If there is a “new normal,” as the pundits are fond of saying, it involves learning to live with the risk of the unknown. And for foreign companies that are adaptable and tolerant of today’s macroeconomic uncertainties, these trying times provide an opportunity to diversify their shareholder base beyond their home market.
Investors, investor relations officers and C-suite executives alike appreciate certainty and predictability, and that is something in short supply in 2020. Yet, in the midst of unprecedented times, there’s a silver lining for foreign companies looking to expand and diversify their investor base in the U.S.
Global companies are reaping the benefits of expanding their shareholder base to U.S. markets today, just as they do during periods that are less volatile. In fact, many believe that, for the international company looking for that growth, it is an opportune time to engage U.S. investors.
A More Global Economy
Geopolitics are complicated, but many business principles are straightforward: whether you’re an investor or a company executive, the more capital you can attract, the more successful you’re likely to be. For an expanding company, fishing from the same small pool of local investors means minimal visibility, higher volatility and limited growth potential.
That’s why hundreds of companies with primary listings on 26 foreign exchanges and markets cross-trade on the OTCQX Market: a transparent, SEC-recognized and regulated trading venue where some of the most highly respected companies in the world have chosen to trade. Companies that trade on this market recognize the benefits of reduced cost and complexity, without compromising their shareholders’ experience or value.
Global companies are building value in the U.S. while enhancing liquidity and driving value in their home markets as well, according to results of a detailed study by Oxford Metrica. The study found there is a strategic growth opportunity for those international issuers who choose to expand their corporate footprint, garner U.S. investor interest in their company and strategically position themselves on OTC Markets. Those investor relations officers that neglect to capitalize on investor interest and haven’t considered the advantages of trading on the OTCQX market may have missed this strategic growth opportunity.
Global Leaders Choose to Cross-Trade on OTCQX
One of the most important decisions a company makes is where to have its shares traded. A company’s public market can affect its liquidity, transparency and investor visibility. Today, a significant number of global industry leaders have made OTCQX the trading venue of choice for both their ADR and ordinary shares. Roche, Hugo Boss, Heineken, Imperial Brands, Tesco, adidas and hundreds of other global companies are among the growing roster of issuers who share a commitment to providing their investors with the premium trading experience the OTCQX Market delivers. These companies have proactively taken the reins to achieve greater global visibility, benefiting from the transparency and high disclosure requirements of OTCQX.
Companies that trade on the OTCQX Market are distinguished by the excellence of their operations and diligence with which they convey their corporate governance and qualifications. Cross-trading in the U.S. unlocks the potential to attract a significant investor pool comprising investment banks, family offices and a broader segment of retail investors. Among these investors are a segment of high net-worth individuals. Once considered more difficult to attract, this population tends to be long-term shareholders — essentially reducing volatility in the security as there’s less churn.
More recent research demonstrates a positive effect on foreign issuers that drives alpha and value to shareholders in multiple markets — all while leveraging their home market disclosure and reporting standards rather than complying with duplicative, burdensome and costly SEC reporting required of NYSE or NASDAQ listings. In fact, data shows that, for the hundreds of foreign companies that cross-trade, U.S. ownership increases nearly 7-fold after joining OTCQX — more than doubling within a year. Trading volume by number of shares increases for these companies by 26% within their home markets, and liquidity on the U.S. market increases 67%.
Companies procuring global expansion today are doing so during times of greater uncertainty than most investors have seen in their lifetimes. Encouragingly, this same kind of growth did not stop during the 2008 economic slowdown, and it remains robust under current global economic uncertainty.
International Company Growth in 2020 and Beyond
Foreign companies that trade over-the-counter represent a multitude of sizes, industries and geographic regions spanning throughout Western Europe, to Latin America, Asia and Australia. Despite the unpredictability that 2020 has brought, the majority of our most actively traded securities on OTCQX in the first half of this year were foreign companies.
Furthermore, foreign issuers are joining our markets in greater numbers today. While in 2019, nearly 60% of the companies that joined the OTCQX market were foreign issuers, thus far in 2020, foreign issuers represent more than three-quarters of the new companies now trading on OTCQX. We’ve seen 45 companies join OTCQX in the third quarter, with 36 of those companies having primary listings overseas.
Whether this global investor diversification was sparked by looming legislation as a result of Brexit, economic uncertainty, or part of a company’s long-term strategic growth plan, one thing is for sure — companies are finding security in broadening their horizons to attract new investors– benefiting from doing so in a way that capitalizes on and is complementary to their longer-term U.S. investor growth opportunity.
UADRs: A Missed Growth Opportunity
Depositary banks made a splash in 2008–the beginning of the last financial crisis–after the passage of an amendment to SEC Rule 12g3-2(b). The amendment expanded the exemption from disclosures for many foreign issuers, prompting the creation of 550 Unsponsored American Depositary Receipt programs (UADR) in foreign companies that were, in effect, issued without the sponsorship of the companies themselves. Essentially, the creation of such a program by the depositary banks might have signaled demand from U.S. investors to trade the foreign companies’ shares regardless of the economic climate at that time. Notably, the UADR market has grown to 1,390 companies since 2008.
Regardless of the type of ADR, international companies should not miss out on the opportunity to access U.S. investors. The demand by U.S. investors to diversify their portfolio to include international equities remains strong. International equities offer numerous benefits and these securities play an important role in reducing U.S. investors’ “home bias.” They also improve portfolio diversification and risk-adjusted returns with higher weighting and offer increased exposure to higher-growth economies.
By harnessing the activity created by banks’ Unsponsored American Depositary Receipt (UADR) programs, global issuers can further capitalize on increased U.S. share ownership and investment—effectively promoting the trading and visibility of their shares to appeal to those investors and broker-dealers who prefer to trade in U.S. dollars, during U.S. trading hours.
With increased transparency, simplified disclosure requirements and high level of corporate governance practices, the OTCQX Market provides an efficient and compelling alternative for increasing a company’s exposure to gain investors. This makes for an effective investor relations strategy that ultimately translates to a reduced cost of capital and increased shareholder value.
International companies are looking for effective and efficient ways to access U.S. investors. Our markets are poised for further growth, in large part because of the breadth of foreign issuers who are joining. Whether they are operating in an underserved geography, or untapped emerging market or feel the need to diversify amid global markets’ upheaval, these international companies are continuing to look to the U.S. for shareholder expansion opportunities.
Now is the time for global companies to avail themselves of an opportunity to access U.S. investors–recognizing that, even in the most volatile and uncertain times, there is nothing to lose and everything to gain.
Jason Paltrowitz is Director of OTC Markets Group International and Executive Vice President of Corporate Services at OTC Markets Group, the operator of financial markets for 11,000 U.S. and global securities. Connect via LinkedIn.