Last week I was involved in a debate at one of the bluest blooded merchant banks in the City of London.
At the heart of the debate was how long we thought it would take for the US to address the problems that have virtually dried up the flow of technology IPOs to Nasdaq.
No doubt it will surprise regular readers of this blog to learn that I was the most bullish around the table.
My bet was two to three years. I was outvoted by the others whose consensus was between 5 and 10!.
Today’s high profile publication in New York of a feisty capital markets manifesto has lengthened the odds against me!
Bloomberg, Schumer, Spitzer & McKinsey - not a venerable attorneys office but just about the bluest blooded collection of concerned New York weathcare reformers – published or endorsed a plan aimed at “Sustaining New York’s and the US’ Global Financial Services Leadership”
This report joins many other recent studies and commentary which have investigated what is happening to the world’s capital markets (see some of my earlier blogs: No hope for the NOs, London Gives Thanks for Hank’s Thanksgiving Gift) as New York’s share – exemplified by the last three years’ IPO volumes – continues to decline.
As you would expect from McKinsey it is a very good report which conforms to Management Consulting best practices by delivering a set of eye-wateringly challenging recommendations, the power of which lies not in the analysis but in the difficulty of execution.
And never to be accused of not giving value for money McKinsey offers up a chunky non-metric dozen of them:
1. Provide clearer guidance for implementing the Sarbanes-Oxley Act;
2. Implement securities litigation reform with particular short-term emphasis on leveraging the SEC's existing authority;
3. Develop a common vision and a supporting set of shared regulatory principles;
4. Ease immigration restrictions facing skilled non-US professional workers;
5. Recognize IFRS without reconciliation for listing purposes and promote convergence of accounting and auditing standards;
6. Protect US global competitiveness in implementing the Basel II Capital Accord;
7. Form an independent, bipartisan National Commission on Financial Market Competitiveness to resolve long-term structural issues;
8. Modernize financial services charters and holding company structures;
9. Establish a public/private partnership to promote New York's local agenda by acting as the high-level liaison between individual industry participants and the city, as well as by driving forward the partnership's broader strategic plan for New York's financial services development.
10. More actively managing attraction and retention for financial services;
11. Establishing a world-class Center for Applied Global Finance, and
12. Potentially creating a special international financial services zone.
Readers of this blog will want to answer two questions:
1. How long is it likely to take to effect the reforms?
2. What will they do for successful, closely held tech companies that in the good old world would, by now, have been on Nasdaq and well on their way to dominating their global space?
I’ll leave policy wonks to calculate the answer to the first question, although I have to say that, having lived and worked in America for years I can’t remember anything ever happening that required bi-partisan support to get it through.
That being said, perhaps that ambrosian dream is not so far away. Governor Spitzer was much more conciliatory in his remarks about the report than he was about Hank Paulson’s call, late last year, for some of the same measures to ease the life of capitalists in New York. (See Spitzer rains on Paulson’s parade for more insight).
But that doesn’t matter – even if the reforms were all to be carried through at breakneck speed, the real issue lies in the second question.
Today, established private technology companies find themselves stranded in an arid spot between a capital equivalents of a rock and a hard place. Between disinterested private capital and unavailable public capital.
This is a time when private funding – venture capital – is focused on tomorrow’s new new thing.
Spectacularly so.
DowJones VentureOne and Ernst & Young reported today that US VCs invested $25.8bn in the US in 2006 – the highest since 2001 – and the majority of which went to new start-ups.
At the same time, public funding – IPOs – isn’t really happening either. Despite a pick-up in Q4 of last year New York IPOs are woefully down.
Hence the McKinsey report.
So, for young tech companies that have battled their way through the last industry cycle to achieve sustainability, profitability and vindication, there is nowhere to go to get their hands on the fuel needed for the next growth spurt – capital, paper and profile.
And sadly today’s initiative, even if it were to overcome the bi-partisan roadblock offers little hope for these companies.
Addressing the 12 action points will make it easier for Wall Street to compete across the capital board – from debt through equity to derivatives. But what New York needs to remain competitive is scale – the furrowed brows in Gracie Mansion and Albany are worried about the loss of huge IPOs to London and Hong Kong.
And, as described in New York's report, that threat is massive.
“Left unchecked, today's trends could significantly negatively impact the U.S. economy. The United States would miss out on between $15 billion and $30 billion in financial services revenues annually by 2011”
To regain its supremacy, New York will need to attract the next round of $multi-billion Asian privatisations.
To paraphrase an old joke - it won’t be able to make up its losses with volume.
So that will still leave the ambitious young tech company without a welcoming capital home.
Once upon a time that was Nasdaq’s claim to fame.
Today that mantle belongs to London’s AIM.
There is a solution however.
New York should create its own separate market designed for younger companies with:
• Lighter, principle-based regulation,
• An eco-system of professionals prepared to deal at the sub $1bn market cap level;
• A buy-side community that understands the dynamics of high-potential businesses; and perhaps
• Located off-shore to avoid the dangers of the plaintiffs’ bar
Perhaps that’s why Nasdaq has launched a hostile bid to acquire AIM’s owners – the London Stock Exchange!
And if that happens I could still win the bet I made in the City last week!
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