Whats the point of the equity market?
Gavin Ralston, Head of Thought Leadership for Schroders
The number of companies listed on the world’s stockmarkets has collapsed in the last twenty years. Since 1996, the number of public companies in the USA has fallen from roughly 8,000 to 4,000, and in the UK from 5,000 to 2,500. Part of the explanation of this is that the number of new companies seeking a market listing in the US has come down from over 300 a year before 2000 to just over 100 since. South Africa presents a similar picture, with a halving in the number of listed companies.
In contrast, the fast growing economies in Asia have attracted many new listings, and the public company count has doubled, China in particular has a thriving new issue market and individual investors look forward to the next hot IPO.
In mature markets, there is no doubt also that getting a stockmarket listing is expensive and, as regulations have tightened since the financial crisis, requires a huge amount of bureaucracy. The average number of words in the annual report US companies have to file with the regulator rose from 23,000 in 1996 to nearly 50,000 in 2014. Many managers also believe that a market listing forces them to direct too much attention to the short term.
As a result, companies have found other ways of financing their expansion – private equity has emerged as an important source of finance over this period and is now a $2.5 trillion industry. Many managers welcome the benefits of having an engaged private equity owner with a focus on the next 5-7 years.
Interest rates in most developed economies have also been unusually low, meaning that companies can borrow cheaply instead of raising equity- and can usually offset interest payments against their tax bill.
So there are good reasons for the ebbing of enthusiasm for joining the public equity markets.
Does all this matter? Do economies still need flourishing equity markets? The original purpose of stock exchanges was to finance growth capital; outside emerging economies this function has atrophied as more companies remain private for longer and find alternative ways of financing growth. However, stockmarkets perform other functions. They provide liquidity for founding shareholders; they enable management to align pay with the success of the company; they allowed banks to repair their balance sheets since 2008; and the requirement for transparency raises standards of corporate governance.
We believe, however, that the real benefit of public listing is to allow a wide range of savers to participate in fast growing companies. This is what private equity does, but private equity vehicles are hard to access for individuals or for participants in retirement plans. With retirement provision in many countries, including South Africa, having shifted to a defined contribution model which looks to access low cost funds that offer liquidity, the only way these savers can invest in growth is through listed equities.
Policy-makers should pay more heed to this issue and do what they can to encourage companies to come back to the public markets.
Find out more at schroders.co.za please click here.
