Axel Springer’s take-private is symbolic of a radical shift in capital markets
Richard Henderson in New York
Axel Springer, a German journalist, turned one Hamburg newspaper into a publishing behemoth that now spans hundreds of titles and billions of euros in annual revenue. The company that bears his name was typical of a growing business that turned to the stock market to fuel its growth, giving a diverse group of investors a claim on an expanding stream of profits.
Now, 34 years since the stock first listed, public investors will no longer have that claim. Axel Springer shares are set to drop off the public market after the company struck a takeover deal this month with KKR, the private equity group.
The retreat into private hands is symbolic of a radical shift in capital markets that has changed the nature of European and US stock exchanges as conduits of capital between growing companies and everyday investors. In the US alone, the number of listed companies stands at just over 4,000, half the amount in 1996, the zenith for the US market. Europe has also contracted, to a lesser degree.
The post-crisis rise of private equity is just one driver behind the change. Other factors include the slower pace of new companies launching on public markets, while mergers that combine multiple stocks have also cut the tally of listed companies. Low interest rates, meanwhile, have increased the appeal of debt financing for companies that may have previously decided to raise money by selling equity.
“Stock markets are not competitive places to raise capital or sell companies right now,” said Robert Buckland, an analyst at Citi. “Public equity markets are shrinking because companies can find cheaper capital elsewhere.”
As investors have sought higher returns, they have reduced allocations from stocks and bonds and instead put the money to work into alternative classes of assets, such as private equity. KKR and peers such as Blackstone and the Carlyle Group have drawn in tens of billions of dollars in the past decade, including more than $2tn in money sitting on the sidelines they have yet to put to work, known as “dry powder”.
“Venture capital and private equity have been around for a long time but they really hit their stride in the last decade,” said Nick Colas, co-founder of DataTrek Research. “With private equity you can use leverage, you’re not beholden to the scrutiny of a public company and you have more control to make cuts more easily.”
At the same time as this wave of money has flowed into private equity, companies have used their own cash to buy back stock, removing shares from public markets. Last year, US companies spent $806bn on share buybacks, a record.
In the first quarter, Apple alone spent $23.8bn on share buybacks. The iPhone maker has ramped up its programme in recent years after Carl Icahn, the activist investor, urged the company to use its burgeoning cash piles to buy back its own stock.
The concentration of the stock market is creating “superstar” firms like Facebook, Google and Amazon that increasingly dominate their industries, according to Goldman Sachs analysts.
“Across industries …firms have captured increasing market share, translating their competitive advantage into higher margins and outperformance during the past three years,” said Ryan Hammond, a Goldman analyst.
The torrent of initial public offerings in the US this year is no counterpoint. Instead, these listings reflect an increasingly prominent function of public markets — acting as an exit valve for private investors and start-up founders. Highly anticipated IPOs such as ride-hailing rivals Uber and Lyft had already reached sky-high valuations through multiple private rounds of fundraising, and have performed indifferently since listing.
“There starts to become a point where those valuations become out of sync with public markets,” said Macie House, a managing director at Baird in Portland, Oregon. “Investors are being a little more selective and companies are being more cautious in determining their pricing range.”
June’s public debut of Slack may provide a template. The messaging platform completed a “direct listing” where its shares are listed on an exchange but the business does not raise any money in doing so. The company had already attracted $1.2bn through private investors, including a $427m fundraising round in August.
“The IPO of today has less upside opportunity than it did 15 years ago,” said Wayne Wicker, Washington, DC-based chief investment officer of ICMA-RC, a US pension fund. “The private equity groups are keeping these companies private for longer so you don’t have a thousand embryonic companies rising up. They emerge as large companies when they list.”
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