What are the equity markets for?

I spent my professional career as a banker focused on the equity markets. Since 2016, my business The ECM Team has relied on a good flow of companies looking to list on the stock exchange, in London or across Europe.

So the questions of how equity markets have evolved, and how corporate use of them has changed, are fundamental to my business success. How do companies fund themselves these days? Are the public markets fulfilling their fundamental role as an efficient capital allocator to generate growth in the national wealth? While ICOs are possibly an interesting but irrelevant diversion for most companies, do they nevertheless ask important questions? In preparing for the IR Society event, I was asked to be provocative. As a result of this, I found myself questioning the rationale for equity markets today.

A common theme in the investment industry in recent years has been the “wall of money” chasing yield. Low interest rates and cheap money have naturally driven up the prices of all assets. So it’s unsurprising companies looking to fund themselves in this interest rate environment will naturally take advantage of the record low costs which are being sustained by central banks, before looking to more expensive equity financing.

To put a size on this, Thomson Reuters indicates global debt capital markets issuance was $5.6 trillion in the first 9 months of 2017. In 2007, that statistic was around $3.4 trillion.

McKinsey uses Preqin data to give a similar size of increase for the amount of private equity assets under management, from roughly $1.5 trillion in 2007 to $2.5 trillion today.

Private ownership seems to be ever more appealing. When unprofitable tech companies can grow to unicorn size without ever seeking public equity, one has to ask what is the point of listed equity. The role of equity markets when they were created – to diversify corporate funding and spread risk for investors – is no longer key,