SINGAPORE (Jan 9): It was an encouraging 2017 for the S&P 500, booking a full year of monthly total gains for the first time ever. But the elephant in the room still remains about the shrinking pool US companies going public.
According to data from Dealogic in a Dec 2017 report, the past year had been a record one for US-listed IPO volume and activity since 2014 – with issuance on the US exchanges totaling US$47.8 billion ($63.6 billion) via 179 IPOs.
This, however, remains at nearly half of the record full-year 2014 performance of the US$92.9 billion raised via 292 IPOs – as pointed out by a recent article in The Financial Times, which underscores the gravity of the dearth of IPOs that may in turn affect the US economy.
1. Abundant private funding
One cited reason for overall downward trend in US IPOs is the increasing availability of private funding, which allows companies to stay private for much longer compared to before. Similar to unicorns – companies with valuations of over US$1 billion gained through private funding rounds with venture capital (VC) firms – the term ‘decacorns’ were invented by bankers for those whose private valuations exceed US$10 billion.
These include tech giants such as ride-hailing app turned transport company Uber and online property broker Airbnb, whose valuations stand at US$69 billion and US$31 billion respectively but have yet to announce plans of following the footsteps of photo-sharing app Snap.
2. Inability to meet short-term demands
Shares of Snap, which proved the largest US tech listing of 2012, are now trading significantly below the offer price of US$17, which is attributed to competition from intense competition from Facebook as well as the fact that its early results have failed to meet expectations. This resonates with an existing divide between the self-image of founders as “tech visionaries intent on changing the world” and the short-term demands of public market investors, says FT.
3. Regulatory burdens
On the note of marked declines among smaller companies, it is also argued that the complexity and regulatory costs of going public presents challenges to these firms, which also tend to trade less often and hence see dimmer prospects of being covered by analysts.
Citing market participants and pro-business groups, FT highlights calls for further reforms to the Jumpstart Our Business Startups Act of 2012, which removed the regulatory necessity for companies exceeding 500 shareholders to publish financial information. It was this requirement which helped to trigger the IPOs of Google and Facebook, and the absence of it that allows the latest batch of growing tech companies the freedom to stay private longer.
So what can be done to reverse the listings decline
One suggestion by Paul Donahue, Morgan Stanley's head of equity capital markets, is for central banks to dial back stimulus – which would then push more private companies to public markets as private capital inflow declines.
Others argue it is only a matter of time for the majority of US companies to go public for the benefits of doing so, such as allowing its shareholders to cash out their holdings, as well as providing a currency for mergers and acquisitions (M&As) and a certain level of legitimacy.
This sentiment is echoed Deepak Kamra, partner at VC firm Canaan. In his words, “The public market is the ultimate arbiter of truth”.