As the conditions in the equity markets have improved in 2013, the sell side has been engaging in riskier transactions. In a Reuters article written by Anthony Hughes and Stephen Lacey, an increasing percentage of the Equity Capital Markets business has gone the route of the block trade. This is a secondary or follow-on offering of a stock where the bank buys the shares and sells them to the buy side within the same or next day. Another term for the trade is capital commitment.
The sources of stock in 2013 are private equity firms seeking exits from past leverage buyouts. In the past, they would be early investors in or founders of a company seeking to diversify their investments. Think Bill Gates and Microsoft. Some large divestments in February of private equity deals include $1.8 billion for HCA (KKR and Bain Capital), $1.5 billion for LyondellBasel Industries (Apollo Group), $500 million for Sensata Technologies (Bain Capital), $321 million for Team Health Holdings (Blackstone) and $930 million for NXP Semiconductors (KKR). Through February of 2013, follow-on offerings comprise of 40% of the entire capital markets business. The share was 24.5% in 2012 and 18% in 2011.
Since the shares are owned by the bank, it is exposed to increased risk. If the offering price was not above the buying price, the bank would suffer large losses. Since the stock market has experienced rising returns, low volatility and investor optimism, there is an increased appetite for risk. As one banker said in the article, "It is going to keep working until someone gets their face blown off."
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