21 Apr 2016
A trio of students present research on the decline of the listed company at the Houses of Parliament
Taking a company public used to be the ultimate reward for an entrepreneur. Not anymore. In fact, family businesses are reluctant to list and fear the loss of control, three London Business School students reported, after conducting research.
Yannick Lakoue-Derant, Margarita Economides and Zhanna Smirnova, Masters in Finance students at London Business School, presented their findings to the All Party Parliamentary Corporate Governance Group at the Houses of Parliament. The report, ‘Causes and consequences of the decline of the public corporation’, was supervised by Julian Franks, Professor of Finance, London Business School.
Their findings answer important questions set out by Professor Franks, including:
1. How much has regulatory change or the cost of regulation contributed to the decline in IPOs in the UK?
2. What role do private capital markets play?
3. How do direct and indirect costs of raising capital differ in private and public capital markets?
4. Why do so few family companies list on the stock exchange?
5. What policy changes need to be made to incentivise listing companies?
“The decline has been a function of the underlying fluctuations in the number of delistings and new listings,” said Economides. The trio reported evidence of a ‘listing gap’ where annual delistings have exceeded new listings. Private equity firms have also experienced “impressive growth” and partly substituted public listed companies.
Some family business owners think private ownership gives them a longer-term view of value creation, unlike in public companies, the research shows. “Family businesses are important and contribute significantly to the economy,” said Economides. The report highlights a set of traits unique to family business owners. Of the 4.6 million family businesses in the UK, 87% are private sector firms.
The research sets out the pros and cons of publicly listing for family owners. The benefits include acquiring and retaining talent and diversifying family assets. However the disadvantages are significant, such as confidential information becoming public, to the benefit of private competitors.
While public equity finance used to be perceived as the best source of capital, in recent years, only a small number of UK listed companies have raised significant equity. Instead, they rely on earnings, and debt finance, said the trio. “The cost of debt has never been so attractive,” Lakoue-Derant said. “There’s a strong perception that the process of listing and raising equity finance can be onerous and expensive.”
“Our conclusions highlight some of the issues relating to the public market. The rise of private capital markets, while being a welcome addition to the alternative forms of financing companies, is also a manifestation of the higher costs of the public corporation,” write the students.
But the question remains: will the decline of the UK public corporation continue?