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OPINION OF THE WEEK: The New World Of Liquidity Events As IPOs Fade, Private Markets Grow

Tom Burroughes

16 February 2024

Official data this week showed 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’s 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 yet seem to have affected share prices much.

What is, perhaps, more concerning for wealth managers now 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,” and that gives advisors much to chew on. But perhaps what ought to be more on top of mind is where new wealth is being made, and whether the kind of liquidity events that create HNW clients are becoming scarcer.

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 , 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 has also gone down sharply in this same period.

As regular readers know, there’s been a long-term shift toward 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. What this also meant was that 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 something that 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 for the "event" to happen. 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.

An issue for financial capitals such as New York, London and Hong Kong is that these markets for unquoted firms, while they exist, aren’t as well known as the stock market. It also means that wealth managers need to be better placed, and informed, to understand when liquidity events take place 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 there’s a lot of pressure on them to try and inject more fizz into public markets. There is regular concern about the decline of listings on the UK stock market, and how to stem the IPO decline, for example. New York's Nasdaq appears in ruder health, but even this market faces headwinds. The wider concern, 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 policymakers want to make the financial vigor of markets a theme, they should spend more time working out how to make these hubs not just famous for stock markets, but private ones.

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

Some markets are starting to sprout. 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, looks like an important business area. Governments need to understand what’s going on and support it, or at least not mess it up with onerous rules and taxes. 

All that aside, it may be that the rumored “death” of public markets is much exaggerated. Public markets have challenges, but they have long-standing advantages, such as high liquidity, familiarity and visibility. The IPO is, and remains, a highly effective way for a business creator to realize his or her dreams of raising capital and funding expansion. They also provide firms with ways of offering staff an 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 that firms are held and managed creates challenges for wealth managers in working out how to reach the freshly minted millionaires when they come along. For the managers that can access these new HNW individuals, the revenue benefits are obvious.