The Pipeline: M&A and IPO Insights | S.3 Ep. 4 - Regulatory environment offers some near- and long-term positives for the IPO market

View Full Transcript

Joe Mantone   00:00:00

Welcome to another episode of the pipeline, an S&P Global Market Intelligence podcast that dives deep into the world of M&A and IPOs. I'm your host, Joe Mantone. And today, I will speak with Eddie Best, a partner at the law firm Wilkie. Eddie is the co-Chair of the firm's capital markets practice and has over 35 years of experience. Along with helping issuers and underwriters on deals, Eddie also advises publicly listed clients on compliance and corporate governance matters. And I think it's a great time to be speaking with Eddie because we are not only seeing a pickup on the deal-making side, most notably IPOs, but we're also seeing some interesting developments in regards to possible compliance changes, most notably a possible end to the SEC quarterly reporting requirements for publicly traded companies. So Eddie, thanks a lot for joining us here today. Is there anything about your background here that I've missed or that you wanted to point out?

Eddie Best   00:01:12

No, other than telling everybody how old I am. It sounds pretty on point.

Joe Mantone   00:01:18

Okay. All right. I set the stage for the discussion today. I wanted to ask about the topic of the declining number of publicly traded companies in the U.S. These numbers have dropped significantly in recent decades since the 1990s. But we've also seen a tremendous increase in the amount of the private sources of capital out there. So companies do have more options when they're looking to expand. And of course, that can help produce more economic growth. So Eddie, from your perspective, why does it matter that we're seeing a drop in the publicly traded companies?

Eddie Best   00:01:59

Great question. So first, let me just set the stage with some facts. In the mid-1990s, the number of public U.S. companies peaked at probably right around 8,000, a pretty large number. By the end of 2024, they were under 4,000. So that's a drop of about half. When we look at some of the other things, the NASDAQ in 1990 had 4,800 companies, which included non-U.S. companies. Now they're down to about 4,100. So that's dropped a bit. And then the NYSE had about 2,800 and now they're down to 2,100. The number of listed companies on those 2 markets isn't down nearly as much as the number of U.S. companies. A big difference for that is the number of foreign companies listed. So as U.S. company listings have dropped, we picked up an awful lot of foreign companies. So for example, back in 1990, about 2% to 4% of NASDAQ companies were foreign. Now it's 20%. The NYSE, similar number is about 6% to 8% in 1990, and now it's about 25%. So -- you asked a great question. Why does it really matter? I'll tell you, I think there's 3 reasons why it matters, and they're both from the company standpoint and the market standpoint. The first one is that private companies have traditionally had less access to capital to fund growth and innovation. So we, as an economy, want to see companies grow and prosper and innovate. On the investor side, as there are fewer companies, there's less liquidity out there. And then also really importantly, I think also what we've seen is a concentration, the fewer companies doesn't mean that they're smaller, and there are some statistics that show that, in fact, they've gotten much, much larger. But there's less competition now. And so there are less companies to invest in. So if you're an investor, one of the things that you want to be doing is diversifying your investment portfolio. And as the companies have gotten larger, but fewer of them, there just is less opportunity for you to diversify and there are less companies to invest in. So there may have been 20 companies in the industry 20 years ago, and now they're 5 or 6. So again, less opportunities there for individual investors.

Joe Mantone   00:04:11

But the fact that we're seeing more foreign companies on the exchanges, does that give investors more options on diversifying?

Eddie Best   00:04:19

It certainly does. It gives investors opportunities to see other companies where, again, back in the 1990s, they may not have seen Chinese companies, they may not have seen as many European companies, South American companies. So it certainly gives them other opportunities. And those companies in many respects are focused on other markets as well. So for example, you can diversify instead of investing in U.S. companies that are exposed to U.S. risks and U.S. opportunities, you can now diversify with South American companies or European companies or African countries. So yes, that certainly helps. Of course, Non-U.S. companies have different issues with them. So corporate governance issues. They face risks that U.S. investors may not necessarily understand as well. With everything, there's the good and the bad.

