Fewer listed companies – why you should care

Patrick Cairns Moneyweb

In the late ’90s there were about 8 000 listed companies in the US. Today, there are a little over 4 000.

Primarily this has been due to a dramatic reduction in the number of initial public offerings (IPOs). In the late ’90s, the US was seeing close to 300 IPOs per year. Last year, there were only about 100.

Companies that are listing are also tending to do so later in their development.

In SA, the number of JSE-listed companies has fallen from about 500 in 2000 to 370 today.

Schroders’ Gavin Ralston says this drop in listings on established exchanges has mostly come about due to competition from other sources of finance.

“Cheap debt has had a big impact. It has been cheaper in the US and UK to borrow money than to raise new equity.

“The second factor has been the growth of private equity. Companies no longer have to go to the stock market to get long-term investor capital.”

Private equity has had a particularly significant effect in causing companies to list later in their lives, as private funding is most often used to sustain their early growth.

What’s the point of stock markets?

In the past, equity markets were primarily a way for companies to raise additional capital to fund their growth. While this may still be happening in certain developing markets, it’s largely not the case with established exchanges.

“Several new listings … are not raising any new equity at all,” Ralston notes. “They are listing so that the founding investors can sell part of their stake or so that they can reward employees with equity that is publicly traded.”

One of the major implications of this is that equity markets are no longer really facilitating the expansion of growth-stage companies.

“These days a lot of the very rapid growth in early development tends to happen in companies before they get onto the stock market,” Ralston argues. “That means that public investors tend to miss out on most exciting phase of growth.”

It’s reducing the pool of available returns for individuals.

“The democratisation of investment has been imperilled by the fact that so much growth is only available to investors in private equity. If you are a small saver, you don’t typically have any way of getting access to private equity.”

Is this change permanent?

Since listed markets provide the simplest, cheapest way for investors to participate in the growth of the corporate sector, there is a risk that, if the quality of public markets continues to deteriorate, returns, on aggregate, could be lower in future.

Asset owners and asset managers therefore have a vested interest in keeping stock markets healthy, and attractive to companies. That means working with policy makers to address some of the issues that have made listing less appealing.