3c hapter - Index of

204 Locavesting
Scott Gehsmann, capital markets partner with PwC Transaction
Services. 7
Small and mid-sized domestic companies—the engines of job
creation and innovation that were once the mainstay of IPO markets—are
now as rare as a fl oor broker.
Our public markets were in decline long before the fi nancial
crisis of 2008. In a provocative paper on the state of the IPO
market, David Weild and Edward Kim, capital markets advisors
at Grant Thornton LLP, trace a dropoff in publicly listed companies
back to 1997. 8 The electronic trading that transformed the
stock markets around that time also rippled through the broader
fi nancial ecosystem. The rise of online discount brokers and new
order handling rules reduced commissions and spreads, eroding
the profi t margins of traditional market specialists and investment
banks. As transaction costs plummeted, trading exploded
(remember day traders?).
In what Weild and Kim call “an epic case of unintended consequences,”
the new economics of low- cost transactions favored large
cap stocks over small ones and ushered in the age of casino capitalism
that thrives on opaqueness and risk. The profi ts embedded
in the spreads and commissions of the old model supported critical
functions such as sales, equity research, and market making, where
investment banks commit their own capital to ensure a liquid market
in a stock. In the new world of cheap transactions, those functions
fell away for all but the most profi table stocks. Boutique investment
banks that once catered to small companies saw the writing on the
wall and sold out to bigger banks. Without those critical support
functions, the shares of many small- cap companies have languished
in obscurity, and many have delisted from the major exchanges. At
the same time fewer small companies can make it to market.
Each year since 2000, more companies have delisted than have
gone public. The total number of companies listed on the major
U.S. exchanges has slid 22 percent, from nearly 7,000 companies
in 1991 to 5,400 in 2008. When adjusted for GDP growth, the
decline is a more startling 53 percent, according to Weild and Kim.
That is cause for concern. Without a vibrant IPO market,
venture capital investment tends to lag, as VC fi rms devote more