I.P.O- A fading Star?
IPOs have been a big part of American history, going back to the birth of the country itself. The very first IPO occurred with the public offering of US’s first central bank which was called the Bank of North America. It was among the first stocks to be listed on the New York Stock Exchange. From then, the IPOs have only grown in power, in the early 20th century consumer and retail industries dominated the IPOs becoming huge market influencers. In the 1950s Ford offered 10.2 million shares to the public, becoming the biggest IPO in history at the time. The spot was overtaken by Ford in the 80s when it went to public on NASDAQ.
The 90s was a true IPO boom as going public became a popular option to raise money, especially for internet and technology companies of the dot-come era. This all started with Netscape going public in 1995. This was followed with Yahoo, Google and AOL among other companies which were the main headlines in news during those days. The three main reasons for the popularity of the IPO was attributed to firstly “going public” being an easy way to raise capital, then listing on an exchange gave the company more legitimacy and being able to provide stock options for the employees. This IPO boom continued with the rise of e-commerce companies and some even attribute IPOs for making e-commerce popular.
Today, the IPO or “going public” have become common household terms, with companies like Lyft, Uber and Snap chat making headlines in the media by going public, or even when there is a speculation whether a company like “We Work” would go public or not. The day a certain company goes public is treated as a festival with media and people, speculating on how the markets would react on that day. If you think of big brands that dominate your day to day life there is a good chance that it is a publicly listed company.
However, there has been also a recent contrarian phenomenon, which is fewer and fewer companies are now going public. During the peak of the dot com bubble in 1999: 486 companies went public. The number since then has been decreasing every year. In 2008, which was the height of the financial crises only 31 companies went public. The number seemed to rise till 2014 and then again started decreasing with only 159 companies going public in 2019.
Even the companies that are now getting listed are not performing as well as they were expected to. The drop in the IPOs has raised many questions about the declining popularity of going public. Thomas Farley the then head of NYSE group said in 2017 regarding it that “it may severely limit companies’ opportunities for economic growth, hiring and the creation of wealth.” One of the main reasons for fewer IPOs is the increasing popularity of getting funding from private investors rather than going public. Holding companies like Soft Bank of Japan and Berkshire Hathaway have been given more preference for funding than going public, especially for startup companies. Earlier IPO was considered a big successful step for any start company, now it is being taken over by private companies and venture capitals. As one can see in the figure below that since 2002 the valuation of global private equity has grown exponentially compared to that of public equity. Thus private equity has become more and more attractive for new companies for further financing. Also, according to Mckinsey, with growth private market has become more mature in the areas of flexibility, depth and sophistication.
Fewer and fewer IPOs are not considered by many a good thing for the overall economic health of the country. After a start up or an established company goes public, any American could make money by buying the shares if the company is doing well. Rather than investing directly many Americans also invest in an index or a mutual fund in which a certain company is listed. Many Americans also have their 401 K invested in an index or mutual fund, so that they could enjoy a comfortable retirement.
However when a company prefers private equity investment only a few really rich people get a piece of action leaving out most of the average Americans. Robert J Jackson a commissioner at SEC had said that this phenomenon could have” real disruptive consequences”, if highest growth companies go private, as greatest economic success stories would only be shared by the richest Americans and not the general public, leading to intense inequality. The then SEC chair had said regarding this: “The potential lasting effects of such an outcome to the society and the economy won’t be good.”
Private Equity investment is not the only main reason for fewer IPOs in the US. In the last few years going public has become more and more expensive. One has to pay lawyers, investment bankers and auditors millions of dollars and have to follow and pay for lengthy registration criteria to be regulated by the SEC. Companies not only have to pay regulators and administrative fees, but also have to release statements and be more transparent in some areas, which take up a lot of the company’s time, resources and effort. While at the same time private equity market is getting more deregulated provided a more suitable investment strategy for companies than going public.
Another reason for the fall of the IPO popularity is the IPO bubble being burst after the dot com bubble. This phenomenon could easily be seen in the first figure above in which the number of IPOs registered from 2001 to 20002 dropped significantly from 406 to only 84. With it the belief that the IPO leads more wealth being created as shattered and a shift to the private equity was more preferred. Also, as explained earlier the new IPOs are not as profitable as they were thought to be. The ride sharing app Lyft went public with a lot of fanfare; however the profits were not as good as expected. As seen in the figure below the dot com bubble had the most profitable IPOs and has not reached the same heights in profit since then. The 2008 financial crises also led to decrease in confidence in generating wealth through IPO.
