A couple of months ago I asked “what happened to IPOs.” I noted then that the decline in US IPOs had something to do with US regulation, including SOX and Dodd-Frank.
A new paper by Doidge, Karolyi & Stulz, The U.S. Left Behind: The Rise of IPO Activity Around the World suggests it has something to do with the rest of the world catching up. Here’s the abstract:
During the past two decades, there has been a dramatic change in IPO activity around the world. Though vibrant IPO activity, attributed to better institutions and governance, used to be a strength of the U.S., it no longer is. IPO activity in the U.S. has fallen compared to the rest of the world and U.S. firms go public less than expected based on the economic importance of the U.S. In the early 1990s, the declining U.S. IPO share was due to the extraordinary growth of IPOs in foreign countries; in the 2000s, however, it is due to higher IPO activity abroad combined with lower IPO activity in the U.S. Global IPOs, which are IPOs in which some of the proceeds are raised outside the firm’s home country, play a critical role in the increase in IPO activity outside the U.S. The quality of a country’s institutions is positively related to its domestic IPO activity and negatively related to its global IPO activity. However, home country institutions are more important in explaining IPO activity in the 1990s than in the 2000s. The evidence is consistent with the view that access to global markets helps firms overcome the obstacles of poor institutions. Finally, we show that the dynamics of global IPO activity and country-level IPO activity are strongly affected by global factors.
Put the two stories together: the rise of the rest of the world leaves the US less room for regulatory excess.
IPO’s no longer work for “smaller” companies. The expense of complying with the securities regs, the liability risks etc. just are not worth it when you can access private equity in almost limitless amounts. Of course PE demands a better deal than the public, but I generally recommend to my clients that staying private is the better course. 15 years ago, IPO was a reasonable exit strategy; now days I question the expertise of any startup management team that suggests an IPO is a likely exit.
I am on the board of a small insurance company in the Midwest with great management and great growth. About a year ago we were looking for capital and wanted to research an IPO. Because of SOX, the US was ruled out, but we were welcomed in London, that is until I reminded everyone that thanks to another US law, my stock brokerage account in the UK was in the process of being ejected because they could not afford to keep their US Persons as clients.
The upshot was that we could float an IPO in London but we could not have any of our customers and clients buy our shares because no UK stock broker would open an account for them.
So no IPO and no capital for expansion. All thanks to US laws.
Land of the Used-To-Be-Free!
Ive downloaded this and must read more than the abstract. I am very suspicious however.
1. who says “vibrant IPO activity is attributed to better institutions and governance” is that true of denver penny stock IPO’s?
2. who says “the quality of a country’s insitutions (as if that could even be measured)is positively related to its domestic IPO activity and negatively related to its global IPO activity”?
If this is the quality of the rest of the paper it is just another political diatribe so common today.
now I must get back to Tulane.