Earlier this month Rick A. Fleming, Investor Advocate at the Securities and Exchange Commission, gave a speech in which he discussed the impact that shrinking public markets have on investor participation. Mr. Fleming noted that over the past 20 years, the volume of initial public offerings (IPOs) has been decreasing and companies are waiting longer to go public, limiting the ability for individual retail investors to participate in capital growth and preserving capital gains for wealthy investors in the private markets. He also noted that there has been a significant shift away from retail investing towards institutional investing. Mr. Fleming explored whether there is a link between the shift to institutional investing and the decrease in IPO activity, specifically with regard to small company IPOs. Based on discussions with asset managers, Mr. Fleming discovered that, in general, institutional investors who engage in active management have little interest in investing in small-cap public companies because of concerns regarding trade liquidity and regulatory barriers. In his speech, Mr. Fleming identified some macro trends on individual investor participation:
- The number of individual investors who invest directly in stocks has decreased in recent years:
- In 2001, 21% of families had direct investments in stocks compared to 13% today.
- Today, only 11.4% of families with net worth between the 50th and 75th percentile of all U.S. households invest directly in stocks.
- Individual investors are shifting from investing in stocks to investing in funds, causing the assets under management (AUM) of institutional investors to grow:
- In 1976, individual investors directly owned 50% of U.S. stocks compared to 21.5% in 2016.
- In 1976, institutional investors owned less than 20% of U.S. stocks; today institutional investors own the majority.
- Today, nearly 45% of U.S. households invest in registered funds.
- AUM of institutional investors has increased from $6 trillion in 1998 to $19 trillion today.
- Mutual fund investments in small IPOs have declined:
- In 1990, 10.6% of funds disclosed an investment in small IPO issuers compared to only 0.7$% in 2010.
- Institutional ownership of small-cap companies has fallen 8% between 2014 and 2016, with institutions shifting their investment focus to mid- and large-cap companies.
Based on the macro trend data and the results of his conversations with asset managers, Mr. Fleming believes that, in order to reinvigorate the IPO market, regulators need to consider reforms that will make institutional investors more interested in smaller public companies. In addition, Mr. Fleming believes regulators will be much more successful if they focus on demand-side reforms directed towards attracting more investors to the public markets rather than on supply-side reforms of decreasing disclosure requirements or shareholder rights to attract more companies to the public markets. The full text of Mr. Fleming’s speech is available at: https://www.sec.gov/news/speech/fleming-enhancing-demand-ipos-050917