The law of supply and demand is foundational in economics, yet the current dynamics in global stock markets seem to defy this principle. Despite a 14% increase in global share prices over the past year, the actual supply of stocks is contracting. This year has seen a notable slowdown in company listings, with equity issuance net of stock buy-backs plummeting to a negative $120 billion, the lowest since 1999. High-valued companies like ByteDance, Openai, Stripe, and SpaceX remain private, contributing to the dwindling public stock supply.
Jamie Dimon, CEO of JPMorgan, attributes this trend partly to the demands for environmental, social, and governance (ESG) reporting and the pressures of quarterly earnings reports. However, the broader reason is that company founders now have more funding options. Private equity, managing $8.2 trillion as of mid-2023, offers an attractive alternative to public markets, allowing founders to avoid the public disclosure requirements that are less favourable for companies rich in intangible assets.
The shift away from public markets raises concerns beyond company founders. Public markets are typically more transparent than private ones, which is crucial for investors and regulators monitoring financial stability. Moreover, as public markets diminish, retail investors find fewer opportunities in their investment portfolios, which might also dampen public support for business-friendly policies.
Efforts to revive stock markets have included legislative changes, like the JOBS Act in the U.S., which reduced disclosure requirements to encourage public listings. While initially boosting IPOs, the long-term impact has been mixed, often promoting lower-quality public offerings. To address transparency issues, regulators could impose stricter requirements on large private companies or reduce public disclosure demands to make public markets more appealing.
Yet, the ultimate revival of stock markets may depend on the actions of private equity investors. With $3.2 trillion in assets yet to be sold, these investors hold the key to reinvigorating public markets as they seek liquidity for their holdings. However, until these assets begin to move, the concerns highlighted by Dimon about the shrinking public markets will remain pressing.
Josep Ma Romances, President and Founder of Closa Capital.
