The still relatively new SEC Chair, Jay Clayton, has let it be known that one of his missions is to improve the health of our IPO market and, thereby, to improve our capital markets generally. His minions – including a senior SEC Staff member I recently heard in Washington – have been spreading this gospel according to Jay.
I wish him (and them) luck, but I wonder if the mission is impossible. I’m thinking of some recent articles, including one by the inimitable Andrew Ross Sorkin entitled “Fixing the ‘Brain Damage’ Caused by the I.P.O. Process”, that makes the resuscitation of IPOs seem unlikely. As if the title weren’t off-putting enough, one of the executives quoted in the article described his company’s IPO process as “a way of living in hell without dying”. Not a good start.
I’ve handled some IPOs in my time. From a securities lawyer’s perspective, they are wonderful transactions. They are the best way imaginable to get to know a company and its business, to understand what makes it tick and succeed, and to get to know its hopefully brilliant management team. But I also know that IPOs are bone-crushing, time-killing behemoths that occupy all or nearly all of management’s time, distracting it from attending to mission-critical day-to-day business matters when they likely need the most attention.
The SEC and Congress are attempting to ease the pain of the IPO process by coming up with various reforms, like enabling all companies, not just “emerging growth companies”, to file their IPO registration statements confidentially. Others, including another entrepreneur mentioned in the Sorkin article, is trying to achieve public company status by forming a “SPAC” (special purpose acquisition company) that would do reverse mergers with Silicon Valley unicorns, taking them public “through the back door”.
Perhaps these are solutions (OK, partial solutions), but they only address the process of going public. Being public is a whole ‘nother challenge that requires businessmen and women to get used to living in a fishbowl, and a fishbowl with some nasty critters in it to boot. I’ve worked for a number of companies that have made (or tried to make) the transition from family or other private ownership to public ownership, and it’s not a pretty sight. People who’ve grown up – sometimes literally – in a family enterprise have difficulty when someone tells them “no” – or “yes, but you have to disclose it”. If I had a nickel for every time one of them told me “But nobody told me I’d have to do that when we went public”, I’d have lots of nickels.
The rules governing disclosure by public companies also don’t help. When you have silly rules like those relating to conflict minerals and CEO pay ratios (to name just two of many), it’s understandable that US companies considering IPOs decide to pursue other routes. At a minimum, it’s interesting that in a recent article about the great IPO market in Asia, no mention is made of its robust (i.e, silly) disclosure rules.
These pressures, along with short-termism (which, despite rumors to the contrary, is alive and well), empowered investors and activism (which is far more prevalent among smaller companies than large ones), is enough to make a family business owner keep it in the family.
A possible partial solution to the latter dilemma has been offered by something called the LTSE, or Long-Term Stock Exchange (also mentioned in the Sorkin article, and in a more recent piece in The Wall Street Journal). The concept here is that the longer you own the stock, the more voting power you have. This approach has been discussed for years, and I’m glad someone it trying it on for size, but you’ll forgive me if I’m skeptical.
Another factor – and one that the SEC has not really addressed – is that the private capital markets are incredibly liquid and are providing money that used to be obtainable only through an IPO. And while the private markets are not available to moms and pops and widows and orphans, (a) maybe that’s not such a bad thing and (b) they are, nonetheless, part of our capital markets, too.
Finally, another recent article suggests that the dearth (death?) of IPOs is a good thing, because it demonstrates that the markets really are efficient.
I’m not sure where this leaves us, but to answer the question posed by the title of this posting, I wouldn’t bet my life on it.