Investors concerned about the shrinking number of companies on the London Stock Exchange may find it surprising that the United States is facing even steeper declines.
Despite its reputation as the world's most vibrant stock market, the US has seen its stock market listings nearly halved since 1996, signalling that the challenges are far from unique to the UK, according to investment platform AJ Bell.
"Its stock market listings are down by almost half since 1996, the number of new floats is down by nearly 90% from 2021’s peak, and this year’s initial public offerings have left investors sat on an average loss of 7.1%. Yes, this deadbeat stock market is... the USA," says Russ Mould, investment director at AJ Bell.
A shared decline across the Atlantic
Data from the World Bank reveals that between 1996 and 2023, the number of stocks listed on US exchanges plummeted from an all-time high of 8,090 to 4,315—a staggering 47% decline. In contrast, London's listings decreased by 19% during the same period, dropping from 2,041 to 1,718, according to the London Stock Exchange and highlighted by AJ Bell.
This downturn isn't just in the number of listings but also in new market entrants. The London Stock Exchange has seen only 26 new listings in 2024 so far, with just nine being initial public offerings (IPOs). This puts London on track for its weakest year since 2009, during the aftermath of the global financial crisis.
US IPO market also losing steam
Across the pond, the US is experiencing a similar slowdown. "America has hosted 152 IPOs in 2024 to date, leaving it some way below the average annual run rate of 253 that has prevailed since 2000, let alone the boom of 2001 when 1,035 new firms came to New York," notes AJ Bell's Mould.
Moreover, the performance of these IPOs has been underwhelming. Of the 152 IPOs in 2024, 67 are trading below their listing price, 34 are unchanged (as they are Special Purpose Acquisition Vehicles still searching for a target), and only 51 have seen gains. The average investor is sitting on a 7.1% loss from these offerings, according to AJ Bell's analysis.
Rethinking the regulatory approach
Given these trends, some have argued for looser listing requirements to make it easier and less burdensome for companies to go public. However, Mould cautions against this strategy: "A regulatory race to the bottom could, conceivably, lead to problems further down the road and sow the seeds of future scandals and accidents, if the rules favour sellers (as firms list) over investors (the buyers of that newly issued paper)."
He emphasises that while regulations increase the cost and scrutiny of being publicly listed, they are designed to protect investors. Rolling back these protections might increase risks for shareholders, potentially leading to lower valuation multiples as investors seek compensation for greater dangers, as per AJ Bell's insights.
Deeper issues than regulation
Mould suggests that the decline in listings and IPOs is part of a broader trend known as "de-equitisation." He points to historically low interest rates making debt a cheaper and more attractive option than equity financing. Additionally, the rise of private equity—bolstered by cheap debt and favourable tax treatments—allows companies to avoid the public markets altogether.
"The bigger issues that may be at work, besides regulation, include a long-term trend to lower interest rates, which means debt is a cheaper and more attractive option relative to equity. Another is the rise and rise of private equity, funded by ever-cheaper debt and favorable tax treatments, which shield executives from the public glare and the demands of shareholders," he explains.
No quick fix in sight
With interest rates trending lower once more, there's no apparent quick fix to reverse these trends. Mould notes that any unexpected issues in the private equity sector could shift the landscape if firms need to sell assets and potentially re-list them, but such scenarios are speculative at best.
"There is no apparent quick fix for either of those, especially as interest rates are trending lower once more," says Mould. "Higher-for-longer interest rates could be a challenge here, especially for those private equity firms who bought assets in 2021 and are thus locked into valuations which may be difficult to attain in a world where capital has a greater cost," he adds, reflecting AJ Bell's perspective.
So, what have we learned?
The challenges of declining stock market listings and weak IPO activity are not confined to the UK; they're part of a global trend affecting even the robust US market. While regulatory adjustments may offer some relief, they are unlikely to address the underlying issues driven by cheap debt and the allure of private equity, as highlighted by AJ Bell.
For private investors, this analysis underscores the importance of looking beyond surface-level market dynamics and considering the broader economic forces at play. As companies find alternative avenues for financing and growth, the traditional stock market faces pressures that require more than regulatory tweaks to resolve.