The stuttering new share issues market calls for a tax fix. Several recent deals have been pulled or postponed, including those of British energy supplier First Utility, German real estate company OfficeFirst and Spanish telecoms infrastructure firm Telxius. Some post-Brexit investor wariness is healthy: initial public offerings are often a way for owners to sell out at the top. But there are deeper issues too.
On the face of it, equity fans have some crumbs of comfort. The US IPO market had a stronger third quarter versus a year ago, despite imminent American elections. Sweden has experienced a relative glut of new listings. Out of 14 European IPOs since early June, only one is trading below its issue price, according to Breakingviews' sister publication IFR. Listings are barely down in Asia year-on-year.
But a wider-angle view presents a less positive perspective. The number and value of new listings globally is down almost a fifth and a third respectively on the same stage in 2015, Thomson Reuters data shows - extending a downward trend that began at the start of the 1990s. The high number of recent IPOs that have been private equity-owned is also worrying: these are usually financially-reengineered companies rather than the market debuts of genuinely new entities.
This matters, because vibrant IPO markets play a part in providing long-term equity capital to boost global economic growth. The Norwegian sovereign wealth fund, which said as much in a June position paper, has an incentive to talk its book: 61 percent of its $890 billion assets as of September 30 were in equities. Yet although it may seem as though IPO volumes are simply a reflection of economic growth prospects, research by European and Indian academics has shown that higher levels of stock market liquidity leads to improved economic indicators in both emerging and developed markets. Listing regimes usually require greater transparency, which should make capital allocation more efficient.
The biggest problem now is the low-rate environment, which seems as likely to persist as self-correct. Since 2011, the gap between companies' cost of equity and their cost of debt has widened sharply to over 200 basis points, according to Citi analysts, who point out that as a result global non-financial corporations have bought back over $2.8 trillion of their own shares, or 11 percent of their average market capitalisations. New issues have raised barely more than a third of that.
Norway's oil fund identifies other structural reasons for equity capital being down in the dumps. The tech companies dominating innovation require less investment than other industry sectors and gain the biggest rewards for waiting until they achieve pre-IPO scale. The rise in passive investing and size of professional asset managers both favour larger issues. Blame regulation too: the US 2012 JOBS Act, for instance, has more than doubled the number of shareholders a private company can sustain.
New forms of financial technology may also be culpable. Retail investors can invest in equity crowdfunding using the internet or lend via peer-to-peer platforms that offer high, equity-like yields. The potential returns on offer seem to have blinded participants to the lack of transparency relative to public stock markets, where valuing companies accurately should be easier. Governments could help. They could foster a culture of equity by encouraging companies to increase the proportion of their employees' pay that is in shares. For-profit stock exchanges make most of their revenue selling data and derivatives, to the detriment of their original remit. So nationalising venues could be one answer. Offering small companies lesser listing requirements for a longer period of time, as some exchanges already do, might be another.
Perhaps the neatest fix - albeit a politically tricky one - would be to redress the uneven balance between the tax treatment of debt and equity. In the UK, for example, equity investors face taxes for buying and selling shares as well as for the receipt of dividends. Yet debt investors can deduct interest payments from corporation tax and only pay tax on interest received, not when they buy or sell bonds.
By removing such friction, the cost of equity for UK-listed companies might reduce by as much as 150 basis points, according to research by KPMG. In practice, if cash-strapped governments were to raise taxes on debt financing rather than cutting the burden on shares, it might be an easier sell to the electorate. And global coordination might be necessary to prevent regulatory arbitrage. Still, aligning the two should encourage more companies to choose IPOs - and might help economies grow.
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