Capital Formation - Call for Information

Category: Other

Country or region: Asia Pacific (Overall)

In this call for information, we are asking you to share your knowledge of your local market and region, and the issues surrounding public vs. private capital formation.

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Listed (public) equity provides the bedrock for the valuation many other growth assets, similar to the function sovereign debt plays for corporate bonds. It is also the focus of a huge amount of analysis and regulation. However, the secular decline in the number of IPOs and listed companies is well-documented.

Increasingly, new companies either do not need much capital, or can raise it in a less burdensome manner, giving up less control, in the private markets than via a public listing. As there is a natural attrition rate in the number of listed companies, a constant supply of new public listings is necessary to maintain public market integrity. The unexpected increase in IPOs in 2017 further confuses the picture, although set in a historical context, the number of listed companies remains low.

While some do not consider this a concern, since capital formation is still happening, albeit along different channels, others consider there to be downsides to capital formation outside public markets, such as:

  • Existing listed markets could become overexposed to older industries and underexposed to growth industries. If this trend becomes extreme, then listed equity will cease to provide an appropriate benchmark for determining risk premia across asset classes, possibly reducing price discovery. It also has implications for potential returns in index-tracking, passive investment vehicles.
  • Average savers are disadvantaged because only large funds and entities can efficiently invest in illiquid sectors such as private equity or infrastructure. While savers could have access to such investment opportunities via pension schemes, it is typically developed market, large defined benefit schemes that are most able to gain exposure to private, illiquid investments. The extent to which defined contribution schemes, or pension schemes in developing markets, can provide exposure to private or illiquid investment opportunities is unclear.
  • The information asymmetry outside of public markets may cause investors to be locked-into poorly performing assets over extended periods, without a liquid secondary market that could be used for price discovery.
In this call for information, we are asking you to share your knowledge of your local market and region, and the issues surrounding public vs. private capital formation.

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