As Donald Trump never tires of boasting, the US stock market is enjoying an extraordinary boom. Last year the S&P 500 recorded its first perfect calendar year of monthly total returns. But the bull run has failed to soothe one of the biggest and most intractable conundrums on Wall Street: the dearth of companies going public.
Last year was a respectable one in the US for initial public offerings. According to Dealogic, 189 companies floated on the US stock market and raised nearly $50bn, almost twice the amount in 2016, a particularly poor year. Last year’s showing has provided hope but concerns remain.
In the 1980s, the US averaged more than 200 IPOs a year, and during the dotcom boom — when the focus was on going public quickly on a prospectus of ideas and enthusiasm rather than a record of success — US markets saw 547 listings in 1999 and 439 in 2000. Now companies seem to delay going public indefinitely rather than listing too soon.
This is particularly stark in the technology sector, which has powered the US stock market’s ebullient run. Snap, the owner of the Snapchat photo-sharing app, proved to be the only major tech listing of the year, raising questions about whether some of the large, well-known names of the gig economy, such as Uber and Airbnb, will ever list.
Bankers once talked about unicorns: companies that achieved valuations of more than $1bn through private funding rounds with venture capital firms. Now they have had to invent the term “decacorns” to describe businesses whose private valuations exceed $10bn. But the fact that IPO activity is essentially average at a time when markets are so welcoming indicates there are factors at work beyond investor sentiment about stocks.
“If you cannot go public with Nasdaq at 7,000 for a tech company, I don’t know when you can,” says Deepak Kamra, a partner at Canaan, a venture capital firm.
Decacorns: Uber and Airbnb
Uber, a ride-hailing app turned transport company, is probably the most famous of the Silicon Valley unicorns. It is now moving into deliveries and self-driving cars. Company current valuation:
There are plenty of reasons to want to avoid the frenzy of the dotcom bubble, when more than two-thirds of all tech IPOs went bust within five years of listing, according to research from University of Florida business professor Jay Ritter. Yet the downward trend in the number of IPOs is raising concerns about both the appeal of America’s public markets and the way that the benefits from the new technology boom are being distributed.
Although tech companies get the most attention, the issue is not confined to that sector. The broad pool of US listed companies is in long-term decline. After peaking at nearly 7,500 in 1997, the number of public companies fell to about 3,600 at the end of 2017, the lowest level since the early 1970s, according to Wilshire Associates, which compiles a benchmark for the US stock markets.
Exchanges, investors, regulators, business groups and politicians have all expressed worries that the ability to take stakes in young and potentially exciting companies is being disproportionately enjoyed by small groups of insiders and elite investors rather than the wider investing public. Some fear that a less vibrant IPO market will sap the US economy of some of its vim.
“The importance of IPOs to the US economy cannot be overstated,” Michael Piwowar, a commissioner at the Securities and Exchange Commission, said in a speech last year. “A robust IPO market encourages entrepreneurship, facilitates growth, creates jobs, and fosters innovation, while providing attractive opportunities for investors to increase their wealth and mitigate risk.”
The SEC, under new chairman Jay Clayton, a lawyer who worked on Alibaba’s $25bn US listing in 2014, has made solving the listings decline a priority.
“It’s about improving investor opportunities,” Mr Clayton told a recent meeting of Sifma, the main US securities industry group. “A broader portfolio of public companies is important to retail investors. A broader portfolio, and [one] more exposed to the growth stage, that would be better. If you continue to shrink that pool, you are going to shrink their opportunities.”
The shrinking pool of US listings is blamed on a series of factors. For some, the self-image of the founders as tech visionaries intent on changing the world clashes with the short-term demands of investors in public markets.
The experience of Snap, which was the largest US tech deal since Facebook in 2012, resonates. Out of the gate the stock rallied sharply, but less than a year on, shares are trading nearly 20 per cent below the offer price of $17 as competition from Facebook has proved intense and early results failed to meet expectations.
The attraction is further lessened by time-consuming and expensive regulatory requirements, say some market participants and pro-business groups. The Jumpstart Our Business Startups Act of 2012 was meant to ease the path for small companies by loosening securities regulation and there are calls for further reforms.
The same act removed one of the main reasons for companies to bring forward their IPOs — the rule that forced them to publish financial information once they had more than 500 shareholders. Spared that requirement, which helped trigger both the Google and Facebook IPOs, the latest batch of tech stars has been freer to stay private longer.
For smaller companies — another area where the decline in listings is marked — the regulatory burdens of being public can be onerous. About 60 per cent of all IPOs in the 1980s raised less than $30m, but by the 1990s this proportion has shrunk to about 30 per cent, according to the SEC. Since the turn of the millennium small IPOs have only accounted for 10 per cent of the total.
~source: Financial Times