Publicly Traded Companies: More on the Way?

Transcript

Paul Winkler: It’s interesting, stock market pushes more companies to go public. You know, so this is something that I have taught a little bit about at some workshops, talking about the number of public companies.

Publicly Traded Companies

So when you invest in the stock market and a lot of people may buy mutual funds, right? They’re investing those ETFs and those mutual funds are pooling investor’s money to invest in publicly traded companies. You know, so a publicly traded company would be a company that’s listed like on the New York stock exchange or the NASDAQ. And, you know, you’ve got exchanges all around the world and those different countries have their own exchanges.

And it’s just this place where you actually can get this information on these companies. You’ll have various market makers that actually hold inventories in these stocks. And, and you know, so that’s basically what’s going on. You have these, then you’ll have private companies. Now private company is a company that would not be listed on a major exchange. It’s privately held. It’s owned by maybe a handful of people, or, you know, you’ll have some of these, these groups will actually raise money and keep a company private. They’ll give them some money and let them and have ownership. But it’s private. It’s not listed on a major exchange. And the reason they do that is so that they don’t have to give up as much information.

You know, they don’t have to abide by certain rules. Well, it’s actually interesting to me that this is some of these companies, some of these red hot stock companies, these they’re actually going more public. And what’s been happening is, after two decades of slump. And this is one of the things I’ll do in my workshops is I’ll say, Hey, how many companies are there in the S&P 500? And then people will say, wow, 500. Yeah, yeah. Around 500. Give or take a couple. How many companies are in the Russell? 2000, 2000.

So, the worst sharp 5,000 is supposed to be the entire US market. You know, every company that’s publicly traded, publicly traded and in US markets. And it’s a little over 3000. Why? Because the number of publicly traded companies has been declining. Now that can be due to maybe companies going out of business. It can be due to buyouts and it can be due to companies going back private. Again, that might be a reason, and maybe they don’t want to necessarily abide by all the rules and they go private again.

Why Are Things Changing?

What was happening is after a two-decade slump, that is starting to change. And it’s interesting as to why it’s been changing. They said that last year the number of companies listed in the exchanges that are the US exchanges was the largest.

And it’s even further down, like I just said that, you know, so you, if you look at this list and go, okay, so, you know, in 1996, there are more than 7,400 companies that were listed in the US stock exchanges. And now it’s less than half than that. And this was the center for research and securities prices. I went and looked at the university of Chicago database to check these numbers. And this is basically what they said. It’s roughly half than that now. And small companies are staying private longer is what’s happening. This is what has been happening. And what they’ve been doing is raising venture capital or private money rather than having to abide by these strict regulatory requirements that public companies have to go by.

And the merger and acquisition activity also continues to shrink these companies as well. So what people have been doing, and I’ve been seeing this in investor portfolios and going, Oh, I don’t think I’d be bad. You know, that they had these private equity portfolios. And the reason I say, I don’t think I do that is because these companies are staying private for a reason. They don’t have to give as much information. Now, one of the things about market efficiency, I remember in the very beginning of the hour, I talked about how personal these investment managers, you know, have a hard time beating what the market does on its own. And it’s because of market efficiency. Well, what makes markets efficient is ease of information, ease of transaction.

Well, when you’re dealing with publicly traded companies, you have lots of access to information and you can trade them easily. So it makes it a lot safer play for now, mind you, I didn’t say safe because markets go up and down, doesn’t matter, you know, and they always have, and always will, but realize if you don’t have ready access to information, or if a company can withhold information and they don’t have to publish it, and it’s harder to trade that company. Now you have a new element of risk that has entered the equation with these private companies. And typically some of these private companies that big investment firms will let you get access to.

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Growth and Regulations

And I remember a friend of mine who had an academic conference out in California and he was sharing with me some of the things that, that he had seen out there, they were, it was a pension conference and he was about how they were coming in and saying that, yeah, a lot of the companies are giving you access to are just garbage and then to the bottom of the barrel stuff. And the reality of it is that, you know, people are investing these things and they’re just losses waiting to happen is really what he was getting into. So, you know, it can be very dangerous in getting into these private companies. Now, the article goes on to say, too, it says, regardless of how they go public, many companies are funding that are finding that the process accelerates their growth in a way that it hasn’t in decades, that now offsets the stricter regulations and transparency requirements that come along with being a listed company.

There was a line in an article I read that said, it’s now less expensive to laser raise capital in public markets than in private right markets. And that hasn’t happened in a long time. So that’s, it’s getting down to self-interest, you know, what’s better for the company is, well, a lot of times it’s better for them to go public. And if they can raise money more cheaply, that way, that will be better for them because you know, the name of the game always in investing is keep your expenses as low as you possibly can.

I mean, you’re a company self-interest rules the day, right. And you know, the more public companies there are, the better. I like diversification. The issue that can be of concern is if you don’t have enough public companies and there’s lots of money chasing not many companies, all of a sudden people have to go other places with their money because public companies would become too expensive, stupidly expensive. And then you have to look for other ways to invest your money for a return. And some of the ways that people have been doing that have been fairly risky ways of doing it kind of scary when it gets down to it. You know? So one of the things that’s actually happening now is we’re starting to see more of these companies, more of these successful companies becoming public.

