The end of major public companies?

So I read an interesting thing the other day. Public stock markets are representing ever smaller percentages of national industry. Apparently, the amount of new stocks made available to public investment has been dwarfed by the amount of stocks removed from public access by going private. Fewer companies are seeking IPOs (or seeking them much later than traditionally), whilst many publicly listed are doing share buy-backs or bought out by massive private investment vehicles. This has been going on in the USA, Europe, and also much of the developed world for twenty years.

Stock markets were originally about ways for companies to raise money, but the idea is now that forms of finance are so available to many companies that they no longer need to rely on public shares. In fact, they probably are more likely to go public so the owners can free up or offload their own capital. There are some interesting ramifications of this.

Firstly, it suggests that the best growth (and highest returns) of youthful and successful companies are increasingly going to the initial owners and the "shadow banking system" (hedge funds, etc.) - the public are left with more mature companies that are more likely to be past their best and most profitable expansion. Now consider your pension plans are in publicly listed companies: so your old-age wealth is likely to be tied up in relatively modest performers. It means that a lot more wealth generation is concentrated in the hands of people who are already very rich and underpin the sources of alternative wealth.

Secondly, it's a remarkable loss of oversight over corporations, as publicly-listed companies have much higher standards of transparency. Consider for instance that the UK government has suggested worker representation on company boards - but what's the point, if lots of companies don't have a public board for them to be represented on?

Is this the new phase of capitalism?

Agema:
So I read an interesting thing the other day. Public stock markets are representing ever smaller percentages of national industry. Apparently, the amount of new stocks made available to public investment has been dwarfed by the amount of stocks removed from public access by going private. Fewer companies are seeking IPOs (or seeking them much later than traditionally), whilst many publicly listed are doing share buy-backs or bought out by massive private investment vehicles. This has been going on in the USA, Europe, and also much of the developed world for twenty years.

Stock markets were originally about ways for companies to raise money, but the idea is now that forms of finance are so available to many companies that they no longer need to rely on public shares. In fact, they probably are more likely to go public so the owners can free up or offload their own capital. There are some interesting ramifications of this.

Firstly, it suggests that the best growth (and highest returns) of youthful and successful companies are increasingly going to the initial owners and the "shadow banking system" (hedge funds, etc.) - the public are left with more mature companies that are more likely to be past their best and most profitable expansion. Now consider your pension plans are in publicly listed companies: so your old-age wealth is likely to be tied up in relatively modest performers. It means that a lot more wealth generation is concentrated in the hands of people who are already very rich and underpin the sources of alternative wealth.

Secondly, it's a remarkable loss of oversight over corporations, as publicly-listed companies have much higher standards of transparency. Consider for instance that the UK government has suggested worker representation on company boards - but what's the point, if lots of companies don't have a public board for them to be represented on?

Is this the new phase of capitalism?

First, I have been hearing of a lot of buybacks. I didn't know that this would be greater than new stocks being made available. So that's very interesting. Secondly, economist have been wondering where all the money people like Bush and Obama were shoving into the economy. It should have had huge ramifications. But it seemed to have little effect. Perhaps this explains what's been happening. It didn't increase volume of trading as it was all being sunk into buybacks and it didn't deflate the currency because... it was somehow separate from the economy by trying it companies? Yeah I still don't know how all this extra money printed by the US didn't deflate the currency. Even my first assumptions is predicated on the fact that the seller in the buybacks don't somehow spend their money.

Third, this seems like a really appropriate response to the GFC. Many companies were screwed over by banks, even when they weren't their bank. You want to not rely on the stock market because its designed to be unreliable. Fourth, Musk has been having trouble with worker being angry over work disputes. So while not being on the board, they might be able to sway public opinion. Also, is this another factor in why unions have been diminishing? Having a member on the board really negates the need for a union.

Lastly, places like Y-Combinator seem to be talking a role in developing new companies. They would probably want to exclude everyone from the fruits of their labour. They might be excluding new companies from the stock market too.

I wonder how much of this is simply a consequence of the concentration of wealth. Non-public financing is quite a bit easier if there are fewer deeper pockets than if there are many shallower ones.

If this is the new phase of capitalism, hopefully it is quite short. If it isn't, hopefully it is quite short.

It's likely that some of it is a consequence of businesses require less start-up. Digital products require no physical space. Physical products can hire out the logistics to ebay or amazon. You can skip a marketing department for a well timed google ad buy. The power of an accounting team is in most people's pockets. It's entirely possible to launch a wide reaching business and become rapidly successful with no start-up capital. Just think of the same dozen or so companies buying ad space on all the youtube channels and twitch streams, a lot of those aren't publicly traded, at least not until someone buys the whole company.

Paying out dividends on stock is like paying interest on loans. It's a drain you'd rather avoid if you can grow your company without it. Sounds like upside to me.

I don't entirely understand. Weren't stocks already mostly owned by mostly very rich people or other organizations anyway? It seems you are telling me that we can go to something more senseless and unequal than the stock markets where people make their money by legalized gambling, preferably carried out through algorithms? It sucks for retirement funds and such, I guess, though they often have such enormous amounts of money that they should be able to cope.

This can work in the other direction as well. Companies increasingly have to seek finance else where as there were so many companies that generated excitement as they went public, sold shares way over price to earnings ratios and quickly collapsed in value. Maybe investors are that much more cautious now.

tstorm823:
It's likely that some of it is a consequence of businesses require less start-up. Digital products require no physical space. Physical products can hire out the logistics to ebay or amazon. You can skip a marketing department for a well timed google ad buy. The power of an accounting team is in most people's pockets. It's entirely possible to launch a wide reaching business and become rapidly successful with no start-up capital. Just think of the same dozen or so companies buying ad space on all the youtube channels and twitch streams, a lot of those aren't publicly traded, at least not until someone buys the whole company.

I agree partially. I think you're right that business start-up costs have dropped on average; internet trade means fewer companies require (as) expensive property, and that there are now a huge range of IT packages that can make it much easier to achieve tasks at lower cost. I also agree that it is probably attractive for owners to keep the business private as long as possible.

On the other hand, we're often talking about start-ups which are small businesses: a firm like Uber still requires massive funding, and the private finance behind it was staggering - $10 billion or so. I seriously doubt any firm could have raised that sort of capital years ago. And as said before, it's likely Uber is going public not because it needs to, but because early investors have seen their stake multiply incredibly, and now want to cash out because Uber's growth is going to be far less dramatic and find a "new Uber".

This also doesn't really cover the fact of companies bought out by massive equity companies like Kohlberg Kravis Roberts (KKR). That's a private company owning over $150 billion worth of other companies, and there are increasingly a lot of these funds out there. Again, they're very adept at snapping up the most profitable stocks, and then they'll release them back into the wild once they're a lot less profitable. But this is to a large extent leaving lower return stocks that us plebs have our investment wealth in.

Pseudonym:
It sucks for retirement funds and such, I guess, though they often have such enormous amounts of money that they should be able to cope.

I have two pensions; the old one (which represents about 12 years of my earnings) is a private pension scheme that has gone through three or four rounds of its eventual pension returns being gimped whilst I've been signed up to it, because it hasn't been able to make enough money on the stock market. That a few thousands a year of my expected post-retirement income when I signed up to it shaved off. So when you say they have enough to cope, I am not convinced.

Agema:
Firstly, it suggests that the best growth (and highest returns) of youthful and successful companies are increasingly going to the initial owners and the "shadow banking system" (hedge funds, etc.) - the public are left with more mature companies that are more likely to be past their best and most profitable expansion. Now consider your pension plans are in publicly listed companies: so your old-age wealth is likely to be tied up in relatively modest performers. It means that a lot more wealth generation is concentrated in the hands of people who are already very rich and underpin the sources of alternative wealth.

Secondly, it's a remarkable loss of oversight over corporations, as publicly-listed companies have much higher standards of transparency. Consider for instance that the UK government has suggested worker representation on company boards - but what's the point, if lots of companies don't have a public board for them to be represented on?

Is this the new phase of capitalism?

I personally think there is a limit to how far this can go. And this simply because the public stock market still is the most liquid and transparent one. While investment funds & (very) wealthy business angels might like to buy up companies and keep them in their "private" hands the option to go public in order to sell their shares is quite valuable. So the market must keep on existing. If the public market starts to fade away too much this "option" would become less valuable as will be the willingness for private investors to invest in private companies.

On the other hand I have the impression there is an increase in interest among people to go through investment funds rather than invest their own money directly in stocks. Even people with moderate income are investing more in investment funds as banks are offering accessible access to them.

It's hard to say which way things will go and what will be the effect but i'm not afraid the public market will disappear or exist only for mature companies past their prime.

 

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