AN INITIAL public offering (IPO) should be a milestone in a company's existence, representing the moment it begins to fulfil the promise demonstrated as a young entity. Yet, companies are delaying this moment, choosing instead to remain cloistered in private hands.
The debate is fierce over why more companies are postponing their public debuts. Has it become suddenly harder to function as a public company? Has it become far easier to raise capital privately? The truth is likely a combination.
Unfortunately, the debate has focused more on cause than effect. Companies that stay private for longer help exacerbate the wealth divide in the US economy; weaken the governance and discipline of emerging companies; and foster valuations that may be undeserved. The most ominous of these impacts is the growing bifurcation of wealth. Companies today might wait a decade or more before going public, reserving their best growth years for the wealthy individuals and institutions able to invest in private rounds.
The US was built on the premise of being the land of opportunity. Capitalism was adopted and supported because it was a story of shared success. Founders and business leaders could leverage capital markets to grow their businesses and their own wealth while creating jobs and delivering opportunities for others to invest.
Now, public investors increasingly play a role only in the company's second act, when the greatest growth prospects have come and gone. This threatens to redefine the fabric of our nation. It should not surprise us if support for capitalism wanes when growth and opportunity are available only to a select few.
Another consequence of staying private longer is the development of bad habits within companies that lack the discipline and transparency our public markets require. Founders can gain outsized influence that may lead to questionable governance structures. Dual class voting structures become more relevant to founders as their ownership stakes are diluted through multiple private funding rounds.
Private market valuations may not even accurately represent a company's worth. The deep pool of investors in public markets gauge value differently than the opaque private process, which can often mask issues that leave public investors suffering as true valuations are established.
To be sure, the issue of companies staying private is a complex one, but there are a few things that all parties need to keep in mind. First, at a moment when we are asking chief executive officers to focus on purpose and all stakeholders as much as profit and shareholders, founders and their early private investors should also consider the social good achieved when their companies are open to public investment and subject to the discipline of public markets.
MAKING REAL PROGRESS
Second, the US Securities and Exchange Commission (SEC) has made real progress in addressing some of the obstacles for public companies. Rather than opening private markets to retail investors, which is an idea being mulled in Washington, the SEC should build on its progress by reviewing disclosure requirements and regulations that may be unnecessary for investor protection but create more drag on issuer flexibility.
Third, shareholders have the ultimate vote on the companies that they own. They should reward good behaviour by investing in well-governed organisations.
Fourth, public exchanges must continue to advocate for policy and regulatory changes as well as create innovative ways to access capital, such as direct listings, to attract companies with evolving needs.
Capital markets are one of the pillars on which our nation stands. They have long been the envy of the world, but we cannot take that status for granted. We all must play our part in assuring that they provide access to the very best opportunities for all, regardless of their wealth or status. WP
- The writer is president of the New York Stock Exchange and president of the NYSE Group