By Jeff Reeves, MarketWatch
Paramount/Courtesy Everett Collection
The average investor would be forgiven for thinking that the stock market is a great place to be in 2019. But discerning analysts should see that below the surface, there are some serious structural problems brewing on Wall Street.
Sure, there’s a lot going for the little guy these days, prompting talking heads to crow that “ joining the party has never been cheaper or easier .” Commission-free trades are becoming standard across the industry, and thousands of low-cost ETFs offer sophisticated portfolio strategies in one-stop funds. And, sure, maybe you’ve made a bundle in the past decade of this bull-market run, as the S&P 500 Index /zigman2/quotes/210599714/realtime SPX +1.45% continues to set new highs.
Late-stage IPOs are a way to transfer the investment risk away from private investors and siphon cash out of public investors’ pockets.
But if you’re only looking at absolute returns, you’re missing the point. Because relative returns of public stocks versus private markets don’t even come close to comparing.
Consider a recent McKinsey report that says private-equity investment values “have grown more than sevenfold since 2002, twice as fast as global public equities.”
The bottom line is that retail investors relying on publicly traded stocks are increasingly missing out on the incredibly lucrative and increasingly secretive private markets, taking on more risk, suffering smaller returns and ultimately being shut out of the true growth potential of the American economy.
Think about that, before you start patting yourself on the back for booking your latest commission-free trade.
IPO drought leaves out you and me
From 1980 to 2000, the U.S. stock market averaged more than 300 IPOs a year. This doesn’t just include a dot-com peak of 676 in 1996, either, with an impressive tally of 451 IPOs way back in 1983. In 2018 there were just 190 IPOs, and with about 130 companies that went public this year through September, the pace is slightly lower than it was last year.
This is not a question of quality over quantity, either. A recent Goldman Sachs analysis forecast that less than 25% of companies going public in 2019 will report positive net income this year. That’s the lowest level since the tech bubble.
Worse, as we learned with Facebook /zigman2/quotes/205064656/composite FB +0.52% , many modern founders wouldn’t ever enter public markets if they had a choice. Mark Zuckerberg took great pains to avoid SEC rules that eventually demanded his firm go public, including raising $450 million from Goldman Sachs in 2011 via a deal that was structured in a way that all of those private investors counted as a single shareholder. It was a nice trick, and one that valued the company at $50 billion on private markets.
Sure, Facebook’s stock has been “good” to investors over the past few years. But keep in mind that when the social-media giant went public in 2012, it entered markets at a $100 billion valuation. Not a bad return for Goldman Sachs /zigman2/quotes/209237603/composite GS +4.13% over 12 months or so!
The bottom line is that these firms don’t need public money, save to fund the exit of insiders and private investors. Look at Uber /zigman2/quotes/211348248/composite UBER +0.63% , which raised $8.4 billion last summer with a public-market valuation of $82 billion at the time. That IPO helped transfer money from public investors into private pockets, and has left those who bought in after the IPO holding the bag as shares have been cut in half.
At best, most of the increasingly rare IPOs we see come after the lion’s share of investment growth has already been reaped by a select few. And, at worst, these late-stage IPOs are simply a way to transfer the investment risk away from private investors and siphon cash out of public investors’ pockets.