The decline and fall of the PLC

Is the future of Responsible Investment going to be a much more private affair? An interesting recent snippet in The Sunday Times pointed to a wider issue affecting the way investors engage with companies – the decline of publicly traded businesses. The piece in The Sunday Times cited research by the Quoted Companies Alliance and broker Peel Hunt which found a majority of asset managers were concerned by the decline in the number of PLCs, which reduced the range of shares they could buy and hit market liquidity. The article noted that the number of IPOs had fallen in recent years, with just 36 companies floated in 2019.
On the flip side, more companies disappeared from the public market as part of public-to-private takeovers, according to figures from Pinsent Masons. This story is reinforced by looking at the number of companies listed in the UK. According to Statista, this number fell from just under 2500 in January 2015 to a bit over 2000 this January, a reduction of over 15%. Looking at just the AIM market, the number of listed companies is at a ten-year low.
There seem to be a variety of forces at play here. One is the growing role of private equity, with more major businesses shifting to private ownership. Another is market concentration as takeovers shrink the number of remaining public companies. But the net result is a smaller investible universe.
This is not just a UK story, we can see similar trends at work in other developed markets, and there are other significant factors in the mix. For an interesting take on the US market, The Vanishing American Corporation by Gerald Davis provides a good way in. He highlights both the reduction in the number of public companies, and the reduction in the size of their (acknowledged) workforces.
In the heyday of the large American corporation, the largest companies by market cap also had a sizeable employment footprint. Industrial giants like AT&T, GE and GM all employed hundreds of thousands of workers. By contrast, today’s tech firms like Apple, Alphabet and Facebook employ far less staff. This type of business often requires increasingly specialist human and financial capital, but also less of both. As a result the traditional public company form, which reached its peak when it worked for large capital intensive employers, can look like an odd fit.
Davis also notes that being publicly-traded typically also offers greater public accountability. Publicly-traded fossil fuel companies face numerous shareholder resolutions seek information and changes in policy in response to the threat from climate change. And activists target asset owners for their exposure to publicly-traded stocks and press them to divest. The same kind of accountability just doesn’t exist – as yet – in the private market.
This points to an interesting potential future. On the public side a combination of a decline in the number of listed companies with greater concentration in the asset management industry, and more use of passive management, suggests increased concentration of ownership. It’s a point we regularly make, but there’s no reason why that wall of passive money should not be democratised, with asset owners and beneficiaries having a greater voice than they currently do.
Meanwhile, looking at the private market it is time to start thinking about how Responsible Investment might need to change. Whilst asset owners are used to holding public equity managers accountable, in the unlisted sector it is usually the GPs who have the power. The fear of missing out on access to top quartile funds has made many asset owners reluctant to rock the boat, even as they have swallowed high fees.
But as societal expectations of asset owners increase, surely we can only expect stakeholder scrutiny to follow the money. As more capital goes into private equity, so transparency can be expected to increase too. And, actually, public policy has got there first. The Wates Principles in the UK for large privately-owned companies marked the first extension of formal corporate governance standards into the private sector. This builds on the Walker Review reporting guidelines, which have been in place for over a decade but don’t seem to attract much attention from investors.
We should only expect more intervention. Whether the reduction in the number of public companies is a secular trend is unclear as yet, but we do know that asset owners are shifting more of their assets to the private markets. Meanwhile, we know that this government, like several of its predecessors, is keen to see more pension capital go into the asset class (albeit at an earlier stage). Taken together, that inevitably points to the need for greater scrutiny of ESG issues in the unlisted sector. It’s definitely something to watch.

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