Information and markets
Another day, another confidential IPO
Hot the heels of news that fast-fashion-creator / slave-labor-enjoyer, Shein is proposing an IPO, comes Luxembourg-HQ-ed, German investment fund JAB’s announcement that they will be returning Panera Brands to the wider world. After seven long years in tax-efficient private hands, John Q. Public can once more own a slice the company that includes Panera Breads, Einstein Bros Bagels, and (my grad school favorite) Caribou Coffee.
While its wonderful to see some life return to the US IPO market1, the interesting point here is that this recent spate of filings have been confidential IPOs. As are apparently the vast majority of listing these days.2 Confidential IPOs got their start in the 2012 JOBS (Jumpstart Our Business Start-ups) Act where companies with market caps under $1bn could propose an IPO with fewer up front disclosures. The benefits were extended to everyone in 2017.
Confidential IPOs offer some pretty great benefits. They allow companies to keep (sensitive) information confidential longer, provide the company an easy out if they choose not to proceed, and broadly allow businesses to dip a toe in the public market waters without necessarily revealing if they’ve developed that ripped summer physique.
The intent behind the rules was 2012-enough: calming some of the speculation that can make or break an IPO (Facebook, anybody?!). And, if we take diffusion as success, it’s a winner. No doubt providing the cover for more than one absolute stinker to slip quietly back to the changing rooms. The approach offer firms a trade-off of spending more on upfront on legal and financial support to (hopefully) avoid costly / embarrassing problems later, and maybe, just maybe sustain some of that initial IPO value past day one. And that’s great for the companies that are going public. But perhaps less so for the operation and governance of markets and their denizens. The de facto confidential IPO points to shifts in the availability and management of information emerging from changes to the organization of markets.
So in classic General Rules & Specific Cases style, I wanted to use confidential IPOs as a window onto organizational changes in the structure and operation of US markets.3 Here I’m particularly interested in the ways that organizational shifts are shaping how information is used, by whom, and to what ends. While we find ourselves awash with more information than ever, more and more of it either sits behind private walls or is becoming less useful. This emerges from the confluence of several issues.
There are big ownership changes:
The number of publicly listed corporations have been declining since its 1996 peak from a little over 8000 to a little over 4000.4 Public listings bring with them significant reporting requirements and this pumps lots and lots of information into the environment. As companies disappears from listings, are absorbed by competitors, and execute more through arms-length partnerships with non-listed or overseas listed entities, information leaves the system.
Private equity has exploded - more than $12tn under management now - and its voracious capacity for taking companies private is pulling more information from the environment.
Index funds have become the predominant owners of public shares increasingly concentrating information that informs governance and decision of some of the largest, wealthiest organizational entities on earth.5 It’s not that the huge index funds (Vanguard, State Street, Blackrock) reduce or distort information. It’s more a case that indexization allows for fewer owners of more sectors. This in turn offers capacity to drive (intentionally or otherwise) all sorts of isomorphic activity. As organizations come to look and act in more similar ways, the varieties of information available are potentially constrained, flattened, or standardized to a point of blandness.6
As ownership changes, so have the reasons for listing. For much of the later half of the 20th century, IPOs were undertaken to access new capital pools to fund growth, expansion, consolidation, innovation - you know, growth of real things. The old rules reflected this use case.
The post-2012 landscape is different. Greater consolidation across sectors is impacting organizational growth. But beyond larger companies absorbing or squashing competition earlier in its lifecycle (hence never reaching IPO-maturity), IPOs are increasingly used for exit over subsistence as financialization overwhelms pretty much everything in the “real” economy.
There are two broad cases. The first is listings like Panera Brands. PE firm takes a company private, pillages it optimizes it, and lists as a mechanism to realize returns. The second is the founder sell-out. The hints in the name, the listing is to allow the founders to cash-out / realize some sort of gain.
Here the pieces come together.
The combination of organizational changes meets changing reasons for listing to broadly remake the information context in this little corner of the market. Information flows in different circuits now and as such it is used in very different ways for very different ends.7 With escape / cash-out as the animating force for more listings, confidential IPOs proliferate due to smaller numbers of potential buyers and a need to ensure they are stage-managed to completion. The need to more carefully stage manage information flows is further complicated by the expansion of broadly useless companies.8 If your core product is garbage (or even if its fine but simply will never meet the hype it’s spent its pre-IPO life living under) but you spent a fortune of someone else’s money you need an out. And that requires finding novel ways to manage the context of information disclosure and use - looking at you adjusted EBITA.
Information is the lifeblood of markets. But its development and use is increasingly shaped by organizational changes that have dramatically remade the structure of the American economy. Confidential IPOs provide a bracing mechanism for managing the flow of information and, hopefully, hedging more effective bets when translating organizational capabilities into financial instruments. They also provide a window on the operation of contemporary markets, illustrating how much has changed, particularly the transition from growth of the real economy to rampant financialization. Information is increasingly defined, packaged, and consumed in very different ways and that’s important for understanding what’s going on.
Honestly, I’m all about that complex division of labor and investment bankers have bills too.
The data on this are conflicting. I saw figures stating that as many as 90% of US IPOs are confidential. If you have better data on this, let me know, especially if I’m wrong.
As an American living in the UK, I promise myself on a near daily basis that I will get closer to what’s happening where I actually live. And maybe one day I’ll manage to overcome the narcolepsy those efforts presently induce.
See Jerry Davis’ The Vanishing American Corporation or for something shorter see his Law & Political Economy Piece, “Is This the End of Corporate Capitalism?”
See John Coates’ The Problem of Twelve.
Of all the arguments I’m making here, this point feels the most conjectural to me. But I’m unaware of any empirical studies in this space. If you got something, spam me.
I’m following Viviana Zelizer’s formulation of circuits. See, e.g. “Circuits in Economic Life”.
Of course, SPACs were meant to be the ultimate informational work-around (read: pump-and-dump) to solve this particular issue and we see how well that’s worked out.