Lecture 9

Raising Equity
and Debt
Globally

(ESM Chapter 14)

Learning Objectives

• Design a strategy to source capital equity globally

• Examine the potential differences in the optimal

financial structure of the multinational firm
compared to that of the domestic firm

• Describe the various financial instruments that can

be used to source equity in the global equity markets

• Understand the role of depositary receipts in raising

equity

9-2 U. Paris 1- Econ Masters| J. Hericourt

 Learning Objectives

• Analyze the unique role private placement enjoys

in raising global capital, and differences between
EU, US and China

• Evaluate the different goals and considerations

relevant to a firm pursuing foreign equity
listing and issuance

• Explore the different structures that can be used

to source debt globally

• Study how Chinese firms used FDI as a way to get

external funding
9-3 U. Paris 1- Econ Masters| J. Hericourt

Funding the Multinational Firm

• To implement the goal of gaining access to global capital

markets a firm must begin by designing a strategy that will
ultimately attract international investors.

• This would mean identifying and choosing alternative paths

to access global markets.

• This would also require some restructuring of the firm,

improving the quality and level of its disclosure, and making
its accounting and reporting standards more transparent to
potential foreign investors.

9-4 U. Paris 1- Econ Masters| J. Hericourt

 Designing a Strategy to Source Equity
Globally

• Designing a capital sourcing strategy requires that

management agrees upon a long-run financial
objective and then chooses among the various
alternative paths to attract international investors.

• Often, this decision-making process is aided by an early

appointment of an investment bank as an official
advisor to the firm.

• Investment bankers are in touch with potential foreign

investors and know what they currently require, and can
also help navigate the numerous institutional and
regulatory barriers to ease transparency.

9-5 U. Paris 1- Econ Masters| J. Hericourt

Alternative Paths to Globalize the Cost and Availability of Capital

Designing a Strategy to Source Capital Globally

Individual firms may take many different paths to globalizing their

cost and availability of capital, all passing through debt to equity
(listings then issuance). One of the many paths is shown here.
Most firms raise their
initial capital in their own
domestic market.

Credit issuance given

lower cost of capital and
less notoriety with equities

Movement to equities,
incrementally establishing
name/brand, followed by
issuance in target market
and ultimately globally

9-6 U. Paris 1- Econ Masters| J. Hericourt

 Optimal Financial Structure

• The domestic theory of optimal financial structure must be

modified considerably to encompass the multinational firm.

• Most finance theorists are now in agreement about whether

an optimal financial structure exists for a firm, and if so, how
it can be determined.

• When taxes and bankruptcy costs are considered, a firm has

an optimal financial structure determined by that particular
mix of debt and equity that minimizes the firm’s cost of
capital for a given level of business risk.

• As the business risk of new projects differs from the risk of

existing projects, the optimal mix of debt and equity would
change to recognize tradeoffs between business and
financial risks.
9-7 U. Paris 1- Econ Masters| J. Hericourt

The Cost of Capital and Financial Structure

WACC sensitivity to debt employed

Investor perceived region

As the debt ratio increases, the overall cost of of insolvency, hence
capital 𝑘𝑊𝐴𝐶𝐶 decreases because of the heavier increase in cost of capital
weight of low-cost (due to tax-deductibility) debt
𝑘𝑑 1 𝑡 compared to high-cost equity 𝑘𝑒 .

Increasing level of financial risk

9-8 U. Paris 1- Econ Masters| J. Hericourt

 AAPL WACC | Financial Leverage

Characteristic WACC “smile”

9-9 U. Paris 1- Econ Masters| J. Hericourt

Optimal Financial Structure

and the Multinational Enterprise
• The domestic theory of optimal financial structures
needs to be modified by four more variables in
order to accommodate the case of the MNE:

1. Availability of capital
2. Diversification of cash flows
3. Foreign exchange risk
4. Expectations of international portfolio investors

9-10 U. Paris 1- Econ Masters| J. Hericourt

 Optimal Financial Structure
and the Multinational Enterprise
MNE optimal financial structure considerations

• Availability of capital:
– A multinational firm’s marginal cost of capital is
constant for considerable ranges of its capital
budget

– This statement is not true for most small domestic

firms (as they do not have equal access to capital
markets), nor for MNEs located in countries that have
illiquid capital markets (unless they have gained a
global cost and availability of capital)

9-11 U. Paris 1- Econ Masters| J. Hericourt

Optimal Financial Structure

and the Multinational Enterprise
MNE optimal financial structure considerations

• Cash flow diversification:

– The theoretical possibility exists that multinational firms are in a
better position than domestic firms to support higher debt ratios
because their cash flows are diversified internationally – why is
this an advantage versus non-diversified cash flows?

– As returns are not perfectly correlated between countries, an MNE

might be able to achieve a reduction in cash flow variability
(much in the same way as portfolio investors who diversify their
security holdings globally)

9-12 U. Paris 1- Econ Masters| J. Hericourt

 Optimal Financial Structure
and the Multinational Enterprise
MNE optimal financial structure considerations

• Foreign exchange risk and the cost of debt:

– When a firm issues foreign currency denominated debt, its
effective cost equals the after-tax cost of repaying the principal
and interest in terms of the firm’s own currency

– This amount includes the nominal cost of principal and interest in

foreign currency terms, adjusted for any foreign exchange gains
or losses, i.e.

