Companies operating outside of the U.S. continue to look to the U.S. capital markets and U.S.-based investors to finance their overseas businesses and projects. The investing interest and desire for opportunity is mutual between these two constituencies. As the following table prepared by The U.S. Bureau of Economic Analysis demonstrates, U.S. investors are eager and willing to place capital into non-U.S. markets, and are doing so in substantial Dollar values (almost $6 trillion in 2019 alone).
The United States remains, as well, as it always has, a place where foreign investors look to continue to place investment capital. This is good news for foreign companies interested in working with U.S. investors. As more investment capital comes into the U.S., the U.S. economy enhances, which leads to further growth and development, and thus more cash flow that those U.S. investors can then use to deploy into foreign markets and overseas businesses.
We expect this trend of U.S.-based financing for foreign market businesses to continue as globalization scales and the availability of meaningful yields and return on investment become more difficult to find in the U.S. mainland. These are exciting times for foreign companies seeking financing and access to the U.S. capital markets.
Why Look to the U.S. Private Markets?
We want to highlight just a few of the reasons why foreign companies often turn to the U.S. capital markets for their financing needs.
High Comparable Cost of Capital in Emerging Markets versus the U.S.
Cost-effective debt financing, for example, can be incredibly hard to access in emerging markets especially when compared to debt financing options available in the U.S. Often in these emerging markets, the banks and other lending institutions are the only ones who prosper in any financing transaction, to the detriment of the borrower. These banks charge clients interest rates that would be considered exorbitant and pecuniary in the U.S. but that are considered commonplace and unquestioned in these emerging markets.
Net interest margin, defined as the profit margin that banks make when lending to businesses versus their own cost to borrow money from other larger financial institutions to make loans, is a good metric to demonstrate simply how unfair emerging market loans are to emerging market clients in the markets shown in the table below.
With a particular focus on Latin America compared to the U.S., Latin banks and lending institutions are thriving, as seen below, while Latin American borrowers are often under incredible repayment and interest rate pressure, as compared to businesses able to access U.S.-based debt financing at much more reasonable rates more consistent with reasonable business growth percentages.
Take Colombia for instance. Colombian banks are making a profit margin of 55% on every loan that they make. A comparable U.S. bank is only making about 5% per loan because they are charging such a lower interest rate compared to their own borrowing cost versus what we see in Colombia and other emerging Latin markets. These exorbitant bank profit margins in foreign markets hurt borrowers and make, for many, debt default a continuing risk. The recent Coronavirus proved this point, with many borrowers unable to keep up with mounting debt payments in the face of the economic downturn in these Latin markets.
Source: The Global Economy
We always go through this type of pros v. cons analysis with our portfolio companies at Legacy Group to determine whether it is in the best interests of the portfolio company to form a U.S. presence in order to avail themselves of these more reasonable U.S.-based financing options. This analysis is not something that foreign companies interested in U.S. financing should delay undertaking since often a minimum time in the U.S. market is required before the U.S.-based lenders will consider financing foreign businesses.
Investor Risk Tolerance & Sophistication
As discussed above, U.S.-based investors are largely willing to consider and invest in non-U.S. operating businesses.
Our own experience raising capital for our foreign businesses from U.S.-based investors – approximately $50 million over the past three years – has proven that U.S. investors are excited about emerging market opportunities. U.S.-based investors like these overseas opportunities because of, among other things, the potential for high returns, lower cost of investment to participate compared to large private equity costs of entry, currency diversification and geographical/sovereign risk diversification. We alone have seen about $50 million of investment made into our foreign and non-mainland U.S. portfolio companies over the past three years as mainland U.S. opportunities with any motivating financial returns seemingly are dwindling or being swallowed up by large institutions.
Our investors, and others like them who are pursuing emerging market opportunities, approach emerging market investment with sophistication often stemming from years of due diligence in foreign markets and lengthy investing experience and project expertise in U.S. markets. Simply stated, disciplined investing is a virtue for U.S. investors, and those we work with come with the financial sophistication necessary to spot foreign opportunities where they exist.
Reduced Regulatory Restrictions on Investment for U.S. Investors
There are limited regulatory restrictions applicable to U.S. investors interested in investing in U.S.-formed businesses with foreign operations or wholly-foreign businesses. Compare this feature of the U.S. capital markets to countries like China, which make it incredibly difficult and/or illegal for its population to make these kinds of offshore investments in foreign businesses. Ease of investing encourages the free flow of capital and avoids funding delays for businesses looking to access capital in these less regulatory-inhibited countries like the U.S.
How to Access the U.S. Capital Markets
For foreign businesses interested in attracting U.S. capital and/or U.S. investors, we want to highlight a few key points for entering the market.
A U.S. Presence
First, foreign businesses should be mindful of potential limitations should they be wholly offshore. In other words, we always recommend a U.S. presence and U.S. corporate structure should businesses want to ease their access to U.S. capital. Simply stated, U.S. lenders and U.S. investors will always be more comfortable investing into a corporate structure that is connected to the U.S. mainland because of its certainty of laws and regulations.
Companies that are interested in accessing the U.S. market and requesting investment from U.S. investors need to also be mindful of the rules and regulations relevant to capital-raising transactions from U.S.-investors.
The Securities and Exchange Commission (SEC) is the U.S. regulatory authority primarily responsible for monitoring compliance with the rules and regulations applicable to soliciting investment from U.S. investors.
As a general rule applicable to all companies, foreign and domestic, securities offerings to U.S. persons require the issuers of those securities to register their offerings with the SEC and get regulatory clearance. This SEC registration is often prohibitively expensive, lengthy and burdensome for many companies, especially early stage companies with more limited capital resources, if they do not avail themselves of the right exemptions to this registration requirement.
To that end, we encourage and work actively with our portfolio companies and other companies interested in the U.S. capital markets to take advantage of the many financing options available to them if conducted in line with applicable regulatory exemptions to these previously mentioned burdensome registration requirements. Our team consists of experts in the area of corporate finance and capital markets, having collectively advised public and private companies both U.S.- and non-U.S. based in financing transactions exceeding $10 billion in total value.
The U.S. Markets are Open to Foreign Companies
The U.S. markets are open to foreign companies, with almost $6 trillion of investment flowing into these overseas markets in 2019 alone. There is plenty of investor appetite for new and exciting opportunities, as we described above.
For those non-U.S. companies who believe that the U.S. market is where they want to look for capital investment, planning and preparedness early in the process is critical to have the best chance of securing a next successful round of funding in the U.S. market.
At Legacy Group, we are here to help you with the “how” of your next financing and to open offshore passive investment opportunities for our own investor base.
About Legacy Group
Legacy Group is distinguished by a singular tradition of service to our portfolio partners; the mutual commitment to, and the seamless collaboration of, a true partnership; formidable financial and legal talent across multiple disciplines and jurisdictions; and shared professional values that focus on client needs.
We provide experience and investment to a wide range of private companies spanning many industries, including real estate, hospitality, tourism, agriculture and technology. Contact us to learn more and to discuss current investment opportunities available to you in our portfolio companies.
*This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Any views expressed herein are those of the author(s) and not necessarily those of our clients.