Something weird happened in the last couple of decades. The number of companies undertaking an IPO (Initial Public Offering – the process of raising capital and listing on the stock exchange) in America went from boom to bumble. Not exactly, bust, but far from the hectic pace of activity in the 1980’s and 1990’s. There’s a few good reasons why this has happened, and the charts below provide some perspective on this trend, and insight into the business life cycle and the investment landscape in the USA.
The key conclusions and takeaways are:
-US IPO activity has been running at a relatively subdued pace after booming in the 1980’s and 1990’s.
-Part of the decline can be attributed to a lower number of foreign companies IPO’ing in America.
-Part of it may even have to do with the capture of the retail investment market by investment funds.
-A big part of it is likely down to the shrinking pipeline of new firms as the startup rate is near a record low.
-Finally, a key aspect is the apparent trend for firms to stay private, or opt for the private equity route instead of IPO.
- Annual Number of IPOs: The first chart is the one which prompted this article. It shows the annual number of IPOs in the USA from 1960 through to 2017. Probably the biggest standout on this chart is how after booming in the 1980’s and 90’s US IPO activity has settled in to a relatively stagnant pace. There are a few theories as to why this has happened, and the next 4 charts provide some perspective.
- Number of Foreign Company IPOs in the USA: Although only averaging around 10% of deal flow in the 1990’s, foreign company IPOs were booming in absolute terms, peaking at 75 in the year 2000 (or 20% of all IPOs in the US that year) – according to Jay R Ritter. As the chart below shows, in years subsequent the number of foreign company IPOs has been relatively less active, although averaging around a fifth of all US IPOs – with Chinese companies making a strong showing. So Foreign companies helped lift the numbers in the 1990’s and can explain a small part of the decline in listing activity.
- Listed Companies vs Investment Funds: Another very interesting trend is shown below: the total number of listed companies dropped from just over 8000 in 1996, to 4336 at the end of 2017 (according to the World Bank), interestingly enough the number of US equity investment funds (mutual funds, ETFs, and closed end funds) has gone from around 1000 to 4234 at the end of 2017 (according to ICI statistics). Yes that’s right, listed companies halved and investment funds grew 4 fold. So there has been a big shift in the relative number of stocks vs investment funds… and it’s getting very close to 1-to-1. Maybe this means investors prefer to invest via funds vs individual stocks, which from a demand standpoint could have an impact on companies’ ability to raise capital.in the retail market. Maybe a sort of crowding-out effect.
- US Business Failures and Startups: Probably one of the best explanations for the fall in IPO activity is the steady decline in the startup rate. While the rate of failures has also declined, the fall in the start-up rate means a smaller pipeline of potential future IPOs (you have to start somewhere). It’s an interesting trend, and seems somewhat counter-intuitive, but I guess with businesses like Uber and Airbnb some folk are effectively “in business” being basically self-employed, but at the same time, not really in business. I could be way off, but while the gig-economy is super helpful for start-ups, it may also be reducing the apparent amount of new businesses too. Something to ponder. The other thing I would wonder about is how cyclical this slowing in startups is – the data (from the US Census Bureau) only goes to 2015, and I would expect that the start-up rate would have improved as the economy has improved markedly since then.
- Listed vs Private Companies in America: Finally, this one is perhaps a little controversial given the dual-axes, but the key message is that the number of US listed companies has tapered-off, yet it seems the total number of firms has more or less stuck to trend (with the exception of 2008). What we can conclude from this is that more companies are choosing to either remain private, or go down the VC and or PE route (and even just get bought by other companies). Indeed private equity investing has become very much mainstream among asset allocators in the past decade or so, and could be a significant contributor to the case of the disappearing IPO. Certainly provides some perspective on the key trends in business ownership and formation in the USA, and indeed, the changing investment landscape.