𝒌𝑫𝑪
𝒊 𝟏 𝒌𝑭𝑪 𝒊 𝟏 𝒔 𝟏,
𝒘𝒉𝒆𝒓𝒆 ′𝒔′ 𝒊𝒔 % 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒇𝒐𝒓𝒆𝒊𝒈𝒏 𝒄𝒖𝒓𝒓𝒆𝒏𝒄𝒚
– This formulation does not ring a bell?? Remember International
Portfolio Theory in Lecture 8 (slide 11)!

9-13 U. Paris 1- Econ Masters| J. Hericourt

ICPS 9-1
SOLUTION ON NEXT SLIDE

• The Copper Mountain Group, a private equity firm headquartered

in Boulder, Colorado (US), borrows £5,000,000 for one year at
7.375% interest.

a. What is the dollar cost of this debt if the pound depreciates from
$2.0260/£ to $1.9460/£ over the year?

b. What is the dollar cost of this debt if the pound appreciates from
$2.0260/£ to $2.1640/£ over the year?

9-14 U. Paris 1- Econ Masters| J. Hericourt

 ICPS 9-1, case a
ICPS 1

Amount borrowed 5,000,000 GBP
interest rate 7.375%

Case a
GBP depreciates /USD 2.0260 USD to 1.9460 USD

What is the total dollar cost of this debt? 
detailed calculation result
Step 1: compute the initial value of the loan in USD  5,000,000*2.0260 10130000
Step 2: compute the total cost of the loan in GBP (principal + 
5,000,000*(1+7.375%) 5368750
interest at the end of the year) 
Step 3: convert the total cost of the loan in USD (principal + 
5,368,750*1.9460 10447587.5
interest) at the end of the year
Step 4: compute the USD cost of the debt 10,447,587.5‐10,130,000 317587.5
Step 5: compute the cost as a %  10,447,587.5/10,130,000‐1 3.135%

Actually this cost splits between:
cost of the interests in GBP  7.375%
gain coming from the depreciation of the GBP ( the firm has 
‐3.9487%
less USD to provide for an identical amount of GBP) 1.946/2.026‐1

< costs of the 
Using exactly the formula provided on slide 13 from Lecture 9 (1+7.375%)(1‐3.9487%)‐1 3.135%
interest in GB
9-15 U. Paris 1- Econ Masters| J. Hericourt

ICPS 9-1, case b

Case b
GBP appreciates /USD 2.0260 USD to 2.1640 USD

What is the total dollar cost of this debt? 
detailed calculation result
Step 1: compute the initial value of the loan in USD  5,000,000*2.0260 10130000 Of course, this 
Step 2: compute the total cost of the loan in GBP (principal +  does not 
5,000,000*(1+7.375%) 5368750
interest at the end of the year)  change!
Step 3: convert the total cost of the loan in USD (principal + 
5,368,750*2.1640 11617975
interest) at the end of the year
Step 4: compute the USD cost of the debt 11,617,975‐10,130,000 1487975
Step 5: compute the cost as a %  11,617,975/10,130,000‐1 14.6888%

Actually this cost splits between:
cost of the interests in GBP  7.375%
cost coming from the appreciation of the GBP (the firm has 
6.8115%
more USD to provide for an identical amount of GBP) 2.164/2.026‐1

>>> costs of the 
Using exactly the formula provided on slide 13 from Lecture 9 (1+7.375%)(1+6.8115%)‐1 14.6888%
interest in GBP

9-16 U. Paris 1- Econ Masters| J. Hericourt

 Optimal Financial Structure
and the Multinational Enterprise
MNE optimal financial structure considerations

• International Portfolio Investors Expectations:

– The key to gaining a global cost and availability of
capital is attracting and retaining international
portfolio investors

– If a firm wants to raise capital in global markets, it

must adopt global norms that are close to the U.S.
and U.K. norms as these markets represent the most
liquid and unsegmented markets
• Norms, e.g. Debt ratios 60%, regulatory transparency, cash
flow generation etc.

9-17 U. Paris 1- Econ Masters| J. Hericourt

Raising Equity Globally

Equity Avenues, Activities, and Attributes

• List on the right describes

three key critical elements
to understanding the
issues that any firm must
confront when seeking to
raise equity capital:
1. First, a public or Coupled with a foreign cross-listing
private equity
placement
2. Then, where to list
the offering
3. Finally, the type of
issuance
• A firm seeking to raise
equity capital is ultimately
in search of an issuance
(IPO or SPO), although it
need not be public.

9-18 U. Paris 1- Econ Masters| J. Hericourt

 Raising Equity Globally

• Overview of the four major equity alternatives

available to multinational firms today:
– IPO (Initial Public Offering)
– Euroequity issue
– Directed public/private issue
– Private placement

9-19 U. Paris 1- Econ Masters| J. Hericourt

Equity Alternatives in the Global Market

Overview of four major equity alternatives available to MNE firms today

Method used for

(foreign) acquisition
financing or capital
investments.

