John St John, Founder of STJ Advisors
Retail participation in initial public offerings (IPO) and equity offerings in Europe is lower than other major markets (US/China/Japan) and is getting lower. Should we worry and is this a “bad” thing? Also, post the meltdown, the European IPO market has been the slowest to recover. Are these two facts correlated?
Clearly, the economy generally benefits from a healthy and functioning IPO market – it provides growth capital to companies and exit opportunities for investors and entrepreneurs.
Most companies would prefer broader share ownership and greater liquidity in their shares – clearly more demand helps drive price and greater liquidity encourages broader ownership. Generally, retail should also lower volatility (because retail is less price sensitive and can take counter cyclical investment decisions) which, again, most companies and their shareholders would welcome.
So, in theory at least, we should, as a society, wish to encourage direct retail investor demand in the market as it broadens and deepens demand, improves liquidity, dampens volatility and improves the availability of the market for companies wishing to raise capital.
Let’s take a look at the facts. In all of the largest IPO markets outside Europe, namely US, China and Japan, nearly all IPOs since 2009 have a retail tranche. In the UK and Europe only 38 and 66 per cent of offerings respectively are available to retail investors and of these the average allocation is less than seven per cent.
More and more, growth companies are listing in markets other than the UK and Europe. Although the US market’s highly specialised institutional growth stock investor base provides an important attraction for European tech issuers, various academic papers have shown that retail investors are allocated 15- 25 per cent of US IPOs.
As with any auction, this level of additional incremental demand will tend to optimise results for the seller and increase the attractiveness of the US to European growth company issuers. The more this happens the more European markets will be denuded of growth stocks and simply become a repository of large cap or yield stocks.
Ironically, stock exchanges are unlikely to do anything to try to change this trend as their principal customers are investment banks and institutions/investors. So it is really down to governments to do something about this.
In the 1980s the Thatcher government started a global revolution by privatising state owned assets and selling more than 50 per cent of these offerings to retail investors in what became known as mass retail offerings.
By creating larger, more liquid stock markets available to retail investors, the whole economy benefited. The retail investors made profits which were either recycled into other “growth” investments, or spent the profits which helped drive growth in the economy. At the peak there were 8m retail investors in the UK.
As the US Treasury’s IPO Task Force noted: “From 1980 to 2005, firms less than five years old accounted for all net job growth in the US. In fact, 92 per cent of job growth occurs after a company’s initial public offering…” So if governments want to drive growth they could do a lot worse than trying to encourage Sid (the retail investor) back into the market.