The City, just like every other tight-knit profession, observes its own omertà: an unwritten code that, whatever arguments may break out within the community, you don’t make them public.
So when major institutions start falling out with each other in a very public way, it’s time to take notice. Last week, the fund manager BlackRock launched a biting attack on the way initial public offerings (IPOs) were handled. The fees, they complained, were outrageous. The bankers were actively deterring new firms from coming to the market. The point was a good one – and long overdue.
In a letter sent last week, Luke Chappell and James Macpherson, two of BlackRock’s most senior UK executives, laid into the banks arranging new listings. “It is in all of our interests for London to remain at the centre of a thriving capital market,” they wrote. “We are always keen to invest in companies that need equity to develop their businesses, particularly in opportunities that we are currently unable to access. However, recent developments in the IPO market have, at times, been frustrating.”
Specifically, they accused the banks of being too aggressive on price, demanding fees that were way to high, and not allowing fund managers enough time to get to know a business before they invest in it. Given that BlackRock, with assets under management of more than £2bn, is the single largest investor in the British stockmarket, its complaints will have carried plenty of weight.
The record of recent IPOs suggests they are onto something. Glencore, a mega-IPO that, because of its size, was always going to vault straight into the upper reaches of the FTSE 100 index, managed to get its IPO away. But the shares immediately sank below the issue price. Betfair, the online betting firm thatstaged one of the biggest IPOs of last year, jumped to a premium on its first few days of trading, but is now well below its issue price. Other new issues have had to be pulled because the demand for the shares just wasn’t there.
That matters. When fund managers buy into an IPO they want to see the share price going up steadily for at least a couple of years. Everyone understands that the prospects for a firm can change. But if the idea becomes fixed in investors’ minds that IPO prices are unreasonably hyped-up, and whoever gets suckered into buying into them is going to end up losing money, then it won’t be any great surprise if they steer clear of new issues.
The figures suggest that’s already happening. The numbers of new companies joining the stockmarket is, as a percentage of the economy, declining. According to the World Federation of Exchanges, the number of quoted companies has been roughly static – at around 45,000 businesses globally – since 2005. In the Americas, it is going down, while in Europe it is only going up fractionally (0.1% over five years). Since the world economy has been expanding at around 4% a year, apart from therecession of 2009, you would expect the number of quoted companies to be growing at 4% to 5% annually. But it’s not. Some high-profile names aren’t even bothering with the hassle of a quotation. Facebook, for example, chose to sell shares privately.
So, overall, the number of listed companies is going down, or standing still. Yet the number of share trades has roughly doubled in this period. Hence investors are, in effect, trading less and less ever more frantically. That is not a happy situation for the long-term health of a market for two reasons.
First, new companies are the lifeblood of any bourse. They are where real growth is going to come from. If they can’t be bothered to join the stockmarket, or they find the process too expensive, then the main indices are just going to become a collection of older and older businesses. They won’t be able to grow as fast as the economy – and eventually investors will have to find some other way to buy into corporate growth. Next, raising capital for companies is what a stockmarket exists for. If they don’t do that, then they really are, as their critics maintain, just casino tables without the bright lights and cocktails. Without any real purpose, nobody should be surprised if they get regulated out of existence.
The core problem is that the investment banks have forgotten how to build and maintain long-term relationships, both with the companies they bring to the market, and the investors who buy shares in them. So a change is due. Sponsoring banks should take a lot more time getting to know, and price, the businesses they are bringing to the market. Ideally, the shares would deliver a steady 10%-15% a year for at least three years after the IPO. Investors would then feel reasonably confident the IPO was worth supporting.
Perhaps the main investment banks don’t want to bother with that. They may have become so immersed in a short-term, quick-profits culture that they no longer find it possible to build relationships over anything like five years. If so, new players should emerge to take their place – because if they don’t, eventually equity markets are going to fade away.