Investment Strategies
Investors Mustn't Lose Out From Shift To Private Markets - CFA Institute

There's a structural shift going on with more firms going private and taking longer to list on stock markets. This can cause investors problems.
A shift to private from public markets for companies is driven by
forces such as low yields on listed equities and reporting
burdens, but the transition creates headaches such as lack of
transparency for investors, a report warns.
Unlisted firms are not required to disclose as much timely
information to investors as listed businesses. The lower
reporting burden is a reason why many firms go off the stock
market. But in this era of shareholder activism and focus on
corporate governance, this shift can cause problems. It is, at
least at first blush, more difficult for private investors to put
pressure on a privately-held firm than a listed one because a
private firm doesn't publish so much material and they tend to be
less widely analysed. Academic research (January 2017) from
figures at Universidad de Chile, Florida International University
and Arizona State University concluded that firms were more
likely to de-list if confronted with having to comply with IFRS
reporting requirements. New EU regulations such as MiFID II,
affecting how firms pay for company research, may also add to
this problem.
The most recent entrant into this debate is the CFA Institute, the
global association of investment professionals. It
highlights the scale of what is going on. In a new report,
it says that firms stay private for longer and raise more
capital privately than in the past. The study estimates
that the median time before an initial public offering for
US companies has risen from 3.1 years in 1996 to 7.7 years in
2016.
“Individuals are being told to save for their retirements by
investing in the public markets at a time when companies are
increasingly preferring to avoid or defer a public listing. This
may deprive savers of the ability to participate in high-growth
business models and further promote the sense that markets are
being operated for the benefit of ‘insiders’,” Sviatoslav Rosov,
CFA, director, capital markets policy at CFA Institute, said.
While firms are still privately held, they are also able to raise
more capital: a median sum of $12.2 million was raised prior to
IPO in 1996, compared with a median of $97.9 million raised
prior to IPO in 2016. Related to these findings is the stock
buyback phenomenon – over $3.6 trillion more was spent on
repurchases than the amount raised from equity issuance between
1997 and 2015. While these trends are most pronounced in the
United States, other developed markets, including the UK and the
euro area, show similar shifts.
This isn't the first time that the phenomenon of a switch to
private from public markets has been noted. Before the 2008
financial tsunami, the clunky term "de-equitisation" was coined
by investment banks to cover the trend of public firms being
taken off the stock market via buyouts, often involving large
amounts of debt. The push to raise returns on equity also
encouraged firms to buy back shares and use debt financing
instead, adding to this process.
A combination of readily available private capital in search of
higher returns in a low interest rate environment, as well as
less capital-intensive new business models, has served to give
new businesses more funding options than ever before, adding to
the private market shift.
With firms pursuing IPOs at a later stage in their development
(or simply exiting the private markets via a trade sale to a
large public company), individual investors have fewer IPO
opportunities and could miss out on the returns provided by
rapidly growing new businesses while they are kept in private
hands. And, what does eventually become public often has much of
the value already extracted, the report warns.
The CFA Institute recommends a number of policy actions,
including requiring more disclosure and transparency in private
markets. It says stringent investor protections should remain in
place. Access to private market investments by pension savers
should be enabled through professional intermediaries.
On a separate but related point,
this publication has pointed to how wealth managers worry
that big inflows to private equity, debt and other markets create
potential vulnerabilities if there is an economic downturn.