Duncan Lamont, head of strategic research at Schroders, looks into why companies are abandoning the stock market in their droves, despite it being the main place where savers have put their money for long-term growth.
Duncan Lamont, at London-based investment manager Schroders, has highlighted how the number of companies on the main market of the London Stock Exchange has plummeted by 60 per cent since 1996, from 2,700 to 1,100 at the end of 2022.
“The figures look even worse when viewed over a longer time frame,” Lamont said in a statement. “There has been a near-75 per cent fall in the number of UK-listed companies since the 1960s. Individual countries like to beat themselves up about their failings on this front – self-flagellation is a popular British pastime – but the reality is that it has been a global trend,” he continued.
“Europe’s downturn started later, but Germany has shed more than 40 per cent of its public companies since 2007. Even the US, often admired from afar, has experienced a 40 per cent drop since 1996. This is even after allowing for the US boom in initial public offerings (IPOs) in 2021,” Lamont added.
“Too few companies have wanted to join the stock market, and a steady stream have left, mainly after being bought. In the US, over 300 companies a year, on average, joined the stock market between 1980 and 1999. Since [then], there have been only 129 a year. In the UK, the number of new listings dropped after the financial crisis and has failed to pick up meaningfully since,” he said.
“Money raised in UK IPOs has also been on a steady downtrend. For UK-based companies this trend set in in the early 1990s. For overseas companies, it has been in the past 10 years. Even those that have joined the stock market have waited longer before doing so. The average age of a US company on IPO increased from eight years in the two decades until 1999 to 11 years since,” Lamont continued.
“The net effect of all of this is that the stock market now provides exposure to a dwindling proportion of the corporate universe. For example, fewer than 15 per cent of US companies with revenue over $100 million are listed on the stock market. Ordinary savers are largely deprived of the opportunity to invest directly in the rest,” he added.
Why such change?
Lamont believes that there are two main explanations for this change: “First, the cost and hassle of being a public company has increased. Other issues counting against public markets is the cost-benefit trade-off include loss of control, unwanted transparency, perceptions around short-termism – and more. The other important reason why companies have turned their back on a stock market listing is that another source of financing has become more widely available. One that comes without many of these perceived drawbacks: private equity.”
Lamont estimates that private equity has grown from a $500 to $600 billion industry in the early 2000s to be worth more than $7.5 trillion in 2023. “With this growth, the size of the cheques the industry can write has soared. It can now finance companies to a much later stage of their development than before. When Google (now Alphabet) joined the stock market in 2004 it had only raised $25 million from private markets beforehand. Today’s biggest unicorns can raise tens of billions of dollars,” he said.
Lamont believes that its unlikely that stock market investors would get the chance to invest in Google at such an early stage today.
“Companies are not only attracted to private equity for the money. The best private equity investors also have deep sector expertise and take a much more hands-on approach to driving value. They are sought after by investors and companies alike,” he said.
“The stock market is the cheapest and most accessible way that savers can participate in the growth of the corporate sector. Private equity has historically been the stomping ground of large institutional investors – not ordinary savers,” he added.
But, with companies choosing to stay private for longer, he thinks that investors who focus solely on the stock market are missing out on an increasingly large part of the global economy. “Many of these companies are in high-growth, disruptive industries. If high-quality companies find little reason to go public, the risk is that over time the quality of the public markets deteriorates. Should this occur, returns from public equity markets in aggregate could move structurally lower relative to private markets,” Lamont said.
Where able, he believes that investors need to broaden their scope and embrace private assets to avoid missing out. But to date, he said this isn’t something which has been easy for ordinary savers to do.
A regulatory hope
“In the UK and Europe, regulators and providers have responded by establishing new investment vehicles known as the ELTIF (European Long-term Investment Fund) and for UK investors the LTAF (Long-term Asset Fund). Both aim to give individual savers access to a wider range of investments, including private markets,” Lamont continued. While this should be welcomed, he also thinks that the appeal of a stock market listing relative to private ownership needs to be improved. “In the UK, this has been long-recognised as an issue – as long ago as in 2012, the Kay review highlighted the ways the UK equity market was failing to serve investors and companies and it is now gathering steam,” Lamont concluded.