Ibukun Adebayo, Co-Head Emerging Markets, Equity Primary Markets, London Stock Exchange Group, UK
Ibukun Adebayo, Co-Head of Emerging Markets & Equity Primary Markets for the London Stock Exchange Group, talks about why LSE has more than half of the top 15 O&G producers listed in London, how LSE tends to be a home for global businesses, and what are the strategies for remaining ahead of the competition of up and coming markets around the world.
What is the importance of the primary market for London Stock Exchange and more specifically, the significance that oil and gas equities carry?
The most important point about London Stock Exchange is that it’s an extraordinarily international market. We have just over 800 international companies and a real focus on providing access to capital for companies of that nature. Truly, what sets London Stock Exchange apart from other exchanges, particularly in terms of oil and gas, is its international focus. We have talked about Oslo, which is a very niche market. The US exchanges tend to cater for domestic US oil and gas companies; Toronto’s TMX tends to focus on small caps; and markets such as Australia are for Southeast Asian and Australasian issuers. But London Stock Exchange very much tends to be a home for global businesses. For that reason we have more than half of the top 15 integrated oil and gas producers listed in London. Obviously, we have the big UK companies BG and BP, but also the big Russian issuers: the Rosnefts of this world. It’s that spectrum that gives the gravitas to London and has created the ecosystem here.
In terms of the weight of companies, we are talking 17 percent of the FTSE 100 is now in oil and gas. That weight however, tails off very considerably when you look at the next 150 companies. Only 4 percent of the FTSE 250 is oil and gas, which includes service providers. So it’s a very important sector, but we are diversified enough as an exchange to ensure that if capital raising dries up in oil and gas, London Stock Exchange still manages to perform. So we have a good balance. The key benefits that we provide is access to institutional capital, global emerging market funds, strategic funds in oil and gas, longer-term investors, and a very good concentration of buy side firms that are prepared to invest long term in the industry, which is critical for a capital intensive business.
On the liquidity side, possibly a function of having some of the largest companies listed here is that the average daily volumes in London tend to be higher than other exchanges. Even when you put those into the context of the size of the companies, London tends to punch above its weight. The liquidity tends to be driven in London by a deep and rich sell side and research community. The exploration side is really supported by our AIM market, which has been around for 19 years and is primarily used to help natural resource companies raise capital, including via the secondary market. London again has high standards of corporate governance and regulation, which is supportive of this type of industry where companies have very complex scenarios working across multiple jurisdictions, regulatory regimes, and local practices that need to be complied with. We find that the London best practice tends to be an overarching set of standards that companies find very useful for meeting local standards as well as their regulatory obligations in the UK.
What would you describe as the main trends of the primary market today?
There are a lot of drivers at the moment. Over the last 12 months we have seen a recovery in UK equity markets. There were 105 initial public offerings last year in London, which raised just over $19 billion. Interestingly, this year we did not see a large amount of capital raised by oil and gas companies: of the total, they raised only about $550 million. The reasons for that are primarily surrounding risk appetites, particularly for commodity prices, which were very volatile. That attributed to a slowdown in capital raising for companies that would traditionally come to London. But we are hoping for a significant pickup in 2014 and we are focused on making those opportunities materialize. Nonetheless, in terms of further capital raised, companies did come back to the market in the oil and gas space and raise additional capital.
In other trends that are not necessarily related to oil and gas but are still significant, we saw a large increase in sponsor backed IPOs—private equity companies exiting, for example.
What is the current appetite among international investors for oil and gas companies listed on London Stock Exchange and what is the typical profile of companies being invested in?
There is certainly a flavour for emerging markets, as well as in companies in the exploration and developmental stages. This was demonstrated quite interestingly in two transactions last year. A Canadian company called Canacol, for example, has assets in Chad. Canacol is very interesting in that the current management team inherited a complicated environment in Chad. However, its success has been demonstrated hugely by the fact that since listing in London it has moved into the FTSE 250. Another interesting company is Lukoil, which raised money based on a Nigerian oil prospecting license. It raised $50 million initially and another $100 million four months after its IPO in London, demonstrating there is appetite for companies at both ends of the scale.
