America’s public markets are perking up. Can it last?
FOR years, discussions of America’s public markets have usually featured a lament for their dwindling appeal. According to Jay Ritter of the University of Florida, the number of publicly listed companies peaked in 1997 at 8,491 (see chart). By 2017 it had slumped to 4,496. True, many of the companies that went public in the internet’s early days should never have done so. But the decline worries anyone who sees public markets as the best way for ordinary investors to benefit from the successes of corporate America.
The mood right now is more buoyant. Bankers and lawyers who usually chat with journalists in their offices are on the road hunting for business, offering only snatched interviews from airports in cities that they are unwilling to disclose. “There are plenty of signs that IPO activity is about to surge,” says Kathleen Smith of Renaissance Capital, a research firm.
The line-up of listings spans countries and industries. The biggest offering in America so far this year has been that of PagSeguro Digital, a Brazilian e-commerce platform. Among those imminent is Dropbox, a file-sharing service. If rumour is right, Lyft, a ride-sharing app, may soon follow. Next month Spotify, a Swedish music-streaming service, is due to make its debut on the New York Stock Exchange in an unusual “direct listing”. It will issue no new shares and raise no money, but simply begin trading its current shares. It will thereby avoid underwriting fees and its owners will be free of the “lockup” period that restricts disposals after conventional IPOs.
A wave of Chinese IPOs is also on the way. iQiyi, often called China’s Netflix, said in February that it would list on NASDAQ, whose headquarters is the neon-clad centre of Times Square. Optimism abounds that Tencent Music (China’s Spotify), Meituan-Dianping (China’s Yelp) and Ant Financial (China’s PayPal/Visa/MasterCard) will follow. The biggest prize would be the IPO of Xiaomi, a Chinese smartphone manufacturer that is being courted by stock exchanges in Hong Kong as well as New York.
Not long ago tumbling oil prices turned investors off energy companies. That has changed now that prices are off their lows and firms have become more efficient. Five energy companies have floated so far this year, putting the sector behind only health care, which had ten, most of them in biotechnology. Elsewhere Zscaler, an internet-security firm founded just a decade ago, is expected to list soon with a value in excess of $ 1bn.
A partial spin-off by AT&T of Vrio, its Latin American direct-television operation, may be the first of a series. Siemens has announced a similar plan for its large health-care unit in Frankfurt. Even banks, not long ago a dead zone, are getting in on the act; two recently filed to go public.
The main reason for all this activity is fizzy prices. Shares have been hitting record highs, and investors have done even better from IPOs than from the market as a whole. An index compiled by Renaissance of companies that have gone public within the past two years, with various adjustments to take account of size, has risen by a third over the past year, half as much again as the S&P 500. Despite concerns about inflated valuations, that fuels enthusiasm for more listings. Some think that recent changes to the tax code, which lowered the top rates and reduced the benefits of debt, may be another factor.
The question is whether one quarter a revival makes. It is easy to see how the effervescent mood in New York could quickly go flat. Stockmarkets could tumble, scaring IPO candidates off. Two hotly anticipated IPOs—of Aramco, a huge Saudi oil company, and Airbnb, a short-term accommodation site—have been delayed until at least next year. The climate for Chinese firms in America is becoming less welcoming. Competition from other exchanges is hotting up. Hong Kong is abandoning its longstanding opposition to dual-class shares in order to grab a bigger share of Asia’s tech listings. Singapore is on track to do the same.
Underlying these concerns is an older one—that the vast and varied costs of first bringing shares to market, and then remaining public, are just too high. These costs include bankers’ and lawyers’ fees, the risk of class-action litigation, the need to reveal commercially sensitive information that could benefit rivals, and the prospect of fights with corporate raiders who want juicier returns for shareholders and social activists who want executives to pay heed to their values. Added to all these are public reporting and tax requirements that private companies can often avoid.
Mr Ritter attributes much of the decline in the number of companies that are listed to the difficulty of being a small public company. This, he thinks, is reflected in the actions of venture capitalists, who once sought public listings when they wanted to exit their investments and now overwhelmingly choose private sales. He remains a diligent collector of evidence supporting the notion that listing requirements have become more burdensome over time.
For example, he notes that the prospectus for Apple Computer’s public offering in 1980 ran to a mere 47 pages and listed no risk factors, despite its novel product, inexperienced leaders and formidable competitors. The prospectus for Blue Apron, a meal-delivery company that listed last year, weighed in at 219 pages, with 33 devoted to risks, presumably intended to pre-empt litigation. One of those risks was the possibility that Blue Apron would not “cost-effectively acquire new customers”.
The difficulties of becoming public and the decline in overall listings was cited as a crucial issue by Jay Clayton in his confirmation hearing last year to be chair of the Securities and Exchange Commission (SEC). In office Mr Clayton has not been especially forceful. Still, lawyers and bankers say the SEC’s act has improved. Its internal mechanisms clank along a bit more smoothly. All companies are now allowed to file their initial applications confidentially, thus delaying any exposure of financial and strategic information to competitors until just before an IPO (investors are less happy because they do not have as much time in which to carry out research).
Even so, firms are staying private for longer. In 2000 the median age of companies at listing was five years; in 2016 it was ten years and six months. That suggests more needs to be done to lighten the burden of going public, if the current flurry of listings is to last.
This article appeared in the Finance and economics section of the print edition under the headline “Proof of life”
