Thursday, April 28, 2011

The Best IPO Market on Earth

The U.S. IPO market has historically been an economic force. I recently watched this interview on Bloomberg with David Weild of Grant Thornton.

Weild argues that changes in market structure over the past decade or so has reduced the number of IPOs in the United States.

In his view, these changes have contributed directly to reduced U.S. economic prosperity and increased unemployment.

This report published in June of last year that Weild co-authored provides some background:


...since 2001 the U.S. has averaged only 126 IPOs per year, with only 38 in 2008 and 61 in 2009 - this compared to the headiness of 1991–2000 with averages of 530 IPOs per year. Companies can no longer rely on the U.S. capital markets for an infusion of capital, nor can they turn to credit-strapped banks. The result? Companies are unable to expand and grow - they are unable to innovate and compete - so they are left to wither and die, contributing to today’s high unemployment rate.

Market Structure is at Fault
The IPO Crisis is primarily a market-structure-caused crisis, the roots of which date back at least to 1997. The erosion in the U.S. IPO market can be seen as the perfect storm of unintended consequences from the cumulative effects of uncoordinated regulatory changes and inevitable technology advances - all of which stripped away the economic model that once supported investors and small cap companies with capital commitment, sales support and high quality research.

Casino Capitalism
the current stock market model forces Wall Street to cater to high-frequency trading accounts at the expense of long-term investors, and that Wall Street is increasingly out of touch with the interests and needs of long-term equity investors.
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"By killing the IPO goose that laid the golden egg of U.S. economic growth, technology, legislation and regulation undermined investment in small cap stocks, drove speculation and killed the best IPO market on earth." - David Weild

Ultimately, it has been the smallest IPOs that have taken the biggest hit.

...small IPOs - those under $25 million in size - suffered a rapid decline from 1996 to 2000. Interestingly, the small IPOs were seeing steady downward pressure at the same time that online brokerage was booming and displacing stockbrokers. 

Before the rapid decline started in the late 1990s, IPOs under $ 25 million in size were routinely in the 200-300 per year range.

The peak year since then?

Less than 30.

A serious deterioration in something that was historically a source of economic strength for the United States. 

The problem needs to be seen for what it is but, with the right reforms, I think there's no doubt it can be fixed.

Adam

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