Public Markets vs. Private Liquidity

Interesting developments over the last few months with the situation at Woodford Investments. I’m not going to make any comment on the fund itself, other than to wish them well over the next few months, but it has highlighted the debate of whether public listings offer liquidity benefits that have been forgotten?

Over the last 30 years, I’ve nearly always worked with listed companies and, on a personal basis, have actively invested in publicly traded shares other than our own businesses. The reason behind this is fairly simple – liquidity. Whilst investing in tax-related schemes involving VCT or EIS relief offers generous tax benefits, it is generally both difficult to access your capital and requires follow on funding, which further drains liquidity. Whilst the majority of funds are invested in publicly-traded stocks, recent events have shone the spotlight on private companies. This world is now hugely well-capitalised, the growth of private funding has eclipsed the stock market for many years and led to a decline in publicly-traded stocks. We have to throw in the enormous funds under management within PE funds to gain a better understanding of the whole picture but ‘de- equitisation’ has become a much used phrase.

The decline of publicly traded shares has also been due to the regulation arbitrage, and I’m sure many of you reading this will be frustrated by the higher levels of governance and regulation involved with being listed. I for one am baffled why the exchanges and regulators continue to pile on the regulation in our industry as if we are a completely different species to other industries or companies. Quite frankly, it’s crazy, and we should all encourage a lighter regulatory touch so all industries and companies are on a level playing field.

BUT, and it’s a big BUT, are people realising that being invested in a private company and not being able to access your capital could be a really bad position?

Take the example of being unable to withdraw money from various funds, compared to almost never being able to sell shares in a private company – why is one viewed as catastrophic and the other not? I’m sure that in a downturn we will have huge problems with private company liquidity, as valuations fail to materialise and people become locked into situations with little or no chance of taking money out.

Part of me also feels that we should do better at creating trading mechanisms for private shares and, again, the US is leading the way with firms now bypassing Wall Street and going straight to listing to give their shareholders liquidity. The free float guidelines should be relaxed and, with less regulation, we could reduce listing costs to get companies on the market.

There are ways to play this and certain funds like the Scottish Mortgage Trust seem to have a good balance of large private companies and listed stocks – worth signing up for their podcasts – and if you don’t agree, then you can simply sell the shares as it’s a listed investment trust.

It would be exciting to see more companies coming to the market as part of their next funding solution. Being listed gives you profile and, in normal circumstances, a group of supportive shareholders who let the management team get on with things – maybe we just need the regulators to play their part and we’ll see increased ‘equitisation’ over the coming years.

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