Joe Mantone   00:05:07

Got you. And then from the company perspective, you noted that one of the reasons why it matters is access to capital. And as I noted earlier, we have seen more pools of private capital out there. Is that a big reason on why we're seeing fewer publicly traded companies just because the companies can access private capital and they can fulfill their funding needs by not just having to go to the public markets?

Eddie Best   00:05:33

That's certainly one of the reasons. So a company typically goes public for one of a number of reasons. One is access to capital, -- they want to grow. Number two is they want to have a currency to buy other companies. Number three is they want to have the ability to give their earlier investors liquidity for their shares. And fourth is they want to be able to use the equity to compensate and retain their executives and their employees. So one of the things that you hit on was on the money, which is the private sources of capital have become massive right now. We've seen recent private capital raises for companies like, for example, OpenAI raised close to $40 billion privately. -- xAI, which is Elon Musk's AI company, was $12 billion. Databricks at the time was $10 billion, and people thought that was almost unheard of. So you've got these private capital raises that frankly dwarf almost any IPO. So that's certainly one of the factors in not having to go public. We talked about liquidity. There are more and more platforms that are providing liquidity in private companies. So the Nasdaq Private Market, Forge, CartaX are giving early-stage investors and employees opportunities for liquidity. So that is certainly helpful. Companies themselves sometimes buy back stock, whether it's on a quarterly basis or every once in a while do that. So you still have the ability to do some of the things as a private company that you might have done as a public company. But for example, whether or not it's useful for a currency to acquire another company is an interesting question, though. For example, OpenAI just bought another company for $1 billion in cash. So they said, we don't have a public market. We don't have a public currency. We'll just use a good old U.S. Green back. And so they had enough of them. And so yes, companies are definitely beginning to see opportunities to stay private longer. Whether that's forever, we'll see, but they're certainly staying private longer.

Joe Mantone   00:07:34

Yes, all good points there. And then you mentioned acquisitions. How does M&A sort of affect the number of public companies?

Eddie Best   00:07:45

So if you think about it, an awful lot of M&A is between public companies or with a private equity firm taking a company private. So M&A activity lessens the number of public companies. And so for example, there was some study that I saw that said that the number of companies that had gone private, so we're no longer public, about 60% of all the delistings were private equity buyouts. So that certainly reduces the number of companies. In terms of M&A, it also helps private companies. Look, a private company that wants to do M&A may not need to go public or a company looking to go public may decide, I'm going to try a dual track. And it's very common we're looking to grow the company and to get liquidity, what's our best avenue? It could be going public or it could be selling to a strategic investor, in which case we can get liquidity, either a cash deal or we get stock in a public company. That other company may give us the capital to grow or we may decide that we'd rather just sell to a private equity firm. And a private equity firm will give us both liquidity as well as capital to grow. So M&A is certainly an alternative to an IPO and M&A is also a reason why there are fewer public companies.

Joe Mantone   00:09:03

You mentioned the dual track there. I mean, have more companies been choosing the M&A route over IPOs in recent years?

Eddie Best   00:09:11

So the dual track makes an awful lot of sense when you have some market uncertainty on an IPO. So remember, a company that's looking for either liquidity or to grow, the founders of the company and certainly the people that run it also want to look at, are we going to be able to control the company? Are we going to be able to run the company after this process? At IPO, you typically get to continue running the company because you're in charge, whereas in an M&A situation, you often give that up. So I would say that many companies are still looking at a dual track scenario where management is less important or control by management is less important. And it also goes to what's going on with in terms of the market, where you've got a hot IPO market. You can get in and out of the SEC fairly quickly. You can get to market, you can price your IPO quickly. And the dual track is often seen as an alternative if the market turns against you, because the IPO market tends to be open windows and closed windows. Right now, we've been in a wonderful open window, and it's been lasting for a number of months now. But that IPO window could close for a number of reasons. And if you've got all your eggs in the IPO basket, I think I can probably say that, then if the window closes, you're out of luck and especially if, for example, you're in the midst of trying to buy another company and you're going to finance it with your IPO, you still need that money. So at that point, having a dual track where maybe you bring in a private equity investor and you stay private is always a good idea to at least investigate it and see whether that meets your needs.