Investors here understand that with additional risk comes better returns. That is what we are able to produce in abundance a full mixture of investors who understand different equity stories and risk profiles.
AIM has been labelled as one of the most successful stock markets in the world when it comes to junior and independent E&Ps. What are the key characteristics that have shaped this model?
Going back to AIM’s evolution, the typical investor has always been one who is more willing to accept risk. The first few companies that listed on AIM in 1995 were natural resource firms drilling holes into the ground in wildcat territories. Obviously, the market has developed now and it is much more mature and international. There are nearly 1,100 issuers on that market. The market dynamics, infrastructure and in particular the regulatory model of that market, very much support raising capital in the natural resources sector. For example, our regulatory system that confers the day-to-day regulation of the market on to a special group of advisers called Nomads has been very effective. Traditionally, oil and gas and resource companies have always had upper managers that tend to be specialists. And the Nomads tend to provide that support on a continued basis in helping a company retain its regulatory duties on the market, particularly for companies where management tends to be drawn into other functions. That is support factor number one.
Supporting factor number two is the very specialized rules on AIM for mineral companies. For example, explorers find it easier to come to our market because there are more flexible requirements around previous track records. Ultimately, the second part of the depth of the market comes from the AIM process for raising further capital, which is greatly simplified, compared to the main market—both in terms of documentation and requirements for shareholder approval. For capital-intensive businesses it has made AIM very popular. We think there is a real support infrastructure with AIM. The market maker community is very familiar with the world’s oil and gas communities, providing liquidity in the secondary market.
Because the AIM market is so crowded, you might end up being a proverbial tree in a forest, compared to up and coming, fast growing exchanges. The Singapore exchange, for example, describes itself as a tree in the middle of the field. How can you remain competitive vis-a-vis the Singapore stock exchange?
London’s credentials with AIM as a growth market are unmatched—the understanding and trust that investors have in AIM has not been developed overnight. It is ongoing and has been through a number of cycles and investors get the model. Issuers understand the model and are comfortable and familiar with it, it works extraordinarily well. As a market, we are constantly looking at how we improve and how we consolidate on the standards that we have.
The second point comes back to the ecosystem in London: investors, sell side analysts, market makers, and a group of professional service companies who are steeped with expertise. Those levels of expertise produce the key fundamentals of appropriate valuation for companies that are sustainable based on the market’s appreciation of those fundamentals. We feel that London can do that better than any other market because we have the concentration of regional expertise, with a global perspective. In that scenario, London tends to underscore and underline its values.
Around the world, London Stock Exchange is seen as an institution at the forefront of shaping the financial muscle of not just the UK, but the world’s energy scene as well. How can the London Stock Exchange and AIM build a value beyond access to capital for this industry?
We initially talked about the problems that oil companies have by working in multiple jurisdictions. One area in particular where we add value in the UK is the corporate governance regime that we operate and the emphasis that we have on the value that is brought to businesses by independent directors. The combined code that companies listed in the UK have to comply with has some built in standards, particularly in risk and audit, that add value to a business and a company. Typically, a London oil and gas company will have a geologist and petroleum expert on its Board, and people with listed financial and regulatory backgrounds—not just in the UK jurisdiction, but multiple ones to ensure a greater understanding of the nuances that affect those businesses. UK based companies also understand resources nationalism, bribery acts, and issues such as the Foreign Corrupt Practices Act. All of these are about providing a deeper wealth of knowledge for companies to not just meet regulatory standards, but exceed them as well.
There is a simple message: the markets are open in London. We are ranked second in terms of new capital raised in 2013. From the conversations we have been having with the buy side, there is a lot of pent up demand for the right paper in the oil and gas space to come on to the market. I think we will see a manifestation of those opportunities this year. Already, for example, we are having conversations with groups related to Mexico‘s energy environment, and we think that this year we will see an emergence of very well managed African companies who will come to tap our markets. It will be a continuation of the internationalization of our markets. We are here to support them and our team is here to help develop those opportunities.