The financial media cannot stop tweeting about the possibility of Dow Jones Index breaching the 20,000 mark. Rising stocks boost public confidence and sense of affluence. Yet, for the broad population, the rising market index doesn’t seem to generate widespread excitement. Why is that? A possible reason is: lower direct participation by the public in market activities, both in listed securities and new issues (IPOs).
|(Source: Wall Street Journal)|
An excellent write up last week in the Wall Street Journal (“America’s Roster of Public Companies Is Shrinking Before Our Eyes”) highlighted the declining pace of IPOs. Tech IPOs have been particularly lackluster. In 2016, technology companies raised only $4.3 billion from public markets, versus $19 billion from private equity investors. Overall, 111 companies went public on U.S. exchanges, raising $24.2 billion. That is the lowest dollar volume since 2003, according to Dealogic.
OK, the IPO volumes were low but the returns were decent in 2016. But why isn’t everybody excitedly talking about a great year? I sense that something has fundamentally changed; the small investors do not seem to care about stock markets anymore.
Twenty years ago, when I came to the U.S. as a student, the cooler room conversations constantly turned to tech stocks, impending IPOs, progress, and new wealth. There was palpable excitement, and seemingly every day a friend claimed a stock win. I also joined the excitement, investing a couple of hundred dollars from my meagre savings. And what a ride it was? America was leading the world to a bright future and we were all together in it. I didn’t have to be a Bill Gates or Larry Ellison to enjoy the fruits of American ingenuity. I could just buy shares and profit from unstoppable growth that was lifting all boats.
In the end, it didn’t matter that the 2001 market collapse wiped my small investments. What mattered was that the experience made me a stakeholder in the nation’s progress. I had found new superheroes—the innovators and the entrepreneurs—who were leading us to a new future, and allowed me to believe and participate in the ‘American Dream.’
Unfortunately, that sense of broad participation seems to be disappearing. There are several reasons for that. First, as the WSJ article points out, the number of public companies in the U.S. markets has declined by a third since 1997. Second, the number of individual investors in stocks has been declining precipitously. They are being replaced by hedge funds (often just computers) and other institutional buyers. Third, the number of IPOs is declining, especially in the tech sector that often generates the most excitement. Finally, the tech IPOs leave very little profit room for the public buyers.
The charts below illustrate this point. As the assets of private equity and sovereign funds have grown, they have channeled larger investments into private companies, reducing their motivation to go public. As a result, there are over 150 companies with private valuations of over $1 billion. Compare that to companies like Amazon, eBay, and Microsoft that went public at valuations below $500 million, and gave their shareholders a long ride to affluence as stocks gained thousands of percentage points. On the other hand, recent companies with relatively successful IPOs (with the exception of Facebook), such Lending Club and GoPro, have performed modestly and, even in the long run, their business models hold inherently limited upside.
This is not to say there are no exciting companies. Yes, there are plenty of game changers like Uber, AirBnB, Palantir and Snap, but the fruits of their growth have already been claimed by the big private investors. Now that they are already valued at tens of billions, their public listings would generate modest future profits for their public shareholders.
Hence, it is no surprise if the rising stock markets don’t spread widespread cheer anymore. The Silicon Valley wins are no longer directly shared by the broad population, except in a roundabout way through their pension funds. This may be deepening the sense of isolation, and broadening the divide between the ‘wall street’ and the ‘main street.’ Who can blame the working class if they feel left out from the march of progress to affluence?
What is really disheartening is that weak public access to Silicon Valley wealth may signify a permanent shift. The retail investors may never again experience the craziness of tech IPOs as they did in the late 1990’s.
Dow crosses 20,000? You got another unicorn? If only most of us would care!