Joe Mantone   00:10:45

Good. And so you just mentioned that the IPO window is currently open. So how wide open do you think it is? Is it across all sectors? What's the activity like right now in the IPO market?

Eddie Best   00:10:58

So the IPO market right now is pretty hot. Just in terms of, for example, statistics, this year, we've had 2025 year-to-date, and we're just about done with the third quarter. We've had 252 IPOs, of which about 90 of them were SPACs. So let's figure that it's somewhere around 160 IPOs. In 2024, same time year-to-date, we had less than 100 IPOs. So we're trending up about 60%, 70% in terms of the number of IPOs. SPAC IPOs are hotter as well, that's a very different segment of the market. The other thing that we're seeing is the returns on companies -- post-IPO companies are doing incredibly well right now. And so that is helping the market. Nothing helps success like success and a company building on the momentum of other companies be it. So we not only have a window that's open. We've got deals that are getting done. They're doing very well. In terms of sectors, most of the sectors are pretty hot right now. Obviously, the ones that we all think about that are the hottest are tech, anything that's associated with artificial intelligence, data infrastructure is pretty hot right now. Two of the best-performing IPOs of the year are CRE even Circle. Circle is in the crypto space. Fintech is big. Health care and life sciences is big. Another one that's relatively new is defense and aerospace, very big. We saw the carbon space IPO earlier in the year that our firm worked on. So that's a bit of a new thing, but that's partially geopolitics as well. Some of the things that aren't doing nearly as well, although we're seeing them are just regular old industrials as well as energy. We're seeing more deals, but we're not necessarily seeing them perform as well as some of the health care, fintech, tech kinds of things.

Joe Mantone   00:12:51

And why do you think there's been a divergence between different sectors there?

Eddie Best   00:12:58

So certainly, the ones that have been performing the best are the ones that have the best growth opportunities. And so you can't not notice what's going on with AI. And so AI is getting larger and larger. We just saw NVIDIA agreeing to invest what was $100 billion in Open AI. So AI is becoming ubiquitous in parts of our lives. What we also see is it's not just the AI companies, but it's also the digital infrastructure around AI has become absolutely massive because they require huge data centers. They require chips, they require electricity. So everything just around that sector is incredibly busy. Fintech, we've seen an awful lot of fintech have been big. Health care and life sciences as well, as I mentioned, these are all growth areas. Defense, unfortunately, is probably a growth area. Where we've seen less of it is industries that just have less growth aspect to them. They could be profitable, but they're not necessarily in a high-growth industry. A lot of this has also been fed, and we can talk about this more with the PE firms. We've had an extended period of time with PE firms that have bought companies that have been unable to sell them or to take them public. So we've got an awful lot of demand right now or I guess, supply. We got an awful lot of supply of companies waiting to come public. So that's, I think, helping things as well.

Joe Mantone   00:14:22

The conditions for IPOs, they've been pretty decent for a while. last couple of years, we've had strong equity markets and low volatility, but we really hadn't seen the number of IPOs picked up. So what's happening now that is -- that is driving the increased activity? Is it investors that you just mentioned is investors getting more comfortable with it or with the deals? Or you also mentioned that deals beget deals. Is it just that effect that's really starting to gain momentum now?

