The President of the Chartered Financial Analyst Institute, Paul Smith, has taken to the media to call out shrinking IPO markets in the US and call for the restoration of fair and secure investment opportunities for retirement savers.
Smith points at “alarming changes” in US capital markets.
According to Smith, since peaking at 700 in 1996, only 100 IPOs were offered to average investors last year in the US, and total public companies available for trading by retail investors have gone from 7300 to 3600 in the same period:
“For average investors, this decline brings profound long-term consequences. Main Street investors generally are not able to invest in private markets; they lack access to companies when they might be expanding at their fastest pace.”
“Today, in the U.S. and across Europe, the big game-changing ideas are often funded privately. Many new ventures aspire to an IPO not as a start, but as the end point of their fortunes. And some never make it to the public markets, choosing to be acquired.”
Companies themselves are not necessarily being deprived of capital, says Smith:
“Private companies have not suffered, however. The private capital markets now provide more than enough capital to fund business models, particularly those in this capital-light era where companies do not require massive amounts of financing to grow and mature.”
…but retail investors are being left with dregs:
“Due to this trend, existing listed markets have become more exposed to older industries, slower-growing companies and short-termism driven by the steady beat of quarterly earnings expectations.”
The CFA makes three recommendations.
First, regulators should maintain high investor-protection standards and should not heed the siren call of deregulating risky instruments:
“We do not see public disclosure requirements as an impediment to going public, and we certainly would not encourage lowering investor protections by ‘innovations’ such as dual-class shares that disempower investors. In short, we see no obvious regulatory solution to make the public markets more attractive without damaging investor protections and market integrity.”
Second, the CFA points out that the opening of reasonable-growth investments to Main Street is a matter of urgency given the fact that retirement savers in the US are increasingly being “forced” to manage their retirement savings as benefit plans shift from “Defined Benefit CDB) to Defined Contribution (DC) plans.”
According to Smith:
“DC plans could become a professional intermediary for access to private markets. Having increasingly large parts of the capital markets off limits for retirement savers clearly disadvantages them; this must be addressed. A framework does need to be built, however, to protect investors in private markets, where disclosure standards remain low. This should be the topic of conversation between regulators and the industry: How do we build a regulated pathway for retail clients into private deals?
Third, Smith warns that private equity markets bear risks:
“Regulators should take precautionary steps to examine the systemic implications of growing private markets. Private markets, by their nature, lack the transparency of public markets and are certainly not liquid. This brings profound challenges and unseen risks.”
Smith ends by warning readers not to be “lulled” by the advent of high profile “recent S-1 filings by Lyft and Uber, declaring their intention to go public in 2019,” chicken feed which could just end up fueling heat in pre-IPO markets further:
“Should those firms go the IPO route, the listings will dominate the headlines and lull people into marking the return of public listings. Additionally, other firms may find it easier to get adequate private financing — which Main Street investors don’t have access to.”
Word on the street is that tech IPOs, in particular, have become an exit strategy for founders or acquirers seeking to dump companies on the public after they have already been milked for most of their value.
This spells trouble for future retirees, whose public pensions are also being strained:
“Unless the inequitable lack of access to private markets is addressed, retirement savers will continue to be deprived of the ability to participate in high-growth business models and further promote the sense that markets are being operated for the benefit of well-connected ‘insiders.'”
At the end of November, Securities and Exchange Commission (SEC) Chairperson Jay Clayton said he is aware of and concerned about diminishing IPO opportunities in the US:
“(T)he numbers don’t lie. We’ve gone from…8400 publicly traded companies to just over 4000. The size of companies entering the markets is much larger…(There are) multiple contributing factors to this…(that) need to look at…”
He added, “You probably shouldn’t regulate (small companies) the way you regulate top companies…” and said that public companies lose advantage when management has to spend too much time on compliance rather than growth.
Clayton said he is working on how to “streamline and reduce” the regulatory burden to companies wanting to go public while maintaining investor protections, but also insisted:
“Our securities laws have been so effective that they have grown this economy.”
He said he did not regard ICO’s as a reasonable solution to the problem, adding that he considers many of them to be in violation of US securities laws.