Stock markets have reached all-time highs again and again throughout 2021. This year has also been a boom year for flotations, or the process of changing a private company into a public company by issuing shares and encouraging the public to purchase them – AKA “going public.” There have been 368 traditional IPOs filed this year, which is more than a 60% increase from 2020, with the healthcare and technology markets responsible for most of this action.
However, the total number of companies listing on the stock market is trending in opposition to this apparent abundance and expansion. In 2014 the number of listed companies worldwide peaked at 45,743, plummeting to 43,248 in 2019 and is continuing to trend downwards.
Companies Going Private
There were 47 deals in 2020 to take companies private, and 2021 has seen a peak in the number of businesses going private, with these transactions surpassing $800 billion. Private equity groups are partially responsible for this trend, giving companies an attractive alternative to listing on the stock market. But these groups aren’t the only factor in their decision – here are some things that companies consider when making the decision to go public or remain private.
Avoiding the Stock Market
Currently, the economic climate is such that interest rates are very low, and the Fed has been stimulating the economy in the wake of the 2007 crisis and more recently, the COVID-19 pandemic. Rather than relying on the stock market for investors, companies are opting to finance through private equity or through debt financing, since the current interest rates are favorable for this path. Listing on the stock market is a lot of work when companies can simply borrow “cheap money” instead.
Another deterrent may be the regulations that come with going public. Companies have to adhere to a higher standard of transparency and disclosure when they list on the stock market, are regulated by the Securities and Exchange Commission, and must undergo periodic financial reporting. In addition to adjusting operations according to these rules, the cost of complying with these regulations can be very high, especially for smaller companies. Beyond following these rules and undergoing this surveillance, the media and general public also watches public companies more closely, scrutinizing their decisions and behavior, which some businesses may want to avoid.
This public scrutiny is especially prevalent in today’s society, between social media and an increase in retail trading. The combination of “average joe” investing and social media has also changed market behavior, as seen in “meme stocks” and evidence that celebrities and “finfluencers” can influence investor’s decisions with a single tweet. These modern phenomena have created illogical, volatile markets, and some companies might want to skip out on this kind of environment altogether.
Benefits to Going Public
In addition to raising capital, going public has its unique advantages as well. While the public scrutiny is hard to endure and the amateur traders and celebrities tweeting online can create volatility, this exposure can also be a good thing for companies. Going public increases general awareness of a company and their product or services by creating organic publicity, which can lead to an increase in market share and also introduce new customers to the business.
Being under the spotlight on a public stage can also encourage companies to consider their presence and their impact on the public at large. This can spur them to reconsider their PR strategy and position and make positive changes within the company that benefit everyone, such as implementing a corporate impact strategy. This can strengthen a company’s relationship to their investors and consumers and increase their positive impact in the long-term.
Accredited Investors Have More Options
There are many ways to invest, especially for an accredited investor. There are a few different ways to verify that you’re an accredited investor, but generally speaking an accredited investor is someone who has a net worth of at least $1 million, not including the value of their primary residence. Once this status is achieved, it opens up the world of crowdfunding, private equity, and investing in other securities that are not registered with the SEC.
If you are an accredited investor and you want to learn how to take advantage of this position while avoiding expensive mistakes, reach out to us at info@nestfinancial.net. Join the other individuals, families, and business owners in Austin and the surrounding Hill Country area and let us help you with all of your wealth management needs!
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DISCLAIMER: We are legally obligated to remind you that the information and opinions shared in this article are for educational purposes only and are not financial planning or investment advice. For guidance about your unique goals, drop us a line at info@nestfinancial.net.
