he retreat of public equity markets
* The listed public company has been the favoured form of ownership for large businesses for much of the last 200 years. Equity markets offer a vital source of capital for growing businesses and provide owners with a way of realising value in their businesses.
* But in the last 25 years public equity markets have increasingly been challenged by various forms of private ownership.
* Soaring equity markets have concealed a decline in the number of listed businesses. Since the peak in 1996 the number of businesses listed in the US has almost halved. The decline in the UK came later and has been less pronounced, but the trend is unmistakable. The stock of UK-listed business has fallen by well over a quarter since the peak in 2006.
* Agreed, companies are still raising capital on public markets. Between 2000 and 2017 over $800 billion was raised through IPOs in European markets alone. But this is a fraction of the $5.0 trillion which has left the European equity market through businesses de-listing, divestments and companies buying back their own shares.
* Western corporates are generating more cash than they are able to deploy in their businesses. Cash balances have risen to record levels and companies have been buying back their own shares on a grand scale, shrinking the pool of equity. Mergers and acquisitions have reinforced the decline in the number of listed companies.
* The Securities and Exchange Commission estimates that US companies raised almost $3 trillion last year through private channels, almost twice the amount raised through IPOs.
* What is driving de-equitisation, the shrinking of public equity markets?
* In the past listing on a public exchange offered the principal route to new funds for larger businesses. Today there are a host of alternatives. Private equity, sovereign wealth funds, infrastructure funds, family offices and late-stage venture capital all compete with public markets.
* Such private buyers command vast firepower. According to the research house Preqin private equity funds alone have almost $2.5 trillion of so-called “dry powder” – capital at their disposal to buy companies, real estate and infrastructure and other assets.
* The costs and burdens involved in listing – which include listing fees, quarterly earnings calls and mandatory disclosures - have added to the attractions of the private route. For technology start-ups seeking to safeguard intellectual property, private investors offer patience and a willingness to burn cash. Start-ups now commonly receive multiple funding rounds, providing pre-IPO liquidity for employees and founders.
* But a more significant factor in the growth of private markets is simply that debt is cheaper than equity. Ultra-low interest rates and huge injections of capital into the system via quantitative easing have pushed market interest rates to record lows. Robert Buckland, Chief Equity Strategist at Citigroup, estimates that the cost of debt for US companies is around 3.0%, less than half the 7.0% cost of equity.
* Private equity’s track record on returns appears to be strong. A 2016 paper by academics at Oxford reports that buyout funds have consistently outperformed public markets. A 2017 white paper from Voya, an independent retirement planning company, found that private equity outperformed the US S&P500 index over the 20-year period between 1996 and 2016.
* Such performance has attracted wealth managers and institutional investors to increase their allocations to private equity. In the US the Securities and Exchange Commission is considering changes to give individual investors greater access to the private market.
* The optimal form of ownership of businesses has long been debated. But the shrinkage of equity markets testifies to the powerful appeal of private forms of ownership.
PS – We have written previously about intergenerational fairness, highlighting the financial pressures on young people today. A report released last week by the Office for National Statistics challenged some widely-held assumptions about the gap between the generations. It found that while today’s 25-54 year-olds pay more in taxes than they receive in benefits previous generations at the same age were even larger net contributors. The report also found that today’s 55-64 year-olds are far greater net contributors to the Exchequer than previous cohorts of 55-64 year olds.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 1.5% at 7207.
Economics and business
* US stocks rose after US president Donald Trump said that China “very badly” wanted to strike a deal to end the trade war
* Chinese officials also commented that they were hoping for continued negotiations and the cancellation of impending US tariffs
* Former vice-chairman of the US Federal Reserve Bill Dudley wrote a column asking the Fed to take into account the economic risk of Mr Trump’s re-election in its policymaking
* A Fed spokesperson said that “political considerations play absolutely no role” in its policymaking
* In a further extension of yield curve inversion, the yield on two-year US treasury bills rose to 5.3 basis points above that on ten-year US government bonds, the highest spread since March 2007
* According to financial data company FactSet, analysts now expect 2.4% growth in profits per share of S&P 500 companies this year, down from a forecast of 7.7% at the start of the year
* US real GDP growth slowed to 2% in the second quarter, from 3.1% in the first, in line with expectations
* The Financial Times reported that a planned simplification of the euro area’s budgetary rules will ease pressure on governments to reduce deficit levels
* The Greek finance ministry announced that it will fully lift capital controls (in place since 2015) on September 1st, while Greek government bond yields fell to record-lows
* According to the World Bank, global remittances will reach $689bn this year, overtaking foreign direct investment as the largest capital flow to emerging markets
* Euro area consumer prices rose by just 1% in the 12 months to August, well below the European Central Bank’s target
* Japan’s jobless rate fell to its lowest level in 27 years in July
* The world’s largest bond fund manager PIMCO’s US economist Tiffany Wilding called for more “aggressive” easing to mitigate the risk of a US recession
* US consumer sentiment saw its sharpest fall in seven years in August
Brexit and European politics
* UK prime minister Boris Johnson announced he will suspend Parliament for five weeks ahead of the Brexit deadline on 31st October
* The decision to shut down – or prorogue – parliament will hamper plans of MPs trying to block a no-deal Brexit
* The speaker of the House, John Bercow, called the suspension a “constitutional outrage” designed to prevent MPs from debating Brexit
* A day before the prime minister’s announcement, six opposition parties had agreed to pursue legislation aimed at stopping Boris Johnson from taking the UK out of the EU without a deal on 31st October
* Shadow chancellor John McDonnell said that MPs opposing the government’s Brexit plan could still succeed in legislating against a no-deal exit, but admitted the timeline is now extremely tight
* Leader of the Liberal Democrats, Jo Swinson, warned Mr Jeremy Corbyn he risks jeopardising losing a vote of no confidence in the government by insisting on becoming interim leader
* Leader of the Brexit party, Nigel Farage said he is open to a pact with the Conservatives at the next general election if they side with him on Brexit
* Italy’s populist Five Star Movement and centre-left Democratic Party agreed to form a coalition government, with Giuseppe Conte staying as prime minister, following the collapse of the previous coalition government last week
And finally… The Office for National Statistics released a review of last year’s most popular baby names in the UK. Arthur and Ada have surged in popularity, perhaps thanks to the popular TV series Peaky Blinders. Meanwhile, the number of baby girls named Alexa has more than halved since 2017 as the Amazon Echo has grown in popularity – speaker of the house