1. Why Capital Markets?

1.2. Public market-based financing

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1.2.1. Why choose public market-based financing?

Market-based financing refers to a system with multiple entities allowing the transaction of equity and debt financial instruments, in which such instruments supply (companies seeking financing) meets demand (investors, including funds, insurers, etc.) in an organized way.

Accessing market-based financing enables the Company to raise money from a wide investor pool. Additionally, accessing market-based financing has a positive impact on the conditions in which the Company can obtain further financing, including bank-based, as it provides a more solid standing with financial institutions, that may lead to low borrowing costs through less perceived risk. Furthermore, the diversification of investors (in debt) tends to decrease the cost of financing, due to the relative lower concentration in the counterparty’s risk. Presence in capital markets also grants the Company increased recognition, credibility and prestige as this decision is perceived as a Company´s commitment to more consistency, accuracy and safety, which in turn improve the Company’s ability to increase market share, reach new markets and attract and retain better talent.

Although the decision to access market-based financing should result from a diligent understanding about the steps of the process and best practices in dealing with investors, regulators, the media and public scrutiny, one of the first steps should be a deep reflection on the benefits that such process can unlock.

The potential benefits that are achievable by accessing market-based financing are:

Gain access to a broader community of investors, which allows to find those that have interests aligned with the Company’s long-term strategy and goals. Market-based financing provides alternatives and greater flexibility for the Company’s management, empowering management to pursue a long-term strategy that will maximize long-term value.

The investor pool normally includes private investors (for example investment funds or insurance companies) which often bring more management knowledge and attentive and professional relationship.

The process of going public and entering capital markets facilitates companies’ international expansion, by granting the Company increased recognition, credibility and prestige, while simultaneously being more visible by clients, suppliers and national and foreign investors.

Grants the Company access to funding, not only at initial offer, but also afterwards through easier secondary offers because it benefits from the experience gained from the initial offer and the knowledge obtained from third parties.

The easier access to funding from capital markets after going public generally enables the Company to raise money in a less costly and more efficient way. It also provides access to more flexible financing instruments, giving the Company more freedom to tailor the funding strategy to its specific needs of the business at any given time.

Provides alternative forms of finance to firms, through several capital market sources, improving the efficiency of the funding process, by avoiding the dependence from a single financing source (e.g. the banking system) and increasing resilience by mitigating financial risk. Markets are less exposed to systemic risk and are not directly connected to the payment infrastructure, which means that in some cases, during an economic crisis, it is advantageous and relatively easier to obtain funds in capital markets than by borrowing from financial institutions.

Additionally, Bank-based financing most often implies greater management constraints than market-based financing. Bank debt often imposes restrictive covenants that reduce operating flexibility (covenants are legally binding obligations made by the borrower to always comply with a certain rule or when taking a specific action) due to the specific prudential needs of that banking entity).

Securities when traded, more or less frequently, give at each of those moments an indication of their value which is reflected in the transaction price. This price is also the result of the interaction between supply and demand at each moment. When these prices are known – this is the usual situation in transactions carried out on trading venues – there is greater transparency towards third parties of the value attributed by buyers and sellers to the securities.

This transparency is likely to induce greater liquidity by predisposing more buyers and sellers – depending on the investment or divestment strategy they pursue – to want to acquire or dispose of the securities at the price that is known. This increases the likelihood that any investor will more quickly find an available counterparty to buy or sell the securities. This circumstance, which is inherent in the capital markets, also has the benefit for entrepreneurs of allowing them to reduce the risk of their assets when it is significantly concentrated.

Their high liquidity and ease of transaction being makes listed securities more suitable for use as collateral in other financial transactions (e.g. bank-based financing).

In addition, this potential greater liquidity also allows the creation of employee incentive schemes. When these schemes are share-based, including stock option plans and other bonus/rewards, their liquidity and ease of transaction helps to attract and retain talent within the organisation while encouraging employee commitment and motivation in the long term, without incurring immediate additional expense. As an example, many successful companies include stock option plans in their remuneration policy, giving their employees the possibility to buy the company’s shares (at a discount) in order to promote their commitment to medium and long-term business performance.

Transparency, reporting and corporate governance requirements for the public capital markets encourage greater and a continuous professionalization across companies, including better internal processes of management control and reporting.

The open communication with investors, analysts and the media and provides an opportunity to receive valuable feedback that may support the management team on how to best manage the Company and what direction to follow.

The value of companies that have been financed in the capital markets tends to be easier to determine, which translates into an advantage for most of their counterparties (e.g. clients, suppliers, investors). This circumstance can also be associated to the fact that the opportunity cost of analysing and investing in a company that has not gone through capital markets financing (because it only relied on bank financing) is relatively higher. And in these comparable situations, the market value of the company that is financed in capital markets would be higher.

