As Chairman of Avenir Registrars, I was invited to offer my thoughts on why we need to ensure that public companies continue to be perceived as a public good. When public scrutiny of corporations has seemingly never been greater and private equity firms are awash with cash, is there an increased risk that businesses will back away from public markets? And what will we all lose if this happens?
The recent burst of IPO activity in the UK and across other developed markets has diverted the conversation away from the longer-term decline in the popularity of listing, a decline accelerated by the surge of private equity acquisitions. The situation is even more pronounced in many frontier and emerging markets, which have had no IPOs at all for several years at the same time as private equity investment has been booming.
Many factors seem to be behind the fall in IPOs. Owners of successful family-owned businesses may be reluctant to seek a listing because of the costs of adapting financial reporting and corporate governance to meet exchange requirements. They may not welcome the scrutiny that follows a listing and could be wary of the risk of losing control of the business they have built up. By contrast, the confidentiality and lower initial cost of obtaining finance from private equity seems very attractive, driving this shift from IPO to PE.
The obvious question this raises is: if businesses have access to the finance they need, does it matter whether it comes from private equity or a public listing?
From one perspective the answer is no. Finance from private equity is just as capable of supporting a growing business as finance from public markets. In some cases, a committed, hands-on investment style may produce better performance than ownership by a large, variegated group of uncommitted shareholders. It is not obvious that a switch to private equity investment is bad for the companies.
However, public capital markets have other important roles to play, besides raising finance for businesses. These include price discovery and providing vehicles for savers.
By “price discovery” I mean that the existence of a continuous market for a company’s shares reveals the changing valuation put on the company by investors. This gives continuous feedback to management about how their performance is perceived, but in addition, public share prices are a form of public good, as they provide a benchmark for the valuation and performance of comparable companies. In aggregate, share prices provide information about economic performance that is considered by policy makers and the public. Think how often the phrase “the stock market rose (or fell)” is used in the news as an indicator of the mood of financial markets. If the base of public companies for which continuous prices are available shrinks, the value of this information is diminished.
The second role of public capital markets is to provide vehicles for savers. The public availability of a range of investments enables different investors to meet their different time horizons and risk/reward trade-offs and, if they wish, participate in the governance of those companies. The switch from publicly listed companies to privately held reduces the opportunities on offer. Although direct investment in individual companies is not right for every investor – and indirect investments in unlisted companies may be available through investment or unit trusts – the opportunity to participate directly as shareholders of public companies is part of the foundation of a market economy. A sense that the best opportunities are not available to all undermines support for the system.
The ability to raise finance from investors as a public company is indeed a privilege and the requirements for being allowed to do so need to be set high. However, as I have argued, public companies are also a public good. We must be careful that, in the interest of setting ever higher standards, we do not let the best become the enemy of the good.
Hugh Simpson is Chairman of Avenir Registrars. With extensive knowledge of capital markets, Hugh is also a senior partner at Bourse Consult where he advises capital market institutions across the globe. Previous roles have included advising the ECB on its T2S project, a 16 year tenure at the Bank of England and Chief Executive of CREST.
This article originally appeared in the August 2021 edition of AIM Journal. You can can download a printable version here.