9-20 U. Paris 1- Econ Masters| J. Hericourt

 Raising Equity Globally—IPO

• Initial Public Offering (IPO) – the first public

issue of a firm’s equity shares.

– First a prospectus is published

– The IPO typically represents 15% to 25% of
ownership
– Later issues by the firm are considered follow-on or
seasoned offerings
– With public issuance of shares comes greater public
disclosure

9-21 U. Paris 1- Econ Masters| J. Hericourt

Raising Equity Globally—Euroequity

Issue

• A euroequity issue is an initial public offering on

multiple exchanges in multiple countries at the same
time.
– E.g. Gucci, British Telecom

• The “Euro” market (a generic term for international

securities issues originating and being sold
anywhere in the world), was created by the same
financial institutions that had previously created an
infrastructure for the Euronote and Eurobond markets.

9-22 U. Paris 1- Econ Masters| J. Hericourt

 Raising Equity Globally—Directed
Public Share Issues

• A directed public or private issue is defined as

one that is targeted at investors in a single country
and underwritten in whole or in part by investment
institutions from that country.
– The issue might or might not be denominated in the
currency of the target market.
– The shares might or might not be cross-listed on a
stock exchange in the target market.

9-23 U. Paris 1- Econ Masters| J. Hericourt

Depositary Receipts

• Depositary receipts (shares) are negotiable

certificates issued by a bank to represent the underlying
shares of stock, which are held in trust at a foreign
custodian bank.

• American depository receipts (ADRs) are traded in

the United States and denominated in US dollars.
– ADRs are sold, registered, and transferred in the US in the same
manner as any share of stock with each ADR representing some
multiple of the underlying foreign share (allowing for ADR pricing
to resemble conventional US share pricing between $20 and $50
per share).
– More on this in the Appendix!

9-24 U. Paris 1- Econ Masters| J. Hericourt

 Equity Capital Raised Through
Depositary Receipts
DR Markets Today: Who, What, and Where

• Who: mix of major

multinationals, but
participation has shifted
back toward industrial
countries.
• What: split between IPO
and follow-on offerings
• Where: mostly New York
and London

Source: “Depositary Receipts, Year in Review 2015,” JPMorgan, p. 3. Data derived by

JPMorgan from other depositary banks, Bloomberg, and stock exchanges, 2015.
Reprinted with permission.

9-25 U. Paris 1- Econ Masters| J. Hericourt

Global Registered Shares (GRS)

• A global registered share is a share of equity that is

traded across borders and markets without conversion,
where one share on the home exchange equals one
share on the foreign exchange.
– Different from a global depositary receipt in that the DR is
bundled or split so that the price represents a typically
traded value for that market. A GSR has the same value
everywhere and is not bundled (or split) for purposes of
trading, e.g.
$ .
• Suppose we have a €4.00 European firm GRS and FX rate =
€
$ .
• ADR: €4.00 𝐹𝑋 𝑟𝑎𝑡𝑒 $4.80 ∴ 𝑙𝑜𝑤 𝑠ℎ𝑎𝑟𝑒 𝑓𝑜𝑟 𝑈𝑆 𝑚𝑎𝑟𝑘𝑒𝑡 𝑠𝑜 𝑤𝑒 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑦 𝑏𝑦 4
€
𝑇ℎ𝑢𝑠 𝐴𝐷𝑅 𝑡𝑟𝑎𝑑𝑒𝑑 𝑎𝑡 $4.80 4 $19.20
• GRS: Traded at $4.80 globally

9-26 U. Paris 1- Econ Masters| J. Hericourt

 Private Placement

• Private equity funds (= money raised is intended to

be used for investing in other securities): are usually
limited partnerships of institutional and wealthy
individual investors that raise their capital in the most
liquid capital markets.
– These investors then invest the private equity fund in mature,
family-owned firms located in emerging markets.
– The investment objective is to help these firms to restructure and
modernize in order to face increasing competition and the growth
of new technologies…
– … and being able to resale them with a comfortable margin.
– Private equity funds differ from traditional venture capital funds
as private equity funds 1/ operate in many countries, 2/ fund
companies in many industry sectors and 3/ often have a longer
time horizon for exiting.
9-27 U. Paris 1- Econ Masters| J. Hericourt

Private Placement

• One type of directed issue is the private placement market.

• A private placement is the sale of a security to a small set of

qualified institutional buyers
– in the US, under SEC Rule 144A;
– in Europe, the Capital Market Union should set a single capital market
with common rules, esp. for private placements - 2020 CMU action plan
– in China, multiplicity of regulators, but CSRC is the main one.

• In the EU there are several variants of privately placed debt

across different Member States.

• German Schuldschein (SSD) market and French Euro-PP

market are the dominant private placement Markets.

9-28 U. Paris 1- Econ Masters| J. Hericourt