This expectation is further assisted by the possible higher liquidity and availability of information, which together, contribute to a lower perceived risk. As a rule, investors usually require an additional return for investment in companies not subject to disclosure obligations, in order to compensate for the higher risk inherent to what is unknown.

Economic agents know that the process of issuing financial instruments demands that the Company has a high level of organization and internal controls.

This common knowledge enhances the Company’s visibility and prestige, nationally and abroad, increasing its credibility with clients, suppliers, business partners, employees, and financial institutions, and is heightened by that fact that by going public the Company receives greater media coverage.

1.2.2. Who are the market agents and key advisors for entering public capital markets?

Accessing market-based finance may require liaising with several parties and performing several steps. This procedure may be relatively simple or considerably more complex, depending on the size of the Company, its development stage in terms of organization and governance structures as well as the complexity of the envisaged offering for the funding of the market-based finance.

If you decide to obtain financing from a Private Equity firm, you may only need to involve Advisors (such as lawyers and financial advisors) to assist you through the process. Nonetheless, if you intend to enter in the public market-based-finance (through an IPO or a Bond Offering) you will also need to liaise with the Market Regulator and the Stock Exchange.

It is common to observe that companies progressively evolve through various stages of financing and complexity of carrying out operations, naturally depending on the financing needs of their projects and on their business ambition.

Bellow we describe a scenario of a public offering involving a large number of entities.

During an offer and the admission to trading, Financial Advisors (including, but not limited to, investment banks) play several different roles at different stages of the process. They may act as an advisor to the Company, acting as a trusted partner in the implementation process and managing the entire transaction, assisting the Company on the evaluation of the opportunity and the transaction’s costs and definition of the offer’s strategy, carrying out the Company’s valuation, performing the communication around the operations and roadshows for investors, determining the securities price. The Financial Advisor may also assume the underwriter role, acting as an intermediary between the Issuer and investors.

These various roles may be carried out by either a single financial advisor, which may act as a listing agent or sponsor*, or by several financial advisors. Traditionally the Financial Advisor will execute the following roles:

Leads the process and provides Corporate Finance advisory

The Financial Advisor manages the entire issuance process, providing advice on the best structure and timing for the operation, developing the Equity Story and coordinating inputs from other advisors throughout the process. To do so, the Financial Advisor will have access to private management information of the Company and make an evaluation of the Company’s profile to provide advice on the corporate finance aspects of the operation, including, after the operation, accessing potential capital raises and M&A opportunities.

Provides advisory in marketability and prepares the roadshow

The Financial Advisor builds relationships with Institutional Investors and gain deep knowledge about their investment profile. The Financial Advisor will also assume responsibility for preparing the roadshow, sending the Prospectus or Information Document to the Institutional Investing Community, and invite Institutional Investors to submit their bids.

Centralizes the book building process and the placement of the securities

The Financial Advisor centralizes the book building, if applicable, and takes responsibility for the underwriting and/or the placement of the Issuer’s securities. If there is a placement or underwriting agreement, between the relevant bank (or banks, in case of a syndicate) and the Issuer, the Financial Advisor will often act as underwriter and subscribe, the totality or part, of the securities. For further information please refer to section “Negotiation agreements and appointment of financial intermediaries” IN SECTION 4.1.1.2.1.4.

*Listing Sponsor and Listing Agent: Some market operators, such as Euronext, require the applicant Company to appoint an intermediary for the purpose of their application for the first admission of shares. This intermediary is usually called a “Listing Agent” (in the case of admission to Euronext regulated markets) and “Listing Sponsor” (in the case of admission to Euronext Growth and Euronext Access). A financial advisor intervening in an offer can assume the role of Listing Agent, without having to engage an additional advisor in the operation.

The Legal Advisor of the Company will ensure the Issuer complies with all applicable laws and regulations during and after the listing process, by advising on regulatory obligations at all stages of the process.

The Legal Advisor will also be responsible for performing the legal due diligence on the Company, focusing on the impact that the listing will have on important contracts from a legal standpoint, on the analysis of the Company’s structure, and on the identification of specific legal risks that investors should be informed of.

The Legal Advisor will also draft, review and update information for the Company’s Prospectus or Information Document and listing application, and will assist the Company in any necessary internal restructuring, amendments of the articles of association, structuring of the transaction, preparation of press releases and negotiation of documents and agreements necessary for the successful issuance and admission to trading.

The Auditor is often the Issuer’s auditor (it may however be an auditing firm hired specifically for this process), and will audit, review and report on its financial statements, perform financial due diligence, and assist the Company on becoming listed. The Auditor will summarise and review the Company’s financial information for inclusion in the Prospectus, or Information Document, and issue a comfort letter to support financial advisors in their due diligence activities.

