Number of annual IPOs has halved since 1997 as more companies chose private path

Globalization, the M&A market and the ability to stay private longer have contributed to a dearth of U.S. initial public offerings, executives at an SEC-New York University event said.

“There is an unprecedented level of private capital in the marketplace,” said Chris Cooper, global CFO of Sequoia Capital, who noted that globalization has not been mentioned when discussing IPOs. “There is unprecedented foreign capital coming into the marketplace.”

The “aggregation” of private capital is looking for a home, Cooper said. At the same time, many companies are keeping “unprecedented” amounts of cash on their balance sheets. Five technology companies, Apple, Microsoft, Alphabet, Cisco and Oracle, had amassed $504 billion of cash by the end of 2015, the Financial Times reported in May 2016, citing a report from Moody’s Investor Service. The $504 billion is nearly one-third of the total $1.7 trillion held on the balance sheets of U.S. non-financial companies, the story said.

Large companies are paying premiums to buy companies that would normally go public, Cooper said. “Activity that once took place in the public markets [is] taking place in the private sector,” said Cooper, who spoke May 10 at the “SEC-NYU Dialogue on Securities Market Regulation Topic: Reviving the U.S. IPO Market.”

Adam Smith, head of capital markets at KKR, said companies are opting to stay private longer, but “it’s not private forever.”

“Staying private longer gives companies the opportunity to grow and develop while private and, in some cases, pivot their strategies or technologies in more flexible ways.” said Smith. Both Smith and Cooper spoke on the “Panel on Regulatory and Other Market Influences.”

Steven Bochner, a partner at Wilson Sonsini Goodrich & Rosati, who also spoke on the regulatory panel, said the Jumpstart Our Business Startups, or Jobs, Act was helpful but the “benefits were incremental.”

The Jobs Act, signed into law in 2012, aims to ease the regulatory burden on smaller companies.

The law lets emerging growth companies file to go public confidentially. It also enables them to meet with qualified institutional buyers and accredited investors to gauge their interest before filing a registration statement with the SEC, Buyouts has reported. If investor demand turns out to be weak, the company can pull the filing without it ever being public. Companies also must have annual revenues of less than $1 billion to qualify as an emerging growth company.

KKR’s Smith said the Jobs Act was a “game changer” for the firm’s portfolio companies because it made IPOs “safer” and allowed them to “smooth things out.”

“The only thing I scratch my head at is the $1 billion revenue cutoff,” Smith said. “Why can’t this be for all companies?”

The data

Earlier, a trio of academics and an economist presented data on the decline in IPOs. The number of new issues has dropped significantly. In the 1990s, there were about 450 new issues annually; that number has dropped to 155, said Scott Bauguess, acting chief economist for the SEC.

Alex Ljungqvist, a professor of finance at New York University Stern School of Business, said the number of IPOs has halved since 1997. “There have never been fewer listed firms than there are today,” he said. “We should be seeing some new blood going to market but we’re not really seeing that.”

Rene Stulz, a finance professor at Ohio State University, said that while a very low number of new firms are listing, a very high number of companies are delisting. “Delisting is the important part of the story,” Stulz said. Companies, he said, are delisting because they are merging.

Roni Michaely, a professor of finance at Cornell University, said that raising cash is not the main reason companies go public. Firms go public when the markets are overvalued, he said.

Companies today go public to obtain liquidity for their investors, said Robin Graham, a managing director and head of technology, media and communications for investment banking at Oppenheimer Holdings.

Graham, who spoke on the panel “How to Revive the IPO Market,” said he wasn’t sure the IPO market should be revived. He said that in the 1990s, considered a boom time for IPOs, it was hard to figure out which public companies would survive. “We’re seeing fewer [but] more mature companies going public. This is good for investors.”

Action Item: To contact Cooper email him at cooper@sequoiacap.com

Traders work on the floor of the New York Stock Exchange on May 10, 2017. REUTERS/Brendan McDermid