31 Oct 2019 Private equity industry reshaping American capital markets
https://www.euromoney.com/article/b1dx148qjztwp3/why-private-capital-will-dominate-markets-for-the-decades-to-comeScepticism over capital markets is on the rise. It is leading more and more investors to turn to the powerful and growing private equity industry. As a result, companies tend to stay private for longer swelling private equity market five times in the last two decades.
Increasing lax corporate governance is one of the main factors shrinking the number of new listings on the US stock market. Over the past 20 years, IPO plans in America’s capital markets have halved.
Moreover, those which do go public perform poorly. Companies which listings were hailed with delight like Uber, Lyft and Peloton have shrunk dramatically remaining below their IPO prices.
Another reason pushing to private market is a boom in share buybacks. Companies purchase their own stock to increase the price. Consequently, companies reduce the number of shares available shrinking the stock market.
Financial statements disclosure and other transparency measures are other factors discouraging IPOs. Financial guru Warren Buffet and JPMorgan chief Jamie Dimon tagged measures which require US listed companies to open their books quarterly as drivers of short-term thinking.
Barack Obama’s 2012 Jobs Act tried to ease IPO registration for companies with annual revenues lower than $1bn, but it also raised from 500 to 2,000 the number of permitted private shareholders before companies are forced to release public financial reports. The resulting effect of the chance to increase the supply of private capital have made founders’ power stronger to delay IPO.
To raise capital, companies also look for Direct Listing Process (DLP) sidestepping IPOs. For instance, Slack and Spotify both relied on DLP to skip IPOs. But while some experts say that DLP gives the flexibility to sell and to allocate capital democratically, it remains unclear how DLP would work out and the role of SEC.
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