The selection of an audit firm with a high reputation is especially relevant by the confidence it conveys to investors that the financial information has been properly prepared, allowing them to save time and resources in their investment decisions.

Whenever a public offer and/or a listing prospectus is required, it should be subject to the prior approval of the Regulator, which entails with the Issuer a collaborative process and is committed to accommodate the Issuer’s timetable. Subsequent to the admission to trading the Regulator also supervises the Issuer, in particular with regard to the disclosure of periodical financial information and information on significant corporate events.

Comissão do Mercado de Valores Mobiliários (“CMVM”), is the Portuguese Financial Markets Regulator.

The stock exchange is a market where securities buyers regularly connect with securities sellers. Euronext Lisbon is the main market operator where Portuguese Companies’ securities are negotiated which is comprised of three main markets:

Euronext is an EU regulated market for the transactions of major companies that have a great amount resources at their disposal. It has three segments according to companies’ market capitalisation:

  • Compartment A over €1b
  • Compartment B €150m to €1b
  • Compartment C less than €150m

Admission on Euronext is recommended for larger, established companies with substantial financing depth.

Euronext Growth/SME growth market is suited to small- and mid- sized companies (SMEs) that want to raise funds to finance growth. Listing requirements are simplified and reporting requirements are lighter and thus offers an alternative route for the funding of companies that find themselves at the growing stages of business development.

Euronext Access is designed especially for start-ups and SMEs that wish to finance their growth and gain the reputational advantages of having their own securities admitted to trading, but do not meet the criteria for admission on the other Euronext markets  Euronext Access is regularly seen as the first step in the process of gaining access to the markets Once companies are big enough, they are encouraged to consider transferring to Euronext Access+ or Euronext Growth, and later to the Euronext regulated market.

Euronext Access+

Euronext Access+ is a special compartment of Euronext Access that is tailored to the needs of start-ups and fast-growing SMEs. Euronext Access+ acts as a springboard to other Euronext markets, helping companies transition smoothly and adapt to the more rigorous market practices. Euronext Access+ has its own negotiation criteria, and companies admitted to trading on this market enjoy special assistance and greater visibility when compared to Euronext Access.

The Central Securities Depository (CSD) is in charge of the management of centralised securities systems.  Prior to the listing, the Issuer must register the securities with CSD. Euronext Securities Porto is the Portuguese entity operating as the Central Securities Depository (CSD).

May have various profiles and their roles may vary:

Entities that invest money on their own behalf or in behalf of other agents. These include asset managers, insurers, mutual and pension funds and sovereign wealth funds. Institutional investors and generally the main contributors to financing rounds and are perceived as more sophisticated than the average retail investor and thus, are suitable to accept a lower degree of information protection by the regulations. As Institutional Investors trade in large volumes, they are usually targeted as a key investor typology in an IPO.

Natural persons or entities who directly invest their own savings or financial surpluses in the purchase of securities for their own personal gain. They often trade in smaller amounts as compared to institutional investors or professionals.

Retail investors regularly execute their trades through banks or brokerage firms. When they trade on a recurrent basis and in aggregated terms retail investors are an important promoting source for market liquidity.

1.2.3. Secondary Markets

1.2.3.1. What are secondary markets?

The initial issuance of securities is known as the primary market. Afterwards, the securities can be bought and sold on secondary markets, either on stock Exchanges/Trading Venues or outside these.

1.2.3.2. How are securities traded in the secondary markets IN PORTUGAL?

Market Members

Only companies that have obtained “Membership status” granted by Euronext are allowed to participate directly in the trading activities on Euronext markets. Accordingly, investors cannot trade directly in the Exchange. They require a Member to execute orders on their behalf at the Euronext trading platform. The accredited intermediaries for Euronext Lisbon may be found in Members list | live (euronext.com).

Central Order Book and Trading Platform

Euronext operates an electronic Order Book in which orders entered are held until they are matched, expired or withdrawn. Specifically, Members introduce the buy and sell orders they receive from the investors in the Central Order Book. These orders can be of different types (market orders, limit orders, stop orders, indexed orders) and must comply a series of indications that are described in the Euronext Market Rules. Typically, an order should have an indication, at least, of the price preference, the volume/quantity and the term.   

OTC trade (“Over The Counter”)

A trade that usually results from a bilateral agreement between a buyer and a seller with no interposition of a trading venue.

Method of trading

Shares are traded in the Euronext Trading Platform either continuously, for shares with sufficient liquidity or at auction for the least liquid shares. For many securities where there may not be a large number of buyers and sellers daily and at all times of the trading session, call auction trading is the most appropriate and efficient way to determine the price of these securities. Bonds trade at auction, but mainly OTC.

All orders on Euronext markets are centralised by the central order book in order to achieve an equilibrium price depending on the supply and demand for each security.

1.2.3.2. The trade and post-trade structure in Portugal

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