A secular trend away from public markets

 16 November 2016

 The company that is changing driving owns no cars; the one that has the hotel industry on the run owns no rooms. Such are the standard tributes to the radical business models of Uber and Airbnb. Something else they lack, despite putative valuations of $68bn and $30bn respectively, is public listings. For good or ill, this is innovation too, and part of a trend that reaches beyond the technology sector.

 

Private investors flush with cash have provided these companies and others with billions in funding. Tech company initial public offerings in 2016 are at the lowest level since the 2009 crisis. Might a new tech bubble be inflating where only insiders - all with an interest in more pumping-up - can see it? And is the wider public the loser when more and more assets are owned by an investment elite?

News that Snapchat's parent company Snap has filed for a $20bn-$25bn public offering has raised hope that the status quo is returning. And pressure from employees and investors will, in time, push some tech companies into the IPO market. But the general trend towards a greater private ownership of equity is likely to last. The availability of private capital of all sorts persists. Dramatic evidence of this was the recent decision of SoftBank and Saudi Arabia to set up a $100bn tech buyout fund. It would have twice the firepower of the entire US venture industry. At the same time, being public is hard work, in terms of reporting and pleasing restless markets.

There are more than 170 private tech companies with valuation in excess of $1bn. These "unicorns" are worth over $660bn in total, more than Apple, the largest public company in the world.

Anyone given pause by the decline of public markets has more than Silicon Valley to worry about. Assets owned by private equity houses have gone from $465bn to $2.4tn globally in the decade to 2015. The big private equity groups, through their portfolio companies, are among the largest private employers.

There is a positive side to all this. There is evidence to suggest that private companies invest more than publicly held ones, which can by hypnotised by the need to hit quarterly targets. The lack of productivity growth in the US and Europe suggests that more investment is welcome. And highly concentrated private ownership is, if anything, more likely to keep a closer eye on corporate governance than highly diffuse public ownership.

That said, in the venture capital world, all participants have reason to put off the pain of a "down" fundraising round, which dilutes older shareholders and employees who have been paid largely in restricted stock. In public markets, short sellers and other sceptics have the motive and information to take the negative side of the valuation argument. This is healthy. Of course, a decade and a half ago, public market transparency brought reason to tech valuations only very belatedly, and in a single destructive spasm. But then the trend was in the other direction: companies were going public before they had given evidence of their viability.

The information that deep, liquid and diverse public markets provides is not only of value to investors. It helps policymakers, corporate managers and entrepreneurs understand the economy. There is therefore a collective interest in seeing that public markets remain robust. So it is worth considering what can be done to ease the regulatory burden on public companies without harming investors.

Eliminating the US requirement for publishing quarterly rather than semi-annual accounts is a place to start. Public markets are messy and demanding but worth cultivating all the same.

 

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