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

Seeing Spots

Last week, Spotify (NYSE: SPOT) – the music streaming business – began trading publicly for the first time.  Spotify’s CEO, Daniel EK, was non-pulsed, telling his employees:

Lots of people have asked me how I feel about tomorrow’s listing. Of course, I am proud of what we’ve built over the last decade. But what’s even more important to me is that tomorrow does not become the most important day for Spotify.  . . .  Normally, companies ring bells. Normally, companies spend their day doing interviews on the trading floor touting why their stock is a good investment. Normally, companies don’t pursue a direct listing.”

Spotify went public via the direct listing process, which basically means the company filed the necessary materials with the SEC (registration statement/prospectus, etc.), applied for listing on the NYSE and waited to become effective. Simple.

Because Spotify did not need to raise new capital, it did not go on roadshows (although it hosted an investor day), nor did it hire a bevy of investment bankers to syndicate the deal.  Further, with no new capital raised, there was no chunk of new shares plopped on the market at one time, there will be no green shoe (overallotment) to drop or lock-up period for existing shareholders (primarily company officers, employees and venture capitalists).

It’s not the traditional way most companies go public, but as I noted in a previous blog post (The Last Great Decade, March 7, 2018), we are currently experiencing something of a golden age of venture capital and private equity.  Today, start-ups have access to this smart money for growth capital, enabling founders to maintain control longer and avoid the pressures typically exerted over public companies.  As I concluded, “When a private company does decide to go public, the listing decision will likely be driven by a need for liquidity, not capital.”  This certainly seems to be the case with Spotify.

Now, what works for Spotify won’t necessarily work for everyone.  As a globally-recognized technology brand, Spotify has some built-in demand for its stock and won’t have trouble attracting sell side coverage.  It also has a solid record of private transactions that served as a reference point for setting price. To create and build trading volume, Spotify will be dependent on existing shareholders to sell.  So, volume will likely remain low (for a company of its size) for some time, which raises concerns of price volatility.  However, many small-cap companies deal with this issue all the time and I expect Spotify can as well.

I believe direct listings will grow – Spotify has shown the way – but it won’t displace the traditional IPO.

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

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The Last Great Decade (for Listed Stocks)

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.

Listed Companies 1975 1997 2016With 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 [1]. 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.

Avg mkt cap and ageThe 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[2].  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.

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

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[1] 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

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