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AgendaJune 2 2014

An established team helps Morgan Stanley hunt for new opportunities

John Moore, the head of Morgan Stanley’s Americas equity capital markets business, explains why identifying innovators is a key part of the job
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An established team helps Morgan Stanley hunt for new opportunities

John Moore considers his move into the healthcare equity capital markets (ECM) team at Morgan Stanley in 2000 as a decisive moment in his career. It coincided with the sequencing of the human genome, which led to a substantial increase in equity-raising among biotechnology companies making use of genomic science for medical treatments.

Mr Moore immersed himself in understanding biological research and healthcare science during a period of intense initial public offering (IPO) activity. As the bank’s head of Americas ECM since 2010, he retains that attention to innovation as a key source of activity for his division. Morgan Stanley holds an annual 'Next Generation' IPO conference that brings together investors and private companies with IPO prospects.

“Innovation trends within and across industry sectors are critical lead indicators for equity underwriting. We see these trends driven by a host of sources, including venture capital and private equity, universities, corporate splits and individual entrepreneurs. Wherever they are present, we see the demand for equity capital follow, which creates opportunities for us,” says Mr Moore.

To exploit those opportunities requires extensive investment and resources beyond the ECM team itself – including banking, research, sales and distribution to provide the insight on deal execution.

“In addition to our institutional investor distribution, Morgan Stanley has the largest individual investor network in the world, which is vitally important across equity products and provides stable distribution and aftermarket support in weak as well as buoyant markets,” says Mr Moore.

Strong revival

He believes the resources that major ECM players have committed, together with the opportunities presented, mean that banks that regard ECM as a core business are most likely there to stay. Although many investment banks are rethinking their strategies and business lines, he does not expect any exits from ECM “except by banks that are subscale in this business”. The improved performance of the segment will strengthen the commitment to it.

“US equity markets had a dramatic recovery in 2013. Markets had been volatile in the 2011-12 timeframe, but 2013 benefited from a resurgence of fund flows, muted volatility, the outperformance of growth stocks, M&A [mergers and acquisitions] activity and high quality IPOs that strengthened the confidence of investors. Macro shocks took a back seat,” he says.

This year started reasonably well, but there are now uncertainties weighing in again, over jobs in the US, slowing economic growth in China and Latin America – especially Brazil – and the implications of geopolitical uncertainty in Russia and Ukraine.

“The pipeline is building and the market is still constructive, and landmark deals are getting completed across sectors and geographies. But this year is trickier than 2013, with windows of opportunity that can close rapidly, pullbacks from risk and, at times, heightened price sensitivity,” says Mr Moore.

His current brief includes Latin America, which was his starting-point in ECM in the mid-1990s thanks to a two-year stint working for a non-governmental agency in El Salvador in the 1980s. While large deals in Latin America may be challenging at present, Morgan Stanley enjoyed a notable success in May 2014 by executing a bold block trade of approximately $1.3bn to sell most of Spanish oil company Repsol’s residual stake in YPF. The deal was all the more remarkable given the company’s recent history, which involved the expropriation of a 51% stake in YPF by the Argentinian government in 2012. The country's authorities ultimately paid $5bn to Repsol as compensation.

“YPF is a very unique case of an attractive asset with a management team that is now partnering with multinationals and financing its development in the international markets,” says Mr Moore.   

Bio boost

In terms of sectors, Mr Moore says the biopharmaceutical industry is enjoying “tail winds” from regulatory agency approvals that are encouraging product research and development. That also helps product development, technology and other service companies supporting biopharma research, such as IMS Health, on whose April 2014 IPO Morgan Stanley was one of three active bookrunners.

He is positive on IT sectors in general, including e-commerce, innovative payment processing, enterprise software and data analytics. And he is also keeping a close eye on leading-edge companies in the so-called 'sharing economy' that are enabled by smartphone apps.

Morgan Stanley’s name is inevitably associated with the Facebook IPO in 2012, where the valuation process proved very challenging. Mr Moore says social media IPOs will become more straightforward as the sector evolves.

“Every quarter allows companies to validate their models, provide further visibility and gain investor confidence. We are moving from discounting future prospects to seeing them unfold. We will never have the kind of 70% to 80% revenue visibility offered by data analytics or business outsourcing companies. But we are certainly seeing some social media models delivering the revenues promised at their IPOs,” he says.

Cross-asset approach

From an institutional investor viewpoint, Mr Moore believes that the demands of capital markets issuers and investors are evolving across asset classes. That creates an opportunity to use relationships with debt investors when marketing to their equity counterparts in the same fund family, as well as the reverse.

“For instance, an investor who bought the debt of a company when we were arranging a private company leveraged recapitalisation will work with us when we introduce the IPO to their equity investor counterpart,” he says.

The ECM team sits on the same floor as its debt and leveraged finance counterparts, and the co-operation also extends to working with the M&A advisory team to assess how investors might react to a planned takeover bid. Those ties also feed another of Morgan Stanley’s key strengths, its role in arranging spin-offs from existing listed companies. Recent deals have included advising Pfizer on the IPO of its animal health division Zoetis in 2013, and CBS on the divestment of its outdoor advertising business in 2014.

In addition, Mr Moore says both the largest investment funds and the private equity houses now generally employ primary markets specialists who become key partners for the investment bank on each side of a given deal. Coupled with the traditional research analysts and fund managers, that has generated a sizeable population of counterparts that the ECM team needs to cultivate.

“If you want to be smart on a name beyond key comparators and financial metrics, you have to do a lot of homework. When we talk to companies about an IPO or prospective follow-on, we go having spent time to understand target investors and how they will frame their investment decision. That informs everything from positioning and valuation to capital structure and timing. Ideally, the marketing process and result aligns with the plan we laid out from the start,” says Mr Moore.

Morgan Stanley’s depth and global reach is also a competitive edge against the growing presence of local banks – especially the Brazilians – in the Latin American market. While those local banks have the close client relationships, Morgan Stanley has access to crossover funds that look at individual Latin American stocks as part of their global sector coverage. Mr Moore says dialogue with industry sector investors and international hedge funds active in a region is equally important for many companies. Certain hedge funds were still willing to buy shares in YPF after the price fell following the expropriation of Repsol’s majority stake.

And Mr Moore says the ECM team’s longevity of staff that he epitomises “makes a difference to the way we work, how we learn from one another, and the results we achieve”, not only within capital markets but also across banking, sales and trading.

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