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The Public Equity Markets Are Not Dead Yet

Traders Magazine Online News, February 7, 2018

Nicolas Colas

The traditional initial public offering (IPO) is not yet dead despite competition from new sources of corporate funding emerge.

That’s the viewpoint of Nichola Colas, Co-Founder of DataTrek Research, who recently published a thought piece on the current state of the IPO market – based on the recent Davos confab. Colas reviewed a panel at the global conference and surmised after listening to several views that the IPO market isn’t dead yet, they continue to serve important purposes that private capital cannot replace.

Here is the feature, first published by Colas in his daily newsletter.

“In 20 years, there won’t be any stocks left to trade.” A client told me that last week, and there was little doubt he meant it. “Look at all the buybacks… all those great tech companies staying private… There just won’t be a stock market in a few decades.”

It is a point I consider quite often, so I was happy to see a Davos panel last week dedicated to the topic: “What Is Happening to IPOs?” There’s a link to the full video at the end of this note, but there is no transcript so we’ll review the substance of the panelists’ comments today. The speakers were:

•             Anthony Fernandes, CEO of AirAsia (a public company)

•             Matthew Prince, CEO of Cloudflare (a “unicorn” private company)

•             Tom Farley, President of NYSE Group

•             William Ford, CEO of General Atlantic (Private Equity)

•             Abidali Neemuchwala. CEO of Wipro (NYSE listed Indian Tech company)

•             Zanny Minton Beddoes. The Economist magazine, moderating

The easy points first:

#1. Panelists agreed that private companies have unprecedented access to venture capital and other sorts of non-public market investors. The need to IPO is therefore lower than in past cycles, even for companies that need “Scale capital” (i.e. $500 million and up).

#2. There was also broad agreement that the regulatory framework in the US is especially burdensome. It isn’t just Sarbanes-Oxley – companies fear the litigation risk that comes with being a US listed company in the form of shareholder class action lawsuits. The offset: US exchanges have access to the deepest pools of capital in the world.

#3. The panelists who actually run companies felt that public market investors are often too short term focused. There are exceptions, like Amazon (their example) and Tesla (our example), where public shareholders are patient. But generally, they aren’t. By contrast, private investors are much more patient capital, especially when it comes to projects that will take +5 years.

#4. Even with the surfeit of private capital currently available, good private tech companies regularly get valuation proposals from venture capital firms that are above (sometimes far above) their current public market valuations.

#5. Several panelists highlighted the historical volatility of public markets as another downside.

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