SPACs

Now, one of the ways that they’re doing that, and you may, if you’ve watched TV and read some you’ve been hearing about SPACs. Spec is a special purpose. This acquisition company is what it stands for. So there was an article about this in New York Times. Yeah. It was in simpler times, famous people. And this is interesting because it takes two things that people like to talk about: money and celebrities and simpler times.

No, I didn’t that didn’t say that in the article, but yeah, it’s funny if you look at the investing prowess of the wealthy, as I’ve often said here, it’s just not typically that great. They’re just not all that great and making great decisions really. But anyway, so it says that if you look how they have typically done this wineries, you know, car dealerships and things like that, restaurants, sometimes you think of, you know, if you’re downtown Nashville, you see bars and stuff like that. But in the pandemic economy, there’s a new way for the rich. There’s this new way for them to go and spend and increase their status and their wealth.

And that’s through a SPAC, which is a special purpose acquisition company. So they were talking about very various people that are do this. Jay Z is involved in one. Shaq O’Neill is involved in one. And, you know, these sports figures are getting involved and they’re even people like, for example, in the political arena that are getting involved in these things. So what are they and what is it, what’s in it for the celebrities? Are they doing it because it’s a great investment and hang tight on that.

So what they say in the article is facts are a shell corporation, and this is basically what they are. They’re listed on the stock exchange. They have a goal of buying a private business and taking a public. So what happens is they raise money. And what they do is they raise money through an initial public offering by another company. And at the time of the IPO and the initial public offering the specs don’t have any existing operations or even a stated target for their acquisition. So you give them money. You don’t really know what they’re going to get. You’d have no idea. And what happens. You’ll have some of these private equity funds or the general public.

And that’s where these things are coming from. And the specs are formed by investors, our sponsors with expertise. Typically they have some kind of expertise in an industry or a business sector. So they know something about the sector. So what you do is you give them money, knowing that they may know something about technology, maybe knowing that they know something about telecommunications or knowing that they know something about transportation or whatever, you know, whatever it is that they are dealing with or what they do. And the idea is that they’re going to pursue deals in that area of expertise. So they create this FAC and the founders, they may have something in mind, but they don’t identify the target because then they’re going to have to put out a bunch of disclosures in the IPO process.

What’s Going On?

So what they do is you’ll hear them referred to as blank check companies for that reason, because you’re just giving them money. You don’t really know what they’re going to buy, and they’ve got two years to do it. So they got two years to actually make the purchase. Otherwise they have to refund the money. So they’ve got two years to identify the acquisition, then they, or they’ve got to return the money. So they want to do some kind of acquisition. So they’re really, they have a limited time span in which, with which to use that money. So why are celebrities jumping on this bandwagon?

Well, to get richer, of course. Well, there was a guide that they interviewed for this New York Times article said it this way. He said, I imagine that some businessman or some sentence somewhere says to them, Hey, listen, there’s this hot new financial offering. Let’s put your name and your celebrity on it. And what we’re going to do is we’re going to bring in some fairy dust and to a SPAC and the upside potential, you know, maybe tens of, not hundreds of millions of dollars.

And what we do is we get your name on it and you’ll benefit from that in essence. So he said that the celebrities aren’t so much the financial decision makers, but rather the promoters brought in to attract investors. Because for some reason we think that somebody that has acted in Hollywood or played well on a basketball court or, you know, does well throwing a football or something like that somehow makes them really good investors. It’s just funny how people think. So you have like, these people are like marketers of the investments, just like they’re marketers of soft drinks and sneakers.

And what happens is they use the power of their celebrity to sell a product. And in this case, some financial instrument and that’s that’s it. So what happens is that they said, hypothetically, let’s say you have a spec that prices at $10 a share. So if people go into $10 and they buy and they raise $500 million in public markets, they raise a whole bunch of money. Then a celebrity comes in and negotiates a 1% on the deal. So they’re, they’re going to be rewarded with a stake in the company worth $5 million. I mean, you look at that and you go, Whoa, you know, that’s pretty good.

They come in and they have, let’s say a deal is done and they come and do this back and they find a successful merger candidate. Maybe they bring in other investors and they’ve got a deal at $10 billion. Let’s say in the celebrities, 1% stake has, you know, they’ve got a hundred million dollar payday, not a bad day’s work for just using your name. And what happens is research on these things. And this is something I pointed out many times regarding this is that IPOs,, you gotta realize that these things are not necessarily great investments. They tend to lose money in the first several months of operation.

That’s why, when I own funds, I don’t own funds that invest in IPOs. Yeah, because in the article, to its credit, it actually goes out and says that they were interviewing one guy on CNBC. And he says that he says that they’ve jumped the shark. He says his reasoning, the involvement of so many celebrities and minimal investing experience, they don’t even know what they’re doing. Well, it’s the rest of the celebrity. One guy says, basically, celebrities are risking their reputations for say a few million dollars initially. But if it works out, it’s a hundred million, but the reality is, is, are people really risking the reputations? Would people be really mad at these celebrities now?

Because it’s only the people that invest in loss, they’d be really mad. How many, how many dumb things that celebrities doing the grudge doesn’t last. It doesn’t tend to last that long people have short memories. So anyway, that’s what a SPAC is.

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