In their 2008 whitepaper, “Why IPOs are in the ICU,” (BVWire™# 75-3), authors David Weild and Edward Kim (both from Grant Thornton) charted the slow demise of the IPO market. The pair recently updated their study in “Market Structure is Causing the IPO Crisis.” Among their current findings:
- The IPO crisis has worsened. “The first six months of 2009 represents the worst IPO market in 40 years.” During that time, only 12 companies went public in the U.S. (and only eight of these were U.S. companies). The median IPO was worth $135 million, compared to twenty years ago, when it was common to close IPOs at $10 million. “Given that the size of the U.S. economy, in real GDP terms, is over 3x what it was 40 years ago, this is a remarkable and frightening state of affairs.”
- Main Street is hurting. Historically, up to half of all IPOs involved enterprises outside the VC or PE realm. “The lack of an IPO market is thus hurting small business by cutting off a source of capital that in turn would drive [local] reinvestment and entrepreneurship.”
- Market structure is to blame. A “perfect storm” of factors caused the current IPO crisis, consisting of uncoordinated regulatory changes, the emergence of online brokers, and the decimalization of the U.S. securities exchanges—“all of which stripped away the economic model that once supported investors and high-quality research.”
As a result, the public markets operate a form of “casino capitalism,” the authors say, that caters to high-frequency trading at the expense of long-term investors. Their radical solution to the broken legacy system: an “opt-in” stock market, subject to SEC oversight and run separately or as a segment of the NYSE or NASDAQ. Or will a secondary market for private securities (as reported last week’s ‘Wire) offer a platform for “private” IPOs? Consider: Pluris Valuation Advisors just announced a new Palo Alto office and the launch of Pluris DLOM Database™, based on data collected from private sales of illiquid securities. Stay tuned…
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