BACK in the 1980s, when the cult of the equity was at its peak, nobody had a bad word to say about listed companies. Three decades later, scandals and poor stock market performance have badly damaged their reputation, January’s FTSE 100 bounce notwithstanding. Many now prefer private equity. I was tasked by the Chartered Institute of Securities and Investment to make the case for the plc model; here are the seven points I made last night at a debate in the City.
1) Plcs allow the public to become capitalists. It is easy to buy shares, blurring the distinction between those who sell their labour and those who own the means of production. Mass stock ownership has destroyed Marxism.
2) Owning capital allows people to become wealthier. Wages tend to grow at the same rate as productivity and inflation, over time. House prices – ironing out bubbles – tend to go up at roughly the same rate as nominal GDP. Cash loses some of its value and bonds make a small positive return, at best. But equities with dividends reinvested go up much faster than any other asset class. Over a lifetime it usually makes sense to own shares.
3) A company with a great idea but with no backing from big funds can appeal directly to the public. This gives innovators another avenue to raise money, increases the number of commercial experiments and creates a more open-minded society.
4) Listed firms end up being far more transparent than privately owned ones, revealing all sorts of data. They follow far more sophisticated governance rules than privately-held ones (there are, of course, disastrous exceptions). There are often better checks and balances on boards, more scrutiny and accountability. And when or if these sorts of rules turn out to work well, private firms often follow them voluntarily to bolster their own performance.
5) Equity and debt are both valuable forms of financing. But across the economic cycle – and especially during downturns – equity is superior. It allows flexibility: dividends don’t have to be paid, unlike interest payments. A prevalence of equity-financed plcs can therefore have a positive macroeconomic impact, helping to reduce volatility.
6) Listed firms don’t require the same degree of shareholder involvement as private ones. You can buy 1,000 shares in a big company and be a passive provider of capital, free-riding on the decisions and knowledge of others, including activists. While this is usually seen as a disadvantage, it is also an advantage: not everybody has the time or skill to get involved. The mergers and (especially hostile) acquisitions market is vital: underperforming firms will be spotted, purchased and run better.
7) Regardless of whether stock markets are “perfect” in the technical sense, they are extremely good at aggregating all of the information and opinions of market participants worldwide. This information creation mechanism is an essential part of modern capitalism – and the price signals from stock markets help inform decisions made in the non-listed sector, including by venture capitalists, among private firms themselves and private equity firms that buy and sell businesses.
There are, of course, also several ways in which private equity is superior. Listed firms have plenty of drawbacks: complex governance rules has made them bureaucratic, they can be short-termist and principal-agent problems – with directors pursuing their own self-interest – can be crippling. But there is space for both models, and we forget the advantages of the Plc at our peril.