Continuing on the post from last week, this week I will highlight another 2018 paper, by Alexander LjungqvistLars Persson and Joacim Tåg.: “The incredible shrinking stock market: on the political economy consequences of excessive delistings”

In their 2018 paper, Ljungqvist, Persson and Tåg address the question of “the shrinking stock market”. Indeed, the number of listings has declined globally over the past two decades. This has coincided with the growth of the private equity industry – for which the stock market provides a great opportunity set of companies that can be taken private, funded by higher leverage and patient LPs. The opportunities are particularly numerous when risk aversion from public markets investors is high – as has been the case over the last year.

We have seen this play out in practice lately, with recent take-private announcements by private equity funds, for example Software AG (Silver Lake), Vantage Towers (KKRGIP Group), Synlab (Cinven), Cary Group (CVC Capital Partners) … with significant capital to deploy, we expect more such deal announcements going forward. Recent IPOs (as in the case of Synlab, Cary group, Vantage Towers, and Majorel) provide a particularly fertile hunting ground, with a dominant majority owner and low free float.

An essential question for asset owners is, what are you giving up when accepting a take-private offer? With a significant premium to the last traded price (often 40%+), and the risk of the stock trading down again if the offer fails, most asset managers will sell their shares or accept the offer and reinvest the cash elsewhere, which is privately optimal for their portfolio. However, by becoming privately owned, asset owners can no longer participate in the economic value creation of that company.

The authors of the paper create a model of the interplay between delistings and the wider economics consequences. By reducing citizens’ exposure to corporate profits, the delistings reduce the support for business-friendly policies, thereby reducing aggregate investment, productivity and employment.

Something to keep in mind as we are debating how to increase citizens’ participation in corporate profits in France. And an important question to consider by asset owners when choosing to tender shares and/or voting for a take-over.

Paper available here: