Making a List and Checking It Twice

That is, checking new public company listings.  2018 is on track to record more than 210 IPOs including some big names like Spotify, DropBox and Cushman & Wakefield.  This compares favorably with 181 IPOs in 2017 and 105 in 2016.  The early 2019 outlook appears exciting with recent confidential filings by Lyft, Uber and Slack.

Yet, this news belies the fact that in the past decade the average number of IPOs per year is 20% below the average between 1999 – 2008 (a period that includes both the dot-com bust and financial crisis)[1].

This is worrisome to many who see a lack of IPOs as reflective of a less dynamic, more stratified economy.  The reasoning goes that IPOs are innovative companies who help drive long-term growth, so a decline portends a potentially weaker economy.

Many blame the complexities of the regulatory environment for scaring companies away from going public.  Certainly, much can be done to simplify the IPO process and streamline ongoing disclosure requirements. There are a number of ideas and proposals underway in Congress and at the S.E.C. to help expand the IPO on-ramp.

But, this is only part of the story.  Others say there’s some distinct disincentives for going public including the market’s short-term orientation and volatility and the risk of activism.  There’s also an understandable reluctance to cede (at least partial) control to outsiders who weren’t part of the company’s founding – the classic tension between value-creators and perceived value-extracters.

The reality is many firms don’t need to tap the public markets to raise capital thanks to changes to the Investment Company Act in the late 1990s, which increased the number of investors a private company is allowed. It’s probably no coincidence that since 1999 over $750 billion has collectively been invested in startups by venture capital (VC) firms[2].  At the same time, private equity (PE) has grown substantially with an estimated $2.5 trillion of assets under management globally in 2016 vs. $600 billion in 2000.

The result:  more total companies in the U.S. – up 10% since 1997 – but a much lower propensity of companies of any size, but especially small ones, to be publicly listed[3].  So, while the number of IPOs is lower than in the past, it’s not necessarily due to a less vibrant start-up and entrepreneurial environment.

However, fewer IPOs does raise worries relative to retail investors and industry concentration.  Equity in young, early-stage companies is typically held by founders, employees, VC/PE firms and sophisticated “qualified” investors.  Main Street investors are essentially shut-out of this opportunity and don’t share in the significant value created in the early-stages of a company’s life.  This sounds concerning from an income-equality perspective, but its important to note that only 14% of U.S. households own stock directly[4].  More IPOs will not solve this problem or broaden U.S. household stock ownership levels.

As for increased industry concentration, today there’s roughly half as many listed companies as in 1997 and those that are listed are, on average, older and larger than 20 years ago.  Stocks are also more highly correlated with each other.  This may raise questions as to the robustness of and risks inherent in the market, but in and of itself, its hard to say if it’s bad or just a natural evolution of the financial markets.  At this point, it doesn’t appear to have slowed innovation, impacted the ability of new companies to form and attract capital or affected overall economic vitality.

The dynamics of public and private companies are changing.  No longer does being public assure a premium valuation or better access to capital.  Younger, smaller companies appear to benefit from staying private longer, while larger, more mature companies appear to benefit from the liquidity and visibility being publicly traded provides.  In the end, I believe that going forward the private vs public decision will be driven just as much by a need for liquidity as capital.

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.


[1] Statistica, Number of IPOs in the U.S. since 1999

[2] PwC, Thomson Reuters, MoneyTree Report, January 2018

[3] 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

[4] Federal Reserve’s 2016 Survey of Consumer Finance

Block by Block

You know it’s a bubble when mainstream news media run stories about bitcoin profits paying for a wedding.  But, in all the cryptocurrencies hoopla, what is often overlooked is the blockchain technology underlying it.

What is blockchain? It’s a distributed ledger, or database, that captures transaction data across a public or private network with each node in the network holding an exact copy.  The data is encrypted as a “block,” “chained” to the records before and after it and is viewable by others in the network.  Further, it cannot be altered retroactively without impacting all subsequent data and raising red flags or requiring approval from the network.  The blockchain ledger can also include “smart contracts,” programmed conditions that can be automatically triggered if certain criteria are met.

Basically, blockchain is a sophisticated database technology.  It has a myriad of potential uses, some disruptive, others not so much.  Its core advantage is it enables information to be verified and value to be exchanged and recorded on a ledger without third-party authentication, thereby eliminating the need for intermediaries.

On the surface, it sounds like the capital markets are ripe for blockchain technology.  But, the reality is more complex.  There are legal-, regulatory-, and governance-related questions as well as practical matters with no easy answers.

Probably the largest non-starter is blockchain in its current iteration cannot enable efficient price discovery.  Nor can it handle the trading speed and volume exchanges do today.

Utilizing blockchain for back-office processes like clearing, depositary, custody and recordkeeping services is a potentially big opportunity.  Private blockchains can help consolidate multiple internal ledgers to make trade settlement more efficient. However, to maximize the technology’s effectiveness, the industry will need to establish uniform standards, processes and interfaces between and amongst the entities involved.  Since this will involve brokers, clearing houses, depositories, etc., sharing and enabling access to internal data and systems, there is understandable trepidation.  Today, there is minimal industry-wide dialogue on what the governance of a blockchain environment should look like.

Other hurdles to wider use of blockchain are legal and regulatory.  A key conundrum is does the digitization of assets (as it would in blockchain environment) change the rights, privileges and responsibilities of asset ownership.  For example, what happens to digital assets in a corporate bankruptcy? What about state escheatment laws? What happens if an asset holder forgets the secure key code to their digital wallet (in the current blockchain environment no one can unlock a digital wallet or change the key code)?  The S.E.C., Delaware and other states have and are exploring such issues, all of which are solvable, but it’s not a simple process.

So, you can exhale.  Blockchain may be coming but its adoption in the capital markets will initially be slow.  There’s still a lot to be learned from the pilots currently in place such as Broadridge’s use of blockchain for proxy voting and Overstock.com’s Series A preferred stock which trades in the over-the-counter market.  It will be interesting to watch.

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.