Stagnation or rebirth? The future of stock exchanges
It’s no secret that 2022 has been a bruising year so far for stock exchanges and public markets in general. With all major indices seeing double-digit declines to date, and IPO activity all but grinding to a halt, exchange groups are now in damage limitation mode.
However, even before their current travails, the situation for many exchanges was far from ideal. In many developed markets, declining IPOs combined with rising delistings has led over several decades to an overall drop in the total number of listed companies.
The trend is especially stark for the US, where World Bank data shows a nearly 50% fall in the number of listed companies from the mid-1990s forwards.
This issue is far from unique to the US, however. As we argue in our report, the saturation reached in public markets today represents a fundamental challenge to all exchanges. BAU simply isn’t an option anymore.
What is driving the decline in public markets activity?
Both retail and institutional investors have long complained that a ‘hollowing out’ of public markets has been underway for some time, effectively reducing the universe of investable companies open to them.
As we explore in more detail in our latest report, there are both push and pull factors involved that are making public markets look less attractive, whilst simultaneously boosting the appeal of staying private.
The costs and burdens of going public are well-known and have changed comparatively little in recent years – what is new is that today private markets are beginning to function much smoother, quicker, more efficiently, and at greater scale than was the case before.
Three developments have been key to this.
Firstly, the rise of VC and PE groups capable of raising and deploying vast pools of private capital has meant the funding options for those wanting to stay or go private are there at scale.
Secondly, the expansion of secondary liquidity via venues such as Nasdaq Private Market has eroded one of the core traditional advantages of being public. Likewise, the inability of venues such as AIM to provide deep and continuous liquidity has reduced their value to many SMEs.
Thirdly, the sophistication of the technology available to facilitate and manage private transactions has rapidly increased, again closing the gap to public markets in terms of efficiency.
Taken together, these three factors help to explain by Preqin are now forecasting private markets AUM to double by 2027. This development represents both a threat to exchanges, but also an opportunity.
Our research suggests exchanges willing and able to evolve their business model can retain their central role as hubs of capital formation, but fundamental and fast adaptation is essential.
How is the Johannesburg Stock Exchange (JSE) responding?
The issue of public markets being saturated and the threat this poses for exchanges is global, but levels of exposure vary. As the largest exchange on the African continent and a top twenty exchange internationally by market cap, the JSE provides an excellent example of how a problem can become as opportunity.
Faced with declining levels of public market activity, the JSE have implemented an ambitious and multifaceted strategy to rejuvenate capital markets in South Africa.
A key part of this 360 strategy is the launch of JSE Private Placements, a project we are proud to have partnered with the JSE to deliver.
Combining Globacap’s leading-edge private capital markets technology with the JSE’s wealth of experience as a hub of capital formation has allowed the JSE to diversify their revenue streams and adapt to the changing macro environment.
The JSE can now provide a ‘one-stop-shop’ for investors and companies who are now able to raise capital via public or private means within the same established and high-functioning organisation.
Public and private markets and the exchange groups of the future
A recurring theme to emerge from our research is that the boundary between public and private markets today is blurring and shifting. A spectrum of capital raising services – often unified under the umbrella of an exchange group – is becoming more and more normal.
There will always be use-cases for companies staying private for longer, or even for good, just as they will always be use-cases for going public. We expect the stock exchanges of the future to be much more diverse institutions than some currently are, and we believe possessing some sort of presence and capability in private markets will be essential for exchanges to remain relevant.
If you would like to know more about our collaboration with the JSE specifically or how we are bringing ever-greater levels of efficiency to private markets, feel free to reach out for a demo.