Archive for the Regulation of US Capital Markets Category

IPO Market in the Doldrums

Posted in Initial Public Offerings (IPOs), Regulation of US Capital Markets, US Stock Markets on October 25, 2011 by David Griffith

The IPO market, an engine of job growth, stalls

ASSOCIATED PRESS Matthew Craft, Monday October 24, 2011

NEW YORK (AP) — Two companies with quirky names, Ubiquiti Networks and Zeltiq Aesthetics, made their public debuts earlier this month with listings on the Nasdaq Stock Market. Each company’s stock went up modestly on the first day of trading.

Ubiquiti pocketed $106 million for the day, and Zeltiq made $91 million. They were the most successful stock debuts of the past two months. Then again, they were the only stock debuts of the past two months.

The market for initial public offerings, or IPOs, is suffering through a drought of Texas proportions. Companies thinking of going public are deciding it’s just too risky.

The stock market lost nearly 20 percent of its value in a month this past summer. Swings of 200 points for the Dow Jones industrial average continue to be commonplace. Getting the timing wrong for a coming-out party can mean missing out on millions of dollars.

A dried-up IPO market matters because stock debuts aren’t just a chance for tech whizzes to become overnight billionaires and ring the bell at the New York Stock Exchange. Companies use the cash they raise to grow — and that means hiring people.

And at a time when 14 million Americans are looking for work and the unemployment rate has been stuck near 9 percent for two years, the last thing the economy needs is for one engine of hiring to stall.

There are 215 companies waiting to go public. They’ve filed the necessary paperwork and lined up bankers, and are just holding out for the right time to unleash their stock. The waiting list is the longest since 2001, according to Renaissance Capital, an investment advice firm.

LogMeIn, a Massachusetts software company, went public in July 2009, raised $107 million and harnessed the cash to hire people. Within two years, its work force grew by a third, to 432 people. Without the IPO, the company might have added only 10 percent to its work force, says Jim Kelliher, the chief financial officer.

“It’s cash to expand your business,” he says.

That’s how it usually works. For upstart companies, IPOs and hiring sprees go hand in hand:

LinkedIn, the online social network for professionals, went public in May to fanfare, raising $353 million. In the three months through the end of June, it expanded its staff by 17 percent.

— Pandora, which streams music online, debuted in June. It bulked up the product development staff by 74 percent and sales and marketing by 125 percent. Pandora employed about 300 people at the end of January and now has more than 400.

ReachLocal, an online marketing company, went public in May 2010. From the month before its coming-out party through the end of the year, its work force grew 30 percent, to 1,381.

In good times, an open door for stock market debuts can start a snowball of benefits, says Steven Kaplan, a professor of finance at the University of Chicago Booth School of Business.

Venture capital firms bankroll small upstarts, like Amazon and Google, years before they go public. A successful IPO enriches the venture capital backers. They then have an easier time raising money from new investors to plow into companies that might be the next Amazon or Google.

“There’s a feedback effect,” Kaplan says.

For profitable businesses, an IPO can also unlock the door to corporate debt markets, another source of cash that helps a company grow.

Entrepreneurs and investors describe going public as a crucial hurdle for fast-growing companies, one that divides the Amazons and Googles of the world from the graveyard of startups.

Those that clear the hurdle can transform themselves from obscure businesses to household names. A recent study by the National Venture Capital Association, a trade group, and IHS Global Insight, an economic forecasting firm, examined companies that went public from 1970 to 2010 and had been backed by venture capital before their IPO.

It found that 92 percent of the people hired by those companies over the four decades came on after the IPO.

A separate report by Nasdaq OMX, which owns the Nasdaq Stock Market, examined companies that went public from 2001 to 2009 and found that they increased their collective work force by 70 percent. The number of employed people in the United States in that time rose 1.3 percent.

Of course, the economy has bigger problems than a barren IPO market. Even if all the promising upstarts in line for an IPO went public, it might not put a dent in the 9.1 percent unemployment rate.

And it’s difficult to know exactly what companies will do with the money. Most are vague in regulatory paperwork about their next steps. And would-be public companies are barred from talking about their plans until a month after their debut.

Before this past summer, fast-growing companies like LinkedIn and Pandora had been jumping into the stock market at a brisk pace. The companies got a good initial price, and their stock generally did well after that. LinkedIn went public May 19, and its stock more than doubled on its first day.

For a while, it appeared that 2011 would be the best year for IPOs since the Internet bubble popped in 2000. Investors were ready for Internet companies like Zynga and Facebook to go public.

They’re still waiting. The Dow lost more than 2,000 points from late July through mid-August. And while the market has rallied since early October, the past two months have been a series of up and down lurches.

As dry as it’s been, the drought for IPOs is still not as bad as during the financial crisis. Just one company, Grand Canyon Education, managed to go public in six months, August 2008 to February 2009.

Faced with a long wait and a volatile stock market, some companies have decided to give up. At least 15 private companies have withdrawn their IPO paperwork from the Securities and Exchange Commission in the past two months.

Others are getting snapped up by larger corporations. Of the five companies that pulled their IPOs in September, three were acquired. Hitachi, Nestle and private equity firms all picked up companies that gave up their dream of going public.