Eddie Best   00:14:54

So I would say there was an awful lot of optimism after the election that the new Republican administration was going to come in and help the economy and help the capital markets. And so there was a lot of optimism there as well as I mentioned, pent-up supply. So we saw a little bit of flurry in the markets earlier in the year with tariffs. Interest rates weren't coming down quite as quickly as people were hoping. But now -- the tariff situation has calmed down, obviously, interest rates seem to be coming down a little bit, although sometimes there's some negative economic news that causes that. But in general, investors have seen very strong equity markets. That is a good thing for them. Plus with interest rates coming down, a robust equity market and good returns there and lower returns on fixed income are going to put investors more towards the equity side of the equation. So I think the market is much more receptive to IPOs right now. Frankly, the companies that are coming public by and large, are also good companies that have been waiting around. So you don't see companies that, for example, were going public with SPACs 3, 4 years ago that didn't have revenue, certainly didn't have income that we were trying to go public. Now the companies that are going public are real companies with real revenues in most cases, earnings and profits. And so these are good companies that are going to be around for a while. And so I think investors have gotten very comfortable with all of that.

Joe Mantone   00:16:18

Okay. So more near term looks pretty good for the IPO market. Longer term, we've been seeing this overall decline in the number of IPOs kind of also speaks to the drop in the number of publicly listed companies. So what are some of your thoughts on the decline in the number of IPOs? Do you think that could be turned around at all?

Eddie Best   00:16:39

I think that's certainly going to get turned around. As we talked about, there are a number of things that contributed to the decline. Some of them are changing and some of them are going to be around for a little while. So for example, some of the things that are somewhat systemic now, you've seen the rise of index funds or passive investing has had a large impact on that. A number of years ago, of funds -- 5% of people's funds were invested in index funds. Now it's close to 50%. And by and large, index funds don't invest in IPOs because the companies have to be trading for a little while. So that is systemic. That's not going to go away. So you've got more and more money in index funds, that's not going to go there. The growth in private capital, we talked about already, that's here to stay, I think, for some period of time. M&A as an alternative exit strategy has always been around. I don't think that's going to change much. But one of the things that really could change, I think, have negatively affected the IPO market are both increased regulatory burdens as well as the rising cost of compliance. So when you put the 2 of those together, all things being equal, it's expensive to go public and to be public. And it can be a little disconcerting with changes in laws and disclosure requirements, et cetera. And as those get eased up, I think companies will look at that and say, it's going to be easier and cheaper to be a public company. Therefore, I'm now going to look at something that maybe I wasn't looking at 3, 4, 5 years ago as an alternative. So I think that's an area where we're going to see an awful lot of change going forward. or potentially.

Joe Mantone   00:18:15

And we did recently hear from the SEC Chair who mentioned support for a proposal that President Trump had put out there about reducing the requirement for publicly traded companies to report on a quarterly basis, report their earnings. So is that an example of a regulatory burden that could be loosened and help with some of the cost of being a publicly traded company?

Eddie Best   00:18:41

Absolutely. The -- when the new SEC administration came in, one of the questions that they were dealing with was, okay, what is our role in the U.S. market and the U.S. economy. And under the prior administration, you saw a much more activist SEC working on things like ESG and policy kinds of issues and important waiting issues of the day as opposed to protecting investors and helping the capital markets. And the new administration came in and said, we're going to get back to the basics, which is protecting investors, helping raise capital and working on orderly markets. And a lot of the things that we're seeing in terms of their regulatory agenda, there was just the SEC is required as all agencies to put out twice a year what their short-term and long-term agendas are in terms of their regulatory agendas. And the SEC has really very much moved towards helping capital flows and capital raises by easing the burdens, making things a little bit more clear -- the best example, and this is really just in the last couple of days, so this is very timely, is should public companies be reporting on a quarterly basis or should it be semiannual the way, for example, many foreign companies only report on a semiannual basis. So that would certainly ease the burden and make things a little bit cheaper, but there are quite a number of other things that add to the burden, add to the cost that the SEC is also looking at.

Joe Mantone   00:20:07

So what are some of the more important burdens that you think?

Eddie Best   00:20:10

There's a big dichotomy. All companies are subject to essentially the same rules. There are some eases of rules and there are some accommodations to smaller companies. But by and large, companies have to file quarterly 10-Qs and their annual 10-K. They -- most companies have to go through audits and internal control kinds of things. So the SEC is looking at a number of things, one of which is to really focus on the difference between smaller and mid-cap companies and larger companies. And should the disclosure burden be the same for smaller companies and larger companies. And with the disclosure burden and some of the other burdens, what is the cost? Clearly, if you've got a company like a Walmart or a huge company like IBM, they just -- they have massive amounts of revenue. And so therefore, $5 million, $10 million to be a public company is just a small drop of the bucket as opposed to a much, much smaller company that could be spending $1 million a year on being public, where that's a significant percentage of their revenue or their net income. So the SEC is looking at the categorization of what's an emerging growth company at EGC. EGCs are given a number of benefits in terms of their ability to raise capital. They get some exemptions for some of the more burdensome regulations. That's one of the things the SEC is looking at. The SEC is trying to make it a little bit easier for companies to go through the capital raising process with enhanced confidential filings. That's another big one. They're trying to rationalize some of the disclosure between different areas. They're looking at the regulatory burdens that some of their regulations impose. I was just reading something this morning that the SEC put out 2 different rules on the same date that were diametrically opposed. One required one thing and one required the other thing, and they didn't really synchronize them. So that's another thing that the SEC is going to try to do is look at their rules and say, what is it that we're really doing to people and how much is it going to cost? So that they're helping. They're also helping, for example, accredited investors going back to big versus small. One of the big focuses of the SEC right now is should retail investors, should mom-and-pops have the same opportunity to invest in different products that institutional investors get to invest in. The biggest ones, of course, would be, for example, private equity and hedge funds. Those have historically only been open to large investors, both because there are minimum investment requirements, but also they're very risky. And so the question is, should retail investors be able to get into them either directly or through their 401(k)s, is the definition of an accredited investor still correct because it's been around for an awfully long time. And for example, you have the minimum net income is $200,000 for a person, $300,000 for a family. That's been the number for an awfully long time. And if you look at the change in inflation, that $200,000 20 years ago is probably $0.5 million now. So should that be increased or should it be decreased because we should be letting more people in. One of the things that people are looking at is, why do we need a numerical test? Shouldn't it be, you should take a test. If you know what you're doing, shouldn't matter whether you've got $100,000 or $1 million to invest, let's take a test. If you can pass the test, by all means we should allow you to invest in things. So the SEC is looking at this really top to bottom. Sorry, that was a bit of a long answer to.

Joe Mantone   00:23:49

Sure. I appreciate it. But the change to how we define accredited investors, would that impact IPOs at all?

Eddie Best   00:23:56

Yes, it wouldn't impact IPOs directly. But again, if you make it easier for a company to raise capital privately, it doesn't need to go public quite as quickly. Also, it gets into, for example, Rule 144, which is the safe harbor that the SEC has on your ability to resell restricted securities, that's another thing that the SEC is looking to ease up a bit. And if you increase the liquidity for investors in private markets, that will then increase the opportunities for companies to raise capital in those private markets and push off the requirement or the need to go public. So they're all intertwined, maybe not directly, but they all come -- they all affect it.

Joe Mantone   00:24:38

So it might not necessarily help IPOs, but it can help companies grow and spur economic growth.

Eddie Best   00:24:45

Correct. Exactly. yes.

Joe Mantone   00:24:47

And then on the burdens for publicly traded companies, it sounded like what you were saying was the SEC is looking at more tailoring the requirements of being public more toward the size of the company, the right size of regulations.

