An analysis of trends US capital markets
It is an undeniable fact that the number of US public companies has declined considerably from the peak of 20 years ago. The decline, over time, is so significant that it has been cited as warranting policy action.
At EY, we are market leaders in advising entrepreneurs and guiding companies through the initial public offering (IPO) process. In order to inform policy debates, we believe policymakers should consider what lies behind the decline in the total number of US public companies, the attractiveness of US public capital markets today, the growing vibrancy of private capital markets and recent policy actions impacting capital formation.
More than half of the decline in the number of public companies since 1996 can be attributed to the post-dot-com bubble era of business failures and delistings that immediately followed an extraordinary number of IPOs. In more recent years, we find that a surge in private capital and the unique characteristics of many of today’s new companies have made it easier to grow outside the public equity market for longer than historically was feasible.
As policymakers debate further actions, we believe it is important to consider objectives and potential consequences. If policymakers’ objective is to generate capital formation, economic growth and job creation, it may be less important whether capital formation occurs in public or private capital markets.
If the objective is to provide retail investors greater access to early-stage high-growth companies, policymakers may face a choice between encouraging a faster pace for IPOs or easing restrictions of private capital market investment opportunities. There are risk trade-offs with either choice — whether due to companies going public too soon, or the relatively lower level of investor protections in the private capital markets.
Policy proposals are presently being debated based on these varied and often competing objectives, regardless of whether they are recognized.
As context, this paper also observes the relative strength and attractiveness of the US public capital markets. It is a mistake to believe that US companies regularly choose to conduct their IPOs outside US public markets. Last year, there were only two. While it is important to consider the “90% rule,” whereby 90% of companies across the globe choose to list on an exchange in the country in which the company is domiciled, among the small number of foreign companies that do list on an exchange outside their home country, twice as many choose US markets as those that list in any other jurisdiction.
We hope this paper will help inform and broaden the debate around the historical decline in the number of US public companies.
EY Americas Vice Chair, Public Policy
The capital markets landscape has changed considerably over the past two decades, including the expansion of private capital markets and related regulatory changes. Policymakers should be mindful of these changes as they consider their objectives for capital formation and the means to achieve them.
US public companies are fewer in number today than 20 years ago but much larger by market capitalization. They are also more stable, and delisting rates are much lower than immediately following the dot-com boom. In general, the total number of domestic US-listed companies has stabilized, especially post-2008, and the number of foreign companies listed on US exchanges has steadily increased over the same time.
A lower number of IPOs than during a boom-bust cycle should not automatically be viewed as problematic. There is ample evidence that today’s IPOs are creating stronger, healthier companies than at any time in the past. Growth companies choosing to sell shares to the public today are typically stable and have solid prospects for growth.
Today’s healthy IPO market is a stark contrast to the post-dot-com bubble years, when companies with uncertain business prospects that went public, often shortly after formation, later collapsed.
Some observers raise concerns about the prospect of companies leaving the US to list in international markets and foreign companies potentially choosing other markets over the US. Those fears, however, are not borne out by the data. Attracted to the stability and liquidity of US capital markets, foreign companies today overwhelmingly choose the US when they list outside of their home markets. Companies based in the US rarely elect to list elsewhere.
Increased market volatility stemming from interest rate and geopolitical uncertainty likely drove down IPO numbers in 2016. But one major and sometimes overlooked driver is the dramatic growth in private capital. Today’s emerging companies have more options than ever to find private financing for a longer term and in greater amounts.
Legislation enacted over the past five years has made it easier for emerging companies to stay private longer by relaxing certain regulatory requirements and encouraging more private financing. Investors with large amounts of capital — including traditional venture capital and private equity as well as large corporate and institutional investors — have turned to the private market in search of investment opportunities in high-growth companies.
In the following pages, we will discuss in more detail the public market, IPO market and private market trends impacting the number of US-listed companies today.
Public market trends: US companies get bigger, more stable
US listings dropped after the dot-com bubble, but the market has largely stabilized, and US public companies today are much larger than in the past.
During the dot-com peak in 1996, US listings hit a record high of more than 8,000 domestically incorporated companies listed on a US stock exchange with an average market capitalization of $1.8b in today’s dollars.¹ The number of domestic US-listed public companies decreased precipitously through 2003, with almost 2,800 companies lost because of M&A activity and delistings.² By 2003, there were 5,295 domestic US-listed companies.³ The loss of domestic US-listed companies in 1996–2003 represents 74% of the loss from 1996 to date.4