The U.S regulatory body could also played a significant role in the decreasing number of IPOs in US. Many business people and lawmakers have blamed overregulation for the dearth of IPOs over the last ten years. Thus many lawmakers and other experts have demanded for fewer regulations by SEC to help make IPOs more attractive for IPOs. If a company does not go public and stays private it discloses very less information about itself. A company which is public has to regularly disclose information about its inner workings and be more transparent. While a private company does not have to disclose much about itself. Thus a public company has to protect the interest of the investors, while the private company does not have the obligation to do this. Thus due to this phenomenon many people believe that the increased regulation by US regulatory bodies like SEC and FINRA seems to have become a good incentive for fewer companies to go public. Also, as explained earlier the high cost of going public and registering to regulatory bodies could also have played a role in discouraging companies from going public.
With the phenomenon of fewer companies going public, the Congress has passed many laws over the last few years to encourage more companies to launch their IPOs. One of these initiatives was The Jumpstart Our Business Startups Act of 2012 and the JOBS acts encourage more startup companies to go public. These initiatives also included making the going public cost less burdensome. But as one can see these initiatives have not found much success in increasing the number of IPOs launched. Professor John Coffee of Columbia Law School said that over regulation has not adversely caused fewer IPOs and more deregulation would not lead to more IPOs as evident by the easing laws passed by the Congress.
I also agree that overregulation is not main cause for fewer IPOs as the phenomenon is much more complicated. The rise in the number of IPOs in 90s and in early 2000s was itself a part of the bubble of the dot com era. When the bubble burst it decreased the investor confidence in the market and in IPOs. Professor Coffee also indicates that the legislatives passed like the JOBS act to make it easier for companies to go public did not lead to more IPOs. Another indication to debunk the myth of overregulation in the US was that the decline in the number of IPOs was not just an American phenomenon but the IPOs all over the world have been declining for the last ten to fifteen years. As evident by the screenshot below one can see that the IPOS have also decreased in Asia, (though as not recent as in its American counterpart), Asia and Africa. With even the developing parts of the world having their IPOS decreased a much bigger phenomenon than overregulation is at play.
The biggest reason for the decline as explained earlier is private investment is that it has become much easier for companies, especially startups, than to go public. Another reason as stated above many startup companies are not seeing going public as a viable option to make a profit as many big IPOs over the recent years have not been successful in making a profit or as much money as they had expected.
In conclusion even though going public helps average Americans to make money through successful companies, it is not a huge crisis as many Americans also prefer other investments than just IPOs. In order for IPOs to compete with private equity and venture capitals, they would first need to create the image that they are as profitable as private investments in the long run. They would also have to prove that burden and cost of regulation are actually beneficial in the long run than privatization as it would help bring more legitimacy to the company, and they could also find new ways for IPOs like Spotify did with “direct listing,” More privatization than IPO could create income inequality, so even average Americans may also prefer other ways to invest like in venture capitals or real estate. However acts passed by Congress for less transparency or fewer regulation for an IPO, would defeat the process as it one of the things that makes listed companies attractive for investment.
References
1. Abbate, Dan (2019, Feb 22).The History of Initial Public Offerings.81-c.com Retrieved from https://81-c.com/history-of-ipos/
2. Statistics. (n.d.).Number of IPOs in the United States from 1999 to 2019. Statista. Retrieved from https://www.statista.com/statistics/270290/number-of-ipos-in-the-us-since-1999/
3. McKinsey’s Private Markets Annual Review.(2020, Feb 19).Private markets 2020: A new decade for private markets. Retrieved from https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/mckinseys-private-markets-annual-review#
4. Partony, Frank (2018, Nov).The Death of IPO. The Atlantic. Retrieved from https://www.theatlantic.com/magazine/archive/2018/11/private-inequity/570808/
5. Molla, Rani (2019, March 6).Why companies like Lyft and Uber are going public without having profits. Vox. Retrieved from https://www.vox.com/2019/3/6/18249997/lyft-uber-ipo-public-profit
6. Advisory. (n.d.). Public vs Private Investments. Wildermuth Advisory. Retrieved from https://wildermuthadvisory.com/wp-content/uploads/sites/3/2018/11/Wildermuth-Advisory-Atlanta-Educational-Materials-Public-vs-Private-Investments-Article.pdf
7. Bowden, Adley & White, Andy.( 2018, June 19). Private vs. public market investors: Who’s reaping the gains from the rise of unicorns? Pitchbook. Retrieved fromhttps://pitchbook.com/news/articles/private-vs-public-market-investors-whos-reaping-the-gains-from-the-rise-of-unicorns
8. LaCroix, Kevin (2018, June 4th).Is Over-Regulation Really the Reason There are Fewer IPOs? The D&O Diary. Retrieved from https://www.dandodiary.com/2018/06/articles/ipos/regulation-really-reason-fewer-ipos/