Eddie Best   00:25:03

Absolutely. Look, I'll be honest. I've got clients that are small companies that have just gone public, and I've got some that are in the Fortune 50. And when you see the 10-Qs that come through and the 10-Ks, there's no reason why a small company that's in a relatively simple business needs to have a 50-page MD&A or that has a 150-page 10-K that's the same size as a company with a $100 billion market cap that's a much more complicated company. So trying to right size it in terms of what is material. Let's get back to the question of what is material to investors, right? We started getting away from that under the prior administration, and I'm not making value judgments, but a lot of it was what makes sense for the public these days. So we had these massive -- potentially massive requirements on greenhouse gas emissions. That would have been incredibly burdensome to so many companies, including small companies that had nothing to do with creating these. They're just a small staffing company or they just human capital. So they're not manufacturing anything. They're not burping clouds into the atmosphere, but yet. It was going to cost them an awful lot of money to do that, whereas you had other companies that were large and we were already doing these kinds of things. So to look at what is material to an investor, and let's get back to what do investors need to know to be able to make an informed decision about this company. And for many companies, that amount or that level of information is very different than for another company.

Joe Mantone   00:26:40

If there is some scaling back of what companies are required to report, is there any concern that, that could end up harming investors if there's less information out there?

Eddie Best   00:26:52

That's a great question. And I think that is one of the reasons why we haven't seen as strong a push to, let's say, rationalize some of the disclosure rules. There are currently different disclosure rules for smaller reporting companies, and they do get certain passes on certain things. So some things that are particularly difficult, for example, internal controls over financial reporting. EGCs don't have to comply with them quite as early as other companies. So there are some things in there. And I absolutely agree that as the SEC is looking at their regulatory agenda and looking at changing some of the rules, they really have to look at, is this going to harm investors? Are we going to be taking away necessary disclosures that investors want to see -- or are we just going to be saying, you don't need to disclose absolutely everything. I'll give you a great example. When the '33 Act was first adopted in all -- not surprisingly in 1933, there were no rules. But it said, you have to file this registration statement kind of a thing with this new agency called the SEC, and it's got to disclose all material facts. My recollection is that the first registration statement filed with the SEC was about 1,500 pages because nobody knew what was material. So they just decided, well, I have to tell you everything. And guess what? Nobody can reach 1,500 pages and understand it. So ultimately, things shrank down to now maybe there are 150 pages. But again, let's look at that and is it material to an investor? A lot of the things, for example, in executive comp, we disclose an awful lot of information about executive compensation that gets down into the weeds. Do we really need to know whether someone is spending $1,500 on a golf club membership or things like that. There are numerical numbers that we could probably all agree on that at some point, probably aren't really material. But again, it can't all be numerical because even a small number can be an important issue if it shows a trend in something or if it's otherwise qualitatively important. So the SEC has to be very careful in what they're doing.

Joe Mantone   00:29:00

You mentioned some of the emerging growth companies don't always have to adhere to those internal controls as early as some other companies. But in some cases, those EGCs will start adhering earlier just because the market wants to see that information, and they know that they'll get more investor support if they start disclosing that information.

Eddie Best   00:29:21

That's right. And I think that's also a great point to make when you're looking at what is material is ultimately, the test of materiality is what a reasonable investor is going to look at in making an investment decision. And so I think we also have to then factor into the rules, what does a reasonable investor want to know. Sometimes we can figure that out because presumably we all are fairly reasonable and many of us invest. But we should also maybe look at it from the investor side and bring them into the process and say, what is it that you look at? You're the ones that are doing the financial analysis. You're the ones that are making the investment decisions. What is it that you're looking at? Is this important to you? And let's hear from them. So the SEC has a comment process. Whenever they come out with new rules, the SEC has a comment process. And it's important for all of the different constituencies, be it the companies, the law firms, the accounting firms and the investors to submit comments to the SEC to let them know how they view the rules and how they view those changes in the rules. And if investors come in and say, we think you're being too easy or you're going to cut back too much, the SEC should understand that. And if investors come back and say, we don't really care about this, I think the SEC should also take that into account. So hearing from them and hearing from participants in the market, I think, is very important in a rule-making process.

Joe Mantone   00:30:53

All really good points there, and I think that's a great one to end on. We touched on a lot of topics today with our guest, Eddie Best, Co-Chair of the Capital Markets practice at the law firm Wilkie. So I thank Eddie for joining us, and we both thank you for listening. That will do it for this episode of the pipeline podcast.