The vanishing public company
James Saft on why the number of publicly traded US firms has fallen.
The number of publicly traded US firms is now lower than at any time during the past 40 years and small investors, if not the economy as a whole, may pay the price.
Since 1996, US listings per capita have fallen, according to a study published in May. That makes the US, at least on this measure, less financially mature than it was in 1996 or 1975. Listings per million Americans has fallen from 30 in 1996 to 13 in 2012, an enormous decline.
“We show that the US has a listing gap relative to other countries with similar investor protection, economic growth, and overall wealth. The listing gap arises in the late 1990s and widens over time,” write Craig Doidge of the University of Toronto, George Andrew Karolyi of Cornell University and Rene Stulz of Ohio State University, authors of the study.
“We also find that the US has a listing gap when compared to its own recent history and after controlling for changing capital market conditions.”
The ‘what?’ in this story is pretty clear; the number of listed firms per capita has been falling. The ‘how?’ too is fairly straightforward, as the phenomenon is due to a combination of fewer firms going public and more delisting. The delisting has been driven in substantial part by takeovers. The ‘why?’ and the ‘so what?’ are a lot less clear.
While startups have actually declined over the period studied, the percentage that ultimately list has also declined. This lower propensity to list by startups, at least in today’s market, may simply be because the private market is offering such good terms. Private financing has developed to the stage, and is making private firm owners such good prices, that many more mature companies are staying private longer. Uber, and other so-called unicorns, firms which are private and have a value of more than US$1bn, are prime examples of this.
The study did find that listing became less attractive for firms of all sizes, not just smaller, newer ones, though the decline was slower for the largest firms. Regulation of public firms also doesn’t bear the blame, according to the study. Though Regulation Fair Disclosure and the Sarbanes-Oxley Act both came into being in the aftermath of the dotcom bubble, the trend was well established before these came into force in the early 2000s.
So, not only did the rate of new listings decline, the listings gap was also driven by more delistings, many of which were the result of takeovers.
Brave new world?
One possibility, as hinted by the rise of the unicorns, is that private ownership, either via private equity or other forms, is doing a better job of reconciling the natural conflict of interest between owners and company managers. To the extent this is true it is encouraging for the economy. Generally equity market deepening has been at the very least coincident with economic development, so a reversal of this may cause some concern.
If people with ideas, ability and capital are simply opting for forms of company ownership other than the old publicly traded model, then perhaps the listing gap doesn’t imply lower growth. There is a contrast between the willingness of listed and non-listed companies’ willingness to invest for growth, with non-listed ones shelling out more and having lower hurdle rates for projects.
All of the listed firms are not being snapped up by private equity. The recent percentage of public firm takeovers involving private equity is about the same as it was before the 1996 peak and lower than what we saw in the 1980s, according to the study. In any event, smaller investors without the ability to easily or cheaply access private equity or early-stage investments may well be left at a disadvantage by the listings gap.
That’s especially true when you consider the separate, but possibly related, phenomenon of private companies choosing to give money back via dividends or buybacks. S&P 500 companies alone are on track to return more than US$1trn of capital in 2015.
These forces may have a number of negative impacts on smaller investors. Those who only invest in public markets will find themselves, perforce, less diversified. Fund managers with fewer options for investment may take bigger bets, with extra emphasis on those parts of the public universe exhibiting growth.
Worse still, a sort of negative selection may be at work for public company investors. If private companies invest more, they will grow more, all else being equal, while public companies eat further and further into their seed corn through dividends and buybacks.
A listings gap may harden into a returns gap.
(James Saft is a Reuters columnist. The opinions expressed are his own. At the time of publication he did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at email@example.com)