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 Since 1996, U.S. listings per capita have fallen, according to a
study published in May. That makes the U.S., at least on this
measure, less financially mature than it was in 1996 or 1975.
Listings per million Americans has fallen from 30 in 1996 to 13 in
2012, an enormous decline.
“We show that the U.S. has a listing gap relative to other countries
with similar investor protection, economic growth, and overall
wealth. The listing gap arises in the late 1990s and widens over
time,” write Craig Doidge of the University of Toronto, George
Andrew Karolyi of Cornell University and Rene Stulz of Ohio State
University, authors of the study.
“We also find that the U.S. has a listing gap when compared to its
own recent history and after controlling for changing capital market
conditions.” (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2605000)
The 'what?' in this story is pretty clear; the number of listed
firms per capita has been falling. The 'how?' too is fairly
straightforward, as the phenomenon is due to a combination of fewer
firms going public and more delisting. The delisting has been driven
in substantial part by takeovers.
The 'why?' and the 'so what?' are a lot less clear.
While startups have actually declined over the period studied, the
percentage that ultimately list has also declined. This lower
propensity to list by startups, at least in today’s market, may
simply be because the private market is offering such good terms.
Private financing has developed to the stage, and is making private
firm owners such good prices, that many more mature companies are
staying private longer. Uber, and other so-called unicorns, firms
which are private and have a value of more than $1 billion, are
prime examples of this.
The study did find that listing became less attractive for firms of
all sizes, not just smaller, newer ones, though the decline was
slower for the largest firms. Regulation of public firms also
doesn’t bear the blame, according to the study. Though Regulation
Fair Disclosure and the Sarbanes-Oxley Act both came into being in
the aftermath of the dotcom bubble, the trend was well established
before these came into force in the early 2000s.
So, not only did the rate of new listings decline, the listings gap
was also driven by more delistings, many of which were the result of
takeovers.
BRAVE NEW WORLD?
One possibility, as hinted by the rise of the unicorns, is that
private ownership, either via private equity or other forms, is
doing a better job of reconciling the natural conflict of interest
between owners and company managers. To the extent this is true it
is encouraging for the economy. Generally equity market deepening
has been at the very least coincident with economic development, so
a reversal of this may cause some concern.
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If people with ideas, ability and capital are simply opting for
forms of company ownership other than the old publicly traded model,
then perhaps the listing gap doesn’t imply lower growth. There is a
contrast between the willingness of listed and non-listed companies’
willingness to invest for growth, with non-listed ones shelling out
more and having lower hurdle rates for projects.
All of the listed firms are not being snapped up by private equity.
The recent percentage of public firm takeovers involving private
equity is about the same as it was before the 1996 peak and lower
than what we saw in the 1980s, according to the study.
In any event, smaller investors without the ability to easily or
cheaply access private equity or early-stage investments may well be
left at a disadvantage by the listings gap.
That’s especially true when you consider the separate, but possibly
related, phenomenon of private companies choosing to give money back
via dividends or buybacks. S&P 500 companies alone are on track to
return more than $1 trillion of capital in 2015.
These forces may have a number of negative impacts on smaller
investors. Those who only invest in public markets will find
themselves, perforce, less diversified. Fund managers with fewer
options for investment may take bigger bets, with extra emphasis on
those parts of the public universe exhibiting growth.
Worse still, a sort of negative selection may be at work for public
company investors. If private companies invest more, they will grow
more, all else being equal, while public companies eat further and
further into their seed corn through dividends and buybacks.
A listings gap may harden into a returns gap.
(At the time of publication James Saft did not own any
directinvestments in securities mentioned in this article. He may
bean owner indirectly as an investor in a fund. You can email himat
jamessaft@jamessaft.com and find more columns at http://blogs.reuters.com/james-saft)
(Editing by James Dalgleish)
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