The 1990s. Was it the last great decade, or what? Nirvana. Seinfeld. Harry Potter. Michael Jordan. The Worldwide Web. Low unemployment. A balanced federal budget. A surging stock market. The peak number of listed U.S. companies ever.
Yes, the 1990s really does seem like nirvana. Especially for investor relations. The 1990s was before Dodd-Frank, SOX and Reg FD. It was a time when real people making real decisions dominated investing.
With a peak of over 7,500 listed firms on the NYSE, AMEX and NASDAQ in 1997, opportunities in investor relations abounded back then. Today, there are roughly 3,700 listed U.S. companies. No wonder more than a quarter of Fortune 500 IROs in a recent Korn Ferry survey said one of the IR profession’s biggest challenges is reduced opportunities due to industry consolidation and fewer publicly traded companies.
Why the dramatic decline? No, it wasn’t regulation. M&A was the major culprit, representing nearly two-thirds of all delistings since 1997 according to a recent study . The balance of the delistings primarily related to performance including not meeting minimum listing standards.
Now, the drop in listings may simply be part of the natural business cycle. But if it was, shouldn’t there have been a somewhat offsetting level of IPOs? Unfortunately, that didn’t happen. This same study indicates that the average annual number of IPOs between 2009 and 2016 was 179. This compares with an average of 684 between 1995 and 2000.
The crux of the matter is small and micro-cap companies have gone away. Prior to the 1990’s more than 50% of listed companies had market capitalization of less than $100 million (in 2015 dollars). This figure dropped to 40% in the 1990s and was 22% in 2016. Today, the average market capitalization and age of a listed company are $6 billion and 20 years, respectively, compared with $2 billion and 12 years in 1997.
Where did those small companies go? They’re still around but most have decided not to go public for a couple of key reasons. First, deregulatory actions in the 1990s increased the number of investors a private company was allowed before registering. This made it easier to raise funds without going public.
Second, the 21st century has been something of a golden age for venture capital and private equity. Since 1999, over $750 billion has collectively been invested in young startups by VC firms. Meanwhile, private equity has grown substantially with an estimated $2.5 trillion of assets under management globally in 2016 vs. $600 billion in 2000. Bottomline, many firms don’t need to tap the public equity markets to raise capital.
Still, the continued vibrancy and health of the listed company environment is important. To that end, the SEC and NYSE are looking to make it easier for private companies to go public. For example, as reported in the Wall Street Journal (Feb. 22, 2018, Michaels), the SEC is considering allowing all companies – regardless of size – to talk privately with investors before announcing a potential IPO. This, coupled with the ability to confidentially file a prospectus, would enable companies to test the waters before making a go/no go decision. Meanwhile, the NYSE has amended its rules to enable qualifying private companies to directly list its shares without an IPO so long as a concurrent Securities Act resale registration statement is filed.
Will these actions help increase the number of listed companies? Time will tell. I believe new, private companies will continue to tap the smart money at VC and/or PE firms for growth capital. This way they can avoid the pressures typically exerted over public companies as they gain scale and grow. When a private company does decide to go public, the listing decision will likely be driven by a need for liquidity, not capital.
Lead-IR Advisors, Inc.
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 Doidge, Craig and Kahle, Kathleen M. and Karolyi, George Andrew and Stulz, René M., Eclipse of the Public Corporation or Eclipse of the Public Markets? (Working paper – January 2018). Available at SSRN: https://ssrn.com/abstract=3100255