In the US, the number of publicly listed firms has been on the decline for many years now. The number of public firms listed on the London Stock Exchange has experienced a similar drop in the number of listings. This phenomenon has rattled policymakers in the UK as they are now seeking ways to improve public markets and reverse the trend.
The reasons for this decline are relatively obvious. The regulatory burden and affiliated costs, which are ongoing year after year, have pushed companies away from listing shares on an exchange. This, and the fact there is an ocean of private capital ready to jump to the head of the queue to fund promising private firms.
One reason to become a public firm is to provide an opportunity for early shareholders to exit some or all of their positions. A recent article on CI highlighted how Stripe allowed employees and former employees to sell their shares in private transactions without becoming a public firm. Stripe is valued at around $91 billion.
Alexander Green, Co-Founder and CCO of Globacap, a private markets platform that also enables secondary transactions, shared a comment with CI that Fintech pioneers Stripe and Revolut have both leveraged private markets for raising funds and providing liquidity. Green sees this as emblematic of a “key shift” as IPOs are no longer the primate route to liquidity.
“These firms are enjoying the strategic flexibility and investor advantages typically associated with a publicly listed company, all while keeping their shares completely private. This means that investors are able to gain access to liquidity early, locking in returns and gains without having to wait for the company to go public. Companies keep complete control without the need for extensive reporting and compliance requirements, saving a great deal of time and effort,” said Green.
He added that a clear path to liquidity offers many benefits helping companies to attract and retain talent by utilizing equity based compensation. These firms can also gain from improving “valuation clarity” as markets are the best way to value a firm.
“Secondary share sales also bolster investor confidence and improve strategic flexibility as shareholders retain the ability to adjust their positions in response to changing business conditions,” Green added.
He believes that innovation in technology can also automate compliance which is expensive for firms that are issuing or allowing secondary share transitions. Tech can help “further smoothen out the process.”
Increasing activity in private markets is driven by demand. Unfortunately, in some situations, smaller investors may get lost in the shuffle and cut out from accessing promising investment opportunities. In the UK, policymakers are working on creating a more robust secondary market for private shares called PISCES but it may exclude smaller investors. In the US, policymakers have discussed options, and some paths are available for exempt offerings, but the ecosystem could be far better.
