The Covid-19 pandemic, thanks to a mixture of lockdown and the cash crunch, has given global stockmarkets a new lease of life.
Consider this example: on Monday, just 9,300 traders using the commission-free platform Robinhood owned shares in Kodak and the stock was trading at $2.20. By Friday, after Kodak announced it was to start making ingredients for Covid-19 related drugs, 133,000 traders owned shares in the company – and the price was $36.
You might sneer at this, and say that Robinhood’s gang of clueless retail investors have turned the market into a video game. But that is a mistake. About half of Robinhood’s ten million-plus users (average age around 30) are first-time investors; other brokers are also reporting sharp rises in new accounts.
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The crisis has also reminded companies that the core purpose of a public listing – access to equity finance from long-term shareholders – comes in very handy when you need cash quickly. The numbers tell the story: globally, listed companies raised $129.5bn in May alone this year – double that of May 2019. In the first half of 2020, US firms raised $125.6bn – the most in 30 years, says PwC. In the UK, Peel Hunt notes 92 Covid-related deals since March. In extra good news, the average return for investors who bought into those capital raises has been about 16% so far. Win-win.
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The rise of private equity
This reminder comes in the nick of time. The number of listed companies has been falling nastily. At the end of June, 2,004 companies were trading on the London Stock Exchange, down from 2,428 in 2000. Last year, just 36 companies floated initial public offerings in the UK – the smallest number for a decade.
In the US, a paper by Alexander Ljungqvist, Lars Persson and Joacim Tag notes that “excessive delisting” – companies being taken private – has led to stockmarket participation collapsing. The number of US-listed companies peaked at 7,428 in 1997 but had dropped to 4,400 by 2019, fewer than in China. By 2018, private equity was providing five times more capital to companies than IPOs. These days there are more US companies owned by private equity than there are listed ones.
There are downsides to being listed: tedious meetings with analysts, stroppy retirees who attend annual general meetings, interference from activist shareholders, and relentless regulation and transparency requirements. Add in the odds that more regulation demanding disclosure and action on diversity, climate and other issues is coming, and delisting might soon look even more attractive than it does now. Why not skip the bother and go straight to the lakes of cash on offer from private equity?
All this matters more than you might think. First, it “segregates investment opportunity”, as a report from the Milken Institute puts it. These days most ordinary investors are, in effect, excluded from profitable opportunities because private equity investors need to be “accredited” or “qualified”, and they don’t have enough assets or experience to qualify. Hence, they are limited to “a segmented (and shrinking) universe of publicly listed companies”.
There are obvious wealth inequality implications. But that’s not the worst of it. If society gets to the point where ordinary people own too few shares in listed companies to feel invested in the corporate world, or to care whether the government is friendly to business, politics itself will change.
Fewer listed stocks can lead to more anti-business governments, say Prof Ljungqvist and colleagues. Once that happens, it can lead to falling investment by businesses in the economy, a shrinking in the size of the overall pie and long-term losses for everyone. Selling out to private equity might look like a good deal to shareholders, but if there is too much of it – and I think there is – it imposes long-term consequences on everyone else who are not accounted for in the sale price.
How the government can help
So what to do? Governments have been quick to help during the pandemic, fiddling with regulation to allow companies to raise more equity quickly. But to get public markets growing again they need to capitalise on the Covid-19 momentum. As with everything else, this is about incentives.
Governments could make delisting less attractive by taxing private equity activity around it, or changing policies that make public listings less attractive. The tax deductibility of interest payments doesn’t help because PE companies tend to rely on debt; the generous tax rules for PE profits don’t help, either.
It might also make sense to cut back on policies ostensibly aimed at improving listed company governance that add to the hassle of being public. And social activists should rethink some of their efforts. If you had been thinking of listing, you might be put off by the public shaming of companies that paid dividends during the crisis.
More radically, we could provide incentives – or even subsidies – for listing: what about a lower rate of corporation tax for smaller listed companies or perhaps a tax break on capital gains for founder-owners who list? There are options. The priority must be to seize this moment to make today’s enthusiasm for public markets more a long-term trend than a Kodak moment.
• This article was first published in the Financial Times
