The Private Capital Shift
While the structural opportunities appear largely the same, the underlying dynamics of the global capital market are evolving. We see this manifested in the global decrease in mid to small cap securities offerings and the growth of the $1bill+ megadeals. From peak to trough, the current US market has seen a dramatic reduction (81%) in the number of IPO’s per year when compared to the mid 1990’s. Even when looking at broader time periods, IPO’s per year in this important global market have still reduced by approximately half in this decade when compared to the 90’s as a whole. However, as identified by public research from Vanguard, the headlines mask the important trend that the sharpest reductions have been in the small and micro-cap market space.
While the public market has slowed, the last 20 years has seen the private capital market has grown at more than twice the speed of its public counterpart as it soaks up deals and companies that previously would have contemplated a public securities offering. According to Bain & Company, this trend shows “no slowdown in sight”.
When speaking at the inaugural Security Token Summit in Sept. 2018, David Weild, a former vice chairman of the NASDAQ, confirmed this view when asserting that “…our (conventional) capital markets are not designed to support small issuances.”
EY, in their May 2017 analysis of US capital markets, makes the case that private capital has to a large extent filled the gap highlighted by Mr. Weild, but the question remains as to how efficiently it has done so – this large and sophisticated market is overwhelmingly comprised of paper-based instruments being entered into between peers. These investments lack the efficiencies offered by digitalization and the new features that electronic instruments in a global market can provide.