Friday, January 28, 2011

IPOs And Other Finance

Matt Yglesias comments on this Felix Salmon quote:
the total number of listed companies, which has been falling steadily for a decade, will continue to fall for the foreseeable future.

FLG went to the article itself and found the entire passage:
My feeling is that there’s so much money flowing into the private markets these days, in the form of VC funds and super-angels, that tech companies have almost no need to tap the IPO markets any more. They make sense for things like banks and car makers, but in general the total number of listed companies, which has been falling steadily for a decade, will continue to fall for the foreseeable future. I tried to get that data once, and failed — does anybody have a graph of the total number of companies listed on the NYSE and the Nasdaq over time? The era of the public company has not yet come to an end, but it certainly feels as though it’s well past its peak.

A few of things stuck out for FLG here. First thing is the decade timeframe. Ten years ago was 2000, when as you'll all remember, when the dot com bubble crashed and with it the IPO fever. So, to say that it has been falling steadily without saying that's from a peak is misleading. Second, the word "steadily" implies this is some sort of clear, secular trend, but if you look the data, then it's not so clear. IPOs dropped after 2000, then picked up until about 2008, when, as you'll all remember, we had a financial crisis. Lastly, neither mention Sarbox at all, which had to have some effect.

Another question is whether Salmon's analysis is correct, surprise surprise, insofar as time horizons are concerned. FLG firmly believes the secret sauce of Silicon Valley is the America's financial system. VC funds typically have a 3-7, let's say 5, year investment horizon. What this means is that they invest in a company, and then look for an exit. A successful exit is usually 1) to be acquired by another company or 2) IPO. Given the current state of the world, low interest rates and lots of cash on corporate balance sheets, it's no surprise that there's no need to tap IPO markets right now. FLG doesn't disagree, but this situation is far from a secular trend. And it doesn't say anything about the long-term future of IPOs. Eventually, the cost of capital will tilt back into equity's favor.

This also struck FLG; Matt writes:
There’s always been something somewhat illogical about organizing the economy around publicly traded firms (I think Keynes said that investment decisions shouldn’t be the byproduct of a casino) and innovations like high-frequency trading and ETFs tend to heighten the contradictions

On one hand, FLG gets this. It's the typically left wing skepticism of capital markets. But on the other hand, the only alternative, leaving aside nationalization and outright socialism, to publicly traded firms is an even more unequal distribution where a few families control all the capital and it's impossible for a small investor to get in. FLG always assumed, and this might have been him projecting his assumption onto others, that people on the Left would welcome the opportunity for the hoi polloi to acquire equity stakes. But now that he thinks about it, the Left has been and is on the other side of that in almost every case he can think of.

5 comments:

nadezhda said...

FLG always assumed, and this might have been him projecting his assumption onto others, that people on the Left would welcome the opportunity for the hoi polloi to acquire equity stakes. But now that he thinks about it, the Left has been and is on the other side of that in almost every case he can think of.

Whoa! You gotta get out more! Your original instincts about "people on the Left" having a preference for equity was sound. Their value systems match up nicely with equity -- innovation, production, growth and diversity of ownership. Lots of Dems can be found in Silicon Valley and the more IPO-ish regions of Wall St investment banking. Yglesias seems to be way over(or under)-thinking this topic.

Bond markets are a much handier candidate for general villainry -- that's where the "hard money" types and bond market vigilantes can be found.

nadezhda said...

As for the decline in IPOs, I expect you're right that it's mostly cyclical. Long periods of lots of IPOs are extremely rare -- IPO windows tend to be infrequent and short-lived. The 90s really were the outlier.

Regardless of when the cycle turns, however, I doubt we'll be back to a late 90s level of publicly traded co's any time soon, regardless of cost of funds. If the SEC doesn't crack down on the new grey "private" markets, folks will be able to cash out without going the public route and will be able to take their firms "private" with no significant loss of value or liquidity. I for one think reduced equity listings would be an unfortunate "financial innovation".

Right now we're getting the worst of all worlds from "innovation" in the equity markets -- it's making it easier to avoid the irritations of being listed, so the exchanges are feeling threatened. Which makes them all that more eager for any other source of revenue and seems to have turned them into high-speed trading junkies. Which is going to eventually blow up the system or drive big institutional investors, yes, to the "private" markets that are going to kill the exchanges. Rinse and repeat.

FLG said...

Nadezhda:

"Lots of Dems can be found in Silicon Valley and the more IPO-ish regions of Wall St investment banking. Yglesias seems to be way over(or under)-thinking this topic. "

It seems like the narrowly political class, you know the types here in Washington and journalist types, are often reflexively anti-capital markets with little distinction made between equity or bond.

nadezhda said...

You definitely gotta get out more!

FLG said...

In complete honesty, I think I'm unduly influenced by the complete nutjobbery in Michael Moore's Capitalism movie, which I just watched a few days ago. Unfair to paint all the left with his wacko brush.

 
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