The editor examines the shifting structures of how companies are held and how the move towards private from listed status affects the very type of "liquidity event" wealth managers track.

Official data released this week shows that the UK and Japan – two of the world’s largest developed economies – fell into a recession, as measured by two successive quarters of decline. There is bound to be a lot of commentary about whether central banks have misread the signals and might start to loosen policy soon.

Anyhow, the data doesn’t seem to have affected share prices much yet.

What is perhaps now more concerning for wealth managers is knowing where their next crop of clients will come from. True, as it is repeated ad nauseam, we are living in a period of multi-trillion dollar wealth transfer in much of the “West,” which gives advisors much to chew on. (It also explains the fascination with the NextGen” and what they want.) But perhaps what ought to be more on top of mind is where new wealth is being generated, and whether the kind of liquidity events that create HNW clients are becoming scarcer. (I also considered this question a while back after a reading a UBS report on billionaires.)

Initial public offerings are important liquidity events, but there are fewer of them today. IPO activity in 2023 stood at $121 billion, according to PricewaterhouseCoopers, falling from $173 billion a year earlier, and that 2022 figure represented a 70 per cent slump from 2021. Activity in 2020 was hit hard by the pandemic, with a total IPO fundraise of $330 billion. A different report from EY (December 2023), said that during 2023, global IPO volumes fell 8 per cent, with proceeds down by 33 per cent compared with 2022. The number of listed businesses is down too. An October 2021 paper by consultants McKinsey noted that the number of public-company listings in the US, for example, peaked in the mid-1990s, at nearly 6,000, but that number has fallen by about half over the past 20 years. The number of IPOs also fell sharply in this same period.

As regular readers know, there has been a long-term shift towards private markets for various reasons – firms that aren’t listed don’t face as many reporting and disclosure requirements, freeing bosses from the chore of having to keep shareholders happy with quarterly results, for example. When interest rates were almost zero – after 2008 in developed countries – private equity had a field day, using cheap debt to take public companies into private hands. Share buybacks flourished, increasing returns on equity. The party was fun while it lasted, but it also meant that balance sheets were laden with debt. Consequently, IPOs tended to be less of a feature of markets, and this particular route to riches became less evident.

With private equity, private credit, real estate and infrastructure, the liquidity event is the “exit” – often it does not happen for several years after the inception of a fund. Another liquidity event where private markets are involved is when a company owner or owners sell up to a fund, or another company. There can be a long wait. And within the private market space we have seen the rise of “secondaries” – the ability to buy and sell existing investment stakes in a fund. This helps liquidity and creates more options. These also count as liquidity events.

A concern for financial capitals such as London is that these markets for unquoted firms, while they exist, aren’t as well known as those on the stock market. It also means that wealth managers need to be better placed and informed to understand when liquidity events happen in these private forums. Managers need to improve their prospecting skills, and technologies that can track such developments must keep pace. That represents quite a challenge. This may also mean that large, integrated banks – combining corporate, commercial and private banking services – have an edge, because they can spot who has a business for sale, or who owns a portfolio that is due for an exit. 

For policymakers, such as UK Chancellor Jeremy Hunt and his foreign counterparts, there is a lot of pressure on them to try and inject more fizz into public markets. The decline of listings on the UK stock market, and how to stem the IPO decline is concerning. Sometimes all this is framed as the fault of Brexit. But the wider issue, as I see it, is that governments are not sufficiently alive to how to make the growing private market sector more accessible to end investors – including those in the mass-affluent/HNW space – and more open to business owners as well. If Hunt wants to highlight the financial vigour of London, he should spend more time working out how to make the City not just famous for its stock market, but for its private one too.

I think that wealth managers can play a part in conversations – including lobbying government where necessary – on how to improve accessibility to private markets, so that owners who want to sell or recapitalise a firm have more options, and investors can obtain more entry points. This is also good for wealth managers seeking to tap into a new generation of business owners who, for whatever reason, choose never to enter into the public market.

Some markets are starting to sprout. As reported here a few weeks ago, the stock market in Guernsey has developed a new platform for unquoted companies, making it easier – so the exchange says – to execute transactions quickly and less riskily. (This is also an example of how offshore centres are useful test beds for “onshore” ones.) In 2022, the London Stock Exchange announced a strategic investment and long-term partnership with Floww, a platform that connects investors with private companies.

Nasdaq in the US has its Nasdaq Private Market platform. Developing solutions for privately held firms to raise capital, and for owners to transact, appears to be an important business area. Governments need to understand and support what’s going on, or at least not mess it up with onerous rules and taxes. 

All that aside, it may be that the rumoured “death” of public markets is much exaggerated. Public markets have challenges, but they have longstanding advantages, such as high liquidity, familiarity and visibility. The IPO is, and remains, a highly effective way for a business creator to realise his or her dreams of raising capital and funding expansion. IPOs also provide firms with ways of offering staff the incentive to be a part of a profitable concern. The goal of “going to IPO” is a carrot to dangle in front of employees with share options as part of a compensation package. But the value of public equities is not always self-evident, and governments should look at regulations and tax as hindrances that can be reduced. 

Whatever happens, the changing ways in which firms are held and managed creates challenges for wealth managers to work out how to reach freshly-minted millionaires when they come along. For the managers who can access these new HNW individuals, the revenue benefits are obvious.