There was an air taking risk off the table on Monday as gold rose, the dollar lost further ground against the yen, and yields on the 10 year US treasury fell again. The S&P 500 however finished the day close to where it started. The Vix index fell index modestly, indicating that at the end of the day Donald Trump’s failure to pass the healthcare reforms was more of an excuse the market was looking for, than causing a material change of sentiment amongst equity investors. The Trump reflation trade may have legs. Interestingly the odds on three hikes this year by the Fed are now being given a less than 50% chance by the market, post this minor correction.
Financial Times columnist John Authers, who is often quoted in these articles for his insights, provided another interesting article on Tuesday. Much is often made of the valuations currently of equity markets, in particular the S&P 500. Generally, if an asset becomes rarer the valuation goes up, and reading Mr Authers article, this may go part way to an explanation of current valuations. At a time when anecdotal evidence suggests there is still a healthy fear of equity markets, the available asset class is shrinking. Either as companies retire equity and replace with debt. Companies are being delisted possibly through merger or acquisition. On top of this the number of public offerings is as low as it has been for 40 years.
The last one is an interesting development, listing a company can have two real benefits. Access to greater pools of capital, and allowing employees or early stage investors the opportunity to realise some of their investment capital. As Mr Authers points out, normally when markets are running high investment banks are snowed under with directors looking to raise capital in the public markets. Taking advantage of the improved valuation they might get for their company.
So why is issuance lower? The obvious one could be the increased burden and cost of turning public. When a CEO runs a private company, he (or she) is pretty much free to do just that. As a public company, he is compelled to provide continual updates on the current performance of the business. Be expected to be on road shows, and often be at the whim of an analyst who may not fully understand the companies model. Meeting shorter term targets becomes more imperative as investors also are judged on shorter term performance targets.
The role of CEO of a public corporation is comparable to that of a football manager, his tenure can be a short one as the fans (shareholders) turn quickly against their style of management. This could be a further deterrent.
Other reasons could be with interest rates so low, the raising of capital is more attractive via the debt market. However, the draw back to this is existing shareholders don’t get the opportunity to realise part of their investment.
I would love to hear Mr Authers insights as to why he believes the IPO market is shrinking.