Industry Looks For Ways To Boost IPOs
Traders Magazine Online News, October 6, 2011
Several financial market insiders have admitted that the industry is partly to blame for the decline of initial public offerings in the United States and are calling for reforms to improve capital-raising and create jobs.
The remarks came on Tuesday at a conference hosted by Baruch College during a panel discussion on IPO capital-raising in the global economy.
David Weild, the former vice chairman of NASDAQ who now heads capital markets at Grant Thornton, moderated the panel. He made clear his own feelings that financial markets exist primarily for capital formation, not just for trading.
“We’ve entirely lost sight of what markets are supposed to do, which is to raise capital and create jobs,” Weild said. “We’ve got to put Americans back to work, and we’ve got to put the global economy back to work.”
Though the Sarbanes-Oxley Act of 2002 has often been the “whipping boy” for the fall off in IPOs, Weild said the decline in public offerings predated Sarbox. He said the trend has been secular and long-term.
Huseyin Erkan, chairman and chief executive officer of the Istanbul Stock Exchange, said other nations used to envy U.S. markets for their ability to raise capital. Now, however, more IPOs are occurring in London and Europe, while the U.S. concentrates on boosting trading volume.
“Yes, trading is a part of the function of stock exchanges,” Erkan said. “But when you just concentrate on trading, you get a very blurry vision.”
Publicly held exchanges no longer go out and pitch to companies the benefits of listing, according to Erkan. Though the ISE is exploring the possibility of going public itself, Erkan said for the time being it is enjoying the benefits of being non-public.
Weild said though it was on his watch that the NASDAQ became a public company, in retrospect, demutualization might not have been a good thing. Profit-driven exchanges have to go after larger companies rather than reaching out to newer and smaller issuers, he said, and they often issue synthetics like exchange-traded funds rather than actual new stocks.
“It could be true that it’s incompatible with the best interests of the country to have stock exchanges be public companies,” Weild said.
Since it probably isn’t possible for exchanges to go back to being non-profit organizations, the industry will have to look for other solutions to the lack of IPOs, he added.
Several panelists stressed that the decline in public offerings is a serious problem. Barry Silbert, founder of the alternative assets exchange SecondMarket, noted that not only have the number of IPOs declined, but the time to go public has doubled and the average IPO size is now more than $500 million.
Gregory Wright, CEO of the investment bank ThinkEquity, said it has become quite expensive to go public in the U.S., keeping smaller companies away from the markets. Once they do list, these micro-cap companies largely get ignored as traders tend to focus on large-cap stocks, he added.
Though trading costs have gone down, that isn’t necessarily a good thing, according to Steve Wunsch, head of corporate initiatives at the ISE Stock Exchange. He said low trading costs have made it difficult for anyone to make money trading smaller names, thus drying up markets for smaller companies.
“It would be wise for all of us to step back a second and think not just of reducing the costs of trading but of developing a capital-raising community,” Wunsch said.
Joseph Hall, a partner with the law firm of Davis Polk & Wardell, said the government could have caused part of the problem by repealing the Glass-Steagall Act’s separation of investment banks and commercial banks. That allowed a lot of small brokers to be bought up by big banks, reducing niche trading, he said.
Grant Thornton’s Weild placed more of the blame on Reg NMS, which he said homogenized the markets to the detriment of new issuers. He said a one-size-fits-all market structure does not support smaller, newer companies.
The good news, Weild said, is that Washington seems to be paying attention. He noted President Obama has talked about making it easier for companies to go public and congress is considering measures to help private companies to raise money.
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