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

Grand Illusion

Like motherhood and apple pie, everyone extols the individual (retail) investor.  Business leaders, regulators and institutional investors feel a strong fiduciary responsibility to growing and protecting the value of the investment everyday people have in the financial markets.

People bandy about big numbers like 43 million U.S. households have a retirement or brokerage account[1]; U.S. retail investors have discretion over approximately $9.8 trillion in equity capital[2]; or $812 billion of hedge fund assets belong to retail investors[3] to impress upon others the importance of individual investors.

So, with all that potential equity capital out there, why aren’t more companies actively trying to recruit them?  Well, from an investor relations perspective, the significance of individual investors is something of a grand illusion.  Let’s unpack this and go beyond the headlines by analyzing retail investor data in the Federal Reserve’s 2016 Survey of Consumer Finance.  This survey, repeated every three years, was what I relied on for individual investor data when I directed a retail investor program many years ago.


First, the most common reason the average person invests is to save for a long-term goal, like retirement.  Data backs this up, with more than 52% of U.S. households having retirement accounts.  Most often such retirement accounts are 401(K)s, where the account holder chooses among the various funds available through the 401(K).  In such cases, the account holder is not choosing specific companies to invest in, that’s the fund manager’s job.  Consequently, from an investor relations perspective, it’s the fund’s portfolio manager or analyst, not the retail investor, who IROs interact with.

Retirement accounts


Next, I suspect that the vast majority of retail investors have day jobs.  They only have so much time to spend researching and making investment decisions or monitoring the markets.  So, retail investors do the smart thing – they invest in vehicles like mutual or exchange traded funds to benefit from professional management and the resources fund managers bring to the table.  As you can see below, about 10% of U.S. families have pooled investment accounts, representing a median investment value of $114 thousand.  Again, the individual chooses the fund, not specific companies, so the IRO’s focus is on the portfolio manager or analyst, not the retail investor.

Pooled Investments


Now, where engagement with individual investors makes sense is when stock is owned directly.  Nearly 14% of U.S. families hold stock directly, which translates to roughly 17.5 million households.  However, with a median investment value of $25 thousand, likely split between a handful of companies, I’m hard pressed to see companies prioritize retail investors as a source of new or sustaining capital. What’s surprising is that these numbers aren’t higher and have, in fact, declined since 2001 despite the ease, low cost and ready access to information today’s brokerage industry provides retail investors through online and full‑service offerings.

Direct ownership


In my view, targeting retail investors shouldn’t be a priority for IROs.  However, I caution against disregarding them altogether.  For well-known or consumer-facing companies, retail investors may be customers and can be arbitrators of corporate reputation.  Further, retail investor ownership can have a stabilizing effect on a stock, as retail investors have long investment horizons and rarely act in herds.  Finally, the importance of retail investor support during proxy contests is well documented.  To that end, companies should:

  • Have an easy to use investor relations website with retail investor-focused information and FAQs
  • Leverage social media channels to cost-effectively keep retail investors informed and engaged
  • Offer a direct stock purchase plan (DSPP) if the company is a dividend payer or has significant employee stock ownership.

As for actively recruiting individual investors, there may be a few circumstances where this makes sense.  In such cases, I recommend IROs carefully consider the significant difference between the mean (average) and median investment values included in the tables above to help decide how to allocate time and resources.  For example, based on the data, you may decide you want to reach a high net worth audience via the wealth management and family offices that serve them, so consider opportunities like Three Part Advisors’ Ideas Conference or the Advisor Access newsletter.  Alternately, a more broad brush approach may have you look into forums like the Money Show.

Bottomline for IROs:  don’t let the big numbers associated with retail investors distract you.  The majority of retail investors invest via professionally managed funds at the institutions you already interact with.  But do treat retail investors with respect by ensuring access to information, quality services and updating them on important matters.

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

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[1] The Evolving Market for Retail Investment Services, Remarks by Jay Clayton at Temple University, May 2, 2018

[2] Retail Investors:  How to develop a Strategy for Reaching These Sophisticated Investors, Money Show White Paper, June 2018

[3] Retail Investors Hold 38% of U.S. Equities, Vikas Shukla, ValueWalk, March 6, 2013