Market watchers have been fretting for years now about the decline in the number of listed companies in the US. Back in the 1990s, investors had their pick of about 7,000 stocks. By the early 2000s, that was down to 5,000-odd. Today there are a mere 3,500. That doesn't mean companies are finding it hard to achieve funding. Far from it; it's just that they are finding the money elsewhere.
Consider the latest Bain & Co Global Private Equity Report: during the past five years, it says, within the private equity industry "more money has been raised, invested and distributed back to investors than in any other period in the industry's history". And they say it isn't over yet. Bain argues that the penetration of private investment into areas that were previously the domain of public stockmarkets "has no end in sight...It portends a future in which a much larger share of capital flows into private markets."
This shift away from public equity ownership matters. We should worry about the extent to which it represents a new era of market concentration and therefore a lack of the high level of competition successful capitalism needs. We should also worry about the way in which it entrenches wealth inequality.
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Wealth will become even more unequally distributed than it already is
If new and newish companies go through their growth stage wholly supported by the already rich (sovereign wealth funds, private equity, family offices and so on) rather than by ordinary retail investors, it would make sense to expect wealth to become even more unequally distributed than it already is. Those who already have wealth profit from the high growth start-ups. Those hoping to build it get stuck with the post-growth doldrums.
It makes sense that we should be rather excited to see so many new companies coming to market in the US right now. Uber is in the middle of a roadshow ahead of an initial public offering (IPO) next week. Its rival Lyft listed in March, closing its first day of trading with a valuation of $22.4bn (although it has dropped since then). Digital scrapbooking site Pinterest listed in April and is now valued at nearly $16bn, well above its IPO offering price). The We Company, parent of shared office provider WeWork, filed for an IPO on Monday. Finally, when California vegan start-up Beyond Meat listed last Wednesday, its share price soared, giving it a valuation of not far off $4bn.
A sceptic might say that Beyond Meat isn't exactly the cash-creating machine you would expect at the price: the company had $90m in revenue and $30m in losses in 2018. But it is coming to market while still in its growth stage. So what has changed? After years of staying private, why are companies now listing when they are still loss-making? And why are investors letting them do it?
The quick answers are because they can and they feel they have to. Equity market investors are buying because, in a low-growth world with super low interest rates, they feel they must have access to growth. They are also terrified of missing out. That makes them willing to pay even more than private equity will. (Bain notes that the private equity industry's biggest concern is "high transaction multiples" the price to buy many companies is now many, many times their revenues.) For their part, loss-making companies are listing because that dynamic allows them to.
Retail investors beware: the great tech stock bull market will end
This great tech bull market will end, as the previous one did. Think of the risks. It is possible that the current loose monetary policy, the greatest driver of capital misallocation, will change. The tone from the Bank of England's meeting this week was slightly more hawkish than before, as was the mood music from the latest meeting at the US Federal Reserve, America's central bank. Fed chair Jay Powell even went so far as to say temporary factors might be pushing down inflation. So don't expect rate cuts.
There is also, as Julien Garran of MacroStrategy Partnership puts it, the possibility that the big tech companies "are highly vulnerable to a regulator, advertiser and user revolt". And don't forget how much energy will be required to feed the data storage and processing needs of many of the products they promise us will drive future growth.
Finally, there are the prices. Right as the dotcom bubble peaked in March 2000, there were 36 companies in the S&P 500 priced at more than ten times revenues. That is a stupid valuation for anything. In April this year there were 30. When the bull run does come to an end it will drag the valuations of everything considered "growth" down with it and shut down the market for overpriced IPOs.
The window of opportunity for flogging loss-making growth companies with minimal future visibility to retail investors is not yet shut. But everyone knows it cannot open much wider however good some of the companies may be. Companies in need of cash, and private shareholders hoping to cash out, are showing excellent sense by asking for it now. The question is whether the stockmarket investors handing money to them are showing the same wisdom.
Those of us who have been complaining about how the lack of listings has increased inequality may soon be complaining that the overpricing of this spate of new listings and the inevitable result is doing the same thing.
This article was first published in the Financial Times.
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