RPT-BREAKINGVIEWS-IPO revivalist push faces private equity hurdle

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Pranav Kiran

TORONTO, Dec 11 (Reuters Breakingviews) - Paul Atkins has a mission to make initial public offerings great again. The U.S. Securities and Exchange Commission chair wants to loosen rules that he says keep smaller firms out of public markets. But the real culprit behind shrinking IPO numbers is the ever-stronger alternative of private capital. His effort is outmatched by the scale of this shift.

Regulations do pose some burden. The complexity of requisite disclosures and governance procedures has indeed ballooned, costing the median U.S. firm 4.1% of market capitalization, according to academics Michael Ewens, Kairong Xiao, and Ting Xu.

That’s probably why the SEC has already codified laxer standards for pipsqueak filers. The JOBS Act, passed in 2012, gave startups under about $1 billion in revenue more breathing room on disclosures. Academic research estimates it sparked a 25% jump in IPOs. It makes sense that Wall Street's top regulator wants to expand on these.

However, the big decline in public listings that Atkins bemoans can ironically be explained by past deregulation. The 1996 National Securities Markets Improvement Act made fundraising easier by exempting unregistered securities from state rules and lifted caps on the number of investors a private equity or venture capital fund could accept before having to register under the Investment Company Act — dodging various heavy regulatory fetters.

The result was explosive growth in private markets. U.S.-focused buyout and venture funds together now hold over $2 trillion in assets, according to Preqin.

Venture capital played a crucial role in America’s digital revolution, minting giants like Alphabet GOOGL.O, Meta Platforms META.O and Uber UBER.N. With so much money flooding it, VC backers can now keep a company going for far longer before having to turn to public investors for capital. The median age of a company making a public debut has increased 37% since the 1980s, Jay Ritter at the University of Florida found.

Private equity has a cleanup effect, buying mature, cash-rich firms and taking them private. Buyout shops increasingly sell to each other or into so-called continuation funds that extend hold periods. With so much capital chasing deals, it’s actively competing against IPOs as an exit option.

Despite it all, stock exchanges are still growing. While there are 25 times as many PE- and VC-backed companies as listed ones globally, their total capitalization is just 12% of public equity markets, according to HarbourVest Partners.

U.S. markets are already the global benchmark, attracting issuers from nearly 50 countries. Its share of prestigious listings is only rising. It’s hard to fix what fundamentally isn’t broken.

CONTEXT NEWS

U.S. Securities and Exchange Commission Chairman Paul Atkins said on December 2 that the agency should reform rules requiring disclosure of executive compensation and move to reduce the legal burdens facing smaller companies.

Atkins also said the burden of complying with SEC regulations was a barrier to raising capital for smaller companies.

(Editing by Jonathan Guilford; Production by Maya Nandhini)

((For previous columns by the author, Reuters customers can click on KIRAN/pranavkiran.t@thomsonreuters.com))