There’s been no shortage of Important Discussion recently on the subject of
what a panel
this afternoon grandly called America’s Global Competitiveness. Up on
stage were Hal Scott, of the Committee
on Capital Markets Regulation, and Arthur Culvahouse, of
the even more grandly-named Commission
on the Regulation of US Capital Markets in the 21st Century. Naturally,
they talked of McKinsey’s Bloomberg-Schumer
report (pdf) as well. What made the panel more interesting than most was
the presence of Michael Oxley himself, architect of the loathed
Sarbanes-Oxley Act. But the star of the show was actually the Carlyle Group’s
Robert Grady, who seemed to mainly be wearing his hat as chairman
of the National Venture Capital Association.
Grady was reasonably polite about Sarbox: It’s not the act in general that
he doesn’t like, just its section 404. What he and the panel were much less
happy about was the rise in what you might call lawyer-related expenses. Venture
capitalists used to be able to exit into the stock market even when the companies
concerned had tiny market caps: when Intel went public the entire company was
worth just $53 million, and when Cisco went public it was worth only about $250
million. "None of those three deals would be doable today, bc there’s too
much friction in the small-cap offering process," said Grady.
It turns out that the quantity of IPOs these days isn’t just low in relation
to the boom years of the late 90s. It’s also low in relation to the bust years
of the early 90s. Nowadays, the overwhelming majority of venture-capital exits
are in the cost-heavy M&A market, which says a lot about the cost of exiting
into the public stock market.
In any case, says Grady, if you’re a small-cap stock listed on the Nasdaq market,
you might as well be a private company for all the public coverage you get.
Fully 60% of the companies listed on Nasdaq have either zero or one analyst
covering them, which means that those stocks simply don’t have most of the advantages
of being public.
Grady has many non-Sarbox targets he blames for this state of affairs: stock-market
decimalization removed Nasdaq broker-dealers’ profits and therefore their incentive
to provide stock coverage; Eliot Spitzer‘s research settlement
also took analysts out of the sell-side and into the world of hedge funds.
I’m not sure that it’s a lack of research coverage that is preventing small
companies from going public. Maybe much of the reason is simply that they’re
worth more if sold privately. But there’s no doubt that regulatory and compliance
costs would make any company think twice about a US listing.