Private/public equity
In recent postings, we've muddled over the significant rise in private equity buyouts and we've also noted the global concentration of the stock markets where shares of public companies are bought and sold. The advantages of privately-held companies is that they can think long-term and that they can avoid the more onerous reporting rules, such as Sarbanes-Oxley. The advantage of public companies is that they can raise money and spread risk more easily by offering shares to the broader markets. Public firms can also reward key employees with shares or options.
Now the two are becoming one, thanks to the clever minds at Goldman Sachs, according to a Wall Street Journal article ("Goldman Takes 'Private' Equity To a New Level", 5/2/407) 3 /24/07). As that story points out, Goldman is "creating its own private system to trade the stocks of companies that don't want the scrutiny and regulatory burdens of going public."
The Goldman initiative cerates a kind of "private stock market, one aimed at major investors like pension, hedge, and private investment funds, one closed to most individual buyers, the ones that don't have $100 million to invest. Most typical investors with money in mutual funds will have limited access to these markets, since mutual funds are limited in how much they can invest in "unregistered" companies. Such unregistered companies are not subject to SEC regulations.
The limiting factor is that by US securities rules: any company with over 500 stockholders is automatically a public company. That's the reason for the limit on investors in Goldman's exchange and the desire for only the biggest players.
And, according to the article, Goldman Sachs is just the first. Nasdaq, for example, is working on creating such a private exchange. Other major banking and securities firms are considering doing the same.
For the private companies, there will be some disclosure, according to the article, "Goldman also said companies that issue stock on its system must promise to issue quarterly, annual and event-related financial reports comparable to those of public companies. However, they don't have the same obligation for widespread dissemination of detailed business information that can be of use to competitors."
Over the past ten years we've seen more and more of the wealth of the economy moving into the private sector. As a result, the withdrawal of that money from the public stock markets has hastened their consolidation. For private equity firms, this move to private exchanges may allow for long-term privatization, taking pressure off the need to turn over the assets by IPOs or sales to strategic buyers. It will certainly cause further private equity buyouts.
The possibly rapid growth of a market that exists outside of current financial disclosure laws is a troubling prospect. Company management will work even more in the shadows, without any watchdog, whether that of national governments r or public scrutiny in the press. And the chance of the government extending its regulation seems unlikely. As it is, Sarbanes-Oxley is under heavy assault and may well be reduced in scope.