What will it take to end the drought? Calmer markets. In recent weeks, moves by European officials to end the region’s debt crisis have lifted stocks, but the market remains volatile.

In the meantime, companies are warily eyeing the calendar. Groupon, the daily-deal email service, plans to go public in early November. It was valued as high as $25 billion in June, but it now expects less than half that.



Hedge Funds Get Closer Scrutiny

Posted in Regulation of US Capital Markets, US Stock Markets on February 17, 2011 by David Griffith

NEW YORK TIMES   JESSE EISINGER, Wednesday February 16, 2011

Now for a bit of good news: Rationality may be breaking out in the hedge fund world.

Investors are punishing funds that have engaged in questionable behavior and balking at ever-escalating fees. Regulators are showing uncharacteristic backbone, insisting that they will not merely fight the last war when it comes to new rules.

That’s a big change from the old way of doing business in hedge fund land, which was to reward failure and ignore problems.

Think back to Long-Term Capital Management. The multibillion-dollar hedge fund imploded spectacularly in 1998, presaging much of the larger financial crisis a decade later. The fund’s implosion was caused by excessive leverage and gigantic derivatives positions.

The Federal Reserve Bank of New York engineered a Wall Street bailout and, in the immediate aftermath, regulators and investors professed a desire for change. Yet John W. Meriwether, the impresario who had blown up L.T.C.M., soon gathered billions in new assets – only to blow up again. Regulators watched passively as hedge funds grew meteorically without close monitoring.

Now after the financial collapse of 2007-8, changes are dribbling in. It’s all the more surprising since hedge funds were not a cause of the crisis. Banks, especially Wall Street firms, get the credit for that. Plenty of hedge funds went out of business, but almost none of them were systemically important enough to stoke fears of a wider panic.

Nevertheless, the changes are welcome.

One hopeful sign is that institutions like pension funds and foundations are pulling money from hedge funds that acted cavalierly during and after the crisis. They are nervous about the insider trading scandal sweeping the industry.

Funds that had spectacular returns only to crash during the crisis, like Atticus Capital, have wound up their operations. At Harbinger Capital, the founder lent himself money from the fund, and investors have punished him for it. Shumway Capital tried to change its management structures without giving investors what they considered adequate notice, and now it is closing. Funds that have been ensnared in the insider trading investigation, fairly or not, are shutting their doors.

When liquidity dried up at the height of the crisis, certain funds prevented investors from taking money out of their firms. Now, some are suffering large-scale redemptions.

D. E. Shaw, the gigantic hedge fund complex, lost investors throughout last year even though it invoked triggers on terms agreed in advance. Other funds engaged in the more controversial practice of suspending redemptions without a previous contractual agreement. Investors have reacted bitterly to both kinds of suspensions.

Another sign of the new rationality is that hedge fund fees are finally creeping downward, a trend long predicted that had not ever managed to arrive.

In the past, hedge funds have been something of a “Giffen good” – that unusual market phenomena of demand rising as the price climbs. The more the hedge funds charged and the more exclusive they were, the more they were desired. Incentive fees, however, have finally begun to ebb, down to 19 percent, from 19.3 percent three years ago according to Hedge Fund Research.

D. E. Shaw is lowering the management fee on its Composite Fund to 2.5 percent from 3 percent and dropping its performance fee to 25 percent from 30 percent. D. E. Shaw declined to comment on the changes and, with about $19 billion under management, something tells me the firm will manage to scrape by, even with lower rates.

Still, fees ought to come down – the performance hasn’t been there.

Sure, there are examples of funds with spectacular returns, like Daniel S. Loeb‘s Third Point, which had a 34 percent gain last year. Over all, however, performance lagged the stock market. Both the Hedge Fund Research composite index and its index of equity-based hedge funds trailed the Standard & Poor’s 500-stock index’s total return two years running.

Hedge fund managers justifiably argue that investors shouldn’t expect funds to beat the market every year. A well-managed hedge fund is devised to make money in good markets and bad, with less volatile returns.

But since many hedge funds lost spectacular sums in 2008, their credibility has been shaken. It turned out they weren’t hedging enough and were more correlated to the markets than they should have been. Investors weren’t getting what they are paying for.

We’ll see how long these positive developments last. Investors put almost $150 billion into hedge funds in the fourth quarter, a record, according to Hedge Fund Research. Assets now stand at $1.9 trillion, just below the peak reached before the financial crisis.

Still, funds that aim for slow-and-steady returns appear to be thriving amid the new risk-averse mood.

And as money rushes back to the industry, regulators seem poised to impose the first genuine controls on it. Hedge funds will have to register and disclose more about their activities to financial overseers.

Last week, the Federal Reserve issued its definitions of what a “significant nonbank financial institution” will be, drawing the lines broadly enough to include big hedge funds. The Fed, properly, has judged institutions’ significance based, in part, on how interconnected they are: how many trades they do, how many counterparties they have, how much they have borrowed. It’s a good, and necessary, step toward policing systemic risk in the system.

Just because hedge funds didn’t cause the last crisis doesn’t mean they can’t cause the next one