The van­ish­ing public com­pany

The Pak Banker - - OPINION - James Saft

The num­ber of pub­licly traded U.S. firms is now lower than at any time dur­ing the past 40 years and small in­vestors, if not the econ­omy as a whole, may pay the price. 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." (here) 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 so­called 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. 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.

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 non­listed 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.

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