The wrong lessons are being drawn over worries on public equities

POLICYMAKERS around the developed world have long been troubled by the shrinkage in the number of listed companies. Initial public offerings have become more scarce while the ranks of existing quoted companies have been thinned by takeovers, many from private equity.

This has been the most obvious in the US, where the number of listed companies has halved since the start of the century. But now we have SpaceX, the biggest IPO the world has ever seen.

Wide-eyed investors put a value of more than US$1.8 trillion on Elon Musk’s rocket-based corporate adventure playground. Could this mark the end of the global IPO drought?

Certainly, other stellar American tech companies such as OpenAI and Anthropic are expected to follow. With artificial intelligence-related capital spending on data centres rising, there will be growing demand for fresh equity as well as debt.

There is also a surge of tech IPOs in China, with the likes of Moonshot expected to go public in Hong Kong.

In fact, a sea change is almost certainly under way. Fierce competition from emerging markets has in recent years tilted developed-world economies away from capital-intensive manufacturing towards services.

At the same time, the rise of private markets has provided a flexible alternative to public markets, with private equity growing from a US$500 billion to US$600 billion industry in the early 2000s, to be worth US$7.6 trillion in 2022, said consultancy McKinsey.

The result is that unquoted companies are staying private for longer.

The AI investment boom amounts to a return to a more capital-intensive developed world. But so far, Europe has been lagging, even the UK, which has a more vibrant tech sector than the big continental economies. And London has been losing tech IPOs to New York.

The UK’s longstanding process of de-equitisation reflects the fact that natural domestic buyers of equity, such as defined benefit pension funds, have cut the percentage of their assets in UK equities from 32 per cent to less than 2 per cent by 2023.

A key cause was a change in accounting standards, whereby companies were required to disclose pension fund deficits as liabilities in their balance sheets. Finance directors responded by urging trustees to adopt low-risk bond portfolios.

Deregulation is not the answer

On both sides of the Atlantic, policymakers have responded to the shrinkage in the stock of listed companies by loosening listing rules to reduce the costs and disclosure burdens of going public.

Yet, this is arguably based on a misdiagnosis. As Harvard academics Mark Roe and Charles Wang pointed out, the economic weight of US public companies has not halved.

Stock market capitalisation is up greatly over the past three decades. Profits are also up, as are revenues, investment and employment.

They conclude that policymakers are too focused on deregulation when de-equitisation partly reflects industrial concentration arising from loose competition policy.

The UK is different. Market capitalisation in relation to gross domestic product is in decline, unlike in the US, and the stock market has been less buoyant.

That said, the British emphasis on financial deregulation to help boost economic growth seems perverse in the light of the disastrous contribution of light-touch regulation to the great financial crisis of 2007 to 2009.

The policy preoccupation with protecting the City of London in its international role is also off-beam as far as listed-company shrinkage is concerned.

Michael Howell of CrossBorder Capital has long argued that the balance of the capital markets has shifted from being about money raising to more refinancing and capital redistribution.

So the primary equity market is really a sideshow in a world of huge currency, derivatives, debt and repo markets, not to mention insurance, commodities and the rest. In a recent paper, Alperen Gozlugol of the London School of Economics found little evidence of a funding gap for British companies.

Where policy is concerned, John Maynard Keynes had an acute sense of what mattered.

In A Treatise on Money, he said: “It is enterprise which builds and improves the world’s possessions... If enterprise is afoot, wealth accumulates whatever may be happening to thrift; and if enterprise is asleep, wealth decays, whatever thrift may be doing.”

The message for Andy Burnham’s government: ignore fee-hungry City lobbyists, and focus on tax and planning reform to encourage enterprise rather than financial deregulation and a race to the bottom in corporate governance. FINANCIAL TIMES