael S. Piwowar first noted that the numerous benefits of IPOs to the U.S. economy “cannot be overstated.” He then said:

“between 30 percent and 50 percent of worldwide IPOs occurred in the United States during the 1990s. … In the last 15 years, however, the reduction in IPO activity has been dramatic … despite the fact that there has been no downward trend in the creation of new companies over the same period. … Strikingly, the fraction of worldwide IPOs occurring on U.S. markets fell below 10 percent between 2007 and 2011.”

Mr. Piwowar speculates that the decline resulted from a variety of factors, including among others:
  • Alternative sources of capital
  • Economic globalization
  • The Sarbanes-Oxley Act’s higher regulatory burdens
What can be done, Mr. Piwowar then wonders, to revitalize the IPO market? If Mr. Davies is correct, we may need only to wait for the effects of Brexit to kick in. One wonders also how an uptick in such offerings might impact U.S. trading markets as an influx of foreign debt and equity offerings chases a finite amount of U.S. investment dollars.

Like virtually everything Brexit-related, the answers to these questions are, at best, uncertain. But they are intriguing to contemplate.