A Wake-up Call for America
Transcript of A Wake-up Call for America
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A wake-up call for America
A study of systemic failure in theU.S. stock markets and suggestedsolutions to drive economic growth
www.GrantThornton.com/WakeupCall
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Grant Thornton LLP. All rights reserved.
Todays presenters
David Weild,Capital Markets Advisor atGrant Thornton LLP and former vice chairman ofNASDAQ
overview
moderator
Edward Kim,Capital Markets Advisor atGrant Thornton LLP and former head of productdevelopment at NASDAQ
job implications
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Todays presenters (cont)
Pascal Levensohn,founder and managing partnerof Levensohn Venture Partners, board member of theNVCA and member of the Council on Foreign Relations
VC industry and entrepreneurial implications
U.S. security interests
Barry Silbert,founder and CEO of SecondMarket the private market
implications for business
changes needed to accelerate growth
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A Blockbuster Study
provides powerful new informationthat will
reframe the debateand
debunkcommon mythsand
call for a restructuring of marketsto better
support investors and economic growth (jobs)
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Myths exploded
Sarbanes-Oxley causedthe IPO Crisis
200 IPOs is a great IPOmarket
the IPO market is back
cheaper transaction costs
are always betterfor theconsumer
the Dot-Com Bubble wasa listings bubble
there are no goodcompanies to take public
banks are causing theeconomic problem by notlending to small business
U.S. equities markets are
the best in the world
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Catastrophic failureA Great Depression in publicly listed companies
undermining: private companies
jobs innovation
U.S. competitiveness
national security
trouble began before the Dot-Com Bubble reached its peak
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Great Depression in Listingsbegan with the advent ofonline brokerage and the Order Handling Rules
SOX and peak of Dot-Com Bubble came later
S&P 500
-43.3%
NYSE Composite
NASDAQ Composite
Values are indexed to zero on January 31, 1991.
Source: Capital Markets Advisory Partners, WorldFederation of Exchanges, NYSE Euronext,NASDAQ Stock Market. Domestic companieslisted, excluding funds.
Companies listed on U.S. stock exchanges
First online brokerage and beginning of Dot-Com Bubble (1996)
New Order Handling Rules (1997)
Peak of Dot-Com Bubble (2000)
Decimalization (2001)
Sarbanes-Oxley Act (2002)
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Number of sub-$50M IPOs declined from 80% to 20%of market by 2000
100
90
80
70
60
50
40
30
20
10
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009thru 6/30
Transactions raising at least $50 million
Transactions raising less than $50 million
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Relative to key segments of the stock market, theideology is false that cheaper trade execution by itself
is better for consumers
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The United States is losing ground to all otherdeveloped nations steep decline since
implementation of Order Handling Rules in 1997
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and destroying the ecosystem that supported smallbusiness formation
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The United States should have twice (2x) as manypublicly listed companies as it currently has
self-inflicted end to the America Era?
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The U.S. lags far behind other global markets Asiais adding companies even fasterthan GDP growth
rates
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It takes many more IPOs to sustain listed markets (andthe economy) than anyone realized until we
conducted this study
Replacement Level to match GDP growth = 520
Average Replacement Level = 360
Average IPOs 2004-2008 = 209
Listings lost
IPOs gained
U.S. stock markets need 360 new listings per year just to tread water, and 520 per year to
keep pace with 3% annual GDP growth levels we have not realized in nearly a decade.
Number of new listings required to maintain replacement levels on all U.S. stock markets
Source: Capital Markets Advisory Partners, World Federation of Exchanges, Dealogic, NYSE Euronext, The NASDAQ Stock Market. Exc ludes funds.
2000 2001 2002 2003 2004 2005 2006 2007 2008
1,000
800
600
400
200
0
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Market failure may be costing the U.S. 10 million to 20millionjobs
The lack of a functional IPO market may have cost the United States 22 million jobs over the last decade.
Calculations based on actual 1996 IPO levels of 803 and number of employees at IPO of 1,372.
Source: Capital Markets AdvisoryPartners, Global Insight (studycited by N VCA in its 4-Pillar Planto Restore Liquidity in the USVenture Capital Industry)
22.7 million potential jobs lost
(17.8% annual employee growth rate)
15.0 million potential jobs lost(10.0% annual employee growth rate)
11.6 million potential jobs lost
(5.0% annual employee growth rate)
Job costs
from 2008 lost IPOs
from 2007 lost IPOs
from 2006 lost IPOs
from 2005 lost IPOs
from 2004 lost IPOs
from 2003 lost IPOs
from 2002 lost IPOs
from 2001 lost IPOsfrom 2000 lost IPOs
from 1999 lost IPOs
from 1998 lost IPOs
from 1997 lost IPOs
Each color band represents the
progressive effects of lost IPOson job growth potential. For
example, the loss of 10 IPOs in 1997
translates into the potential loss of
83,167 jobs in 2008.
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
20,000,000
15,000,000
10,000,000
5,000,000
0
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When primary capital formation (IPOs) fails, quality jobformation fails in both public and private enterprise
Millions of jobs would have been created if we had maintained even modest IPO levels.
Source: Capital Markets Advisory Partners, Dealogic, Global Insight. IPOs exclude funds, REITs, SPACs and LPs.
Historical IPO levels
Annual
employee
growth rate
Number of
employees at IPO
361 IPOs
(1998 actual)
568 IPOs
(1991-1996 average)
803 IPOs
(1996 actual)
5.0%
500 1,092,104 2,378,822 4,248,229
750 1,638,156 3,568,232 6,372,343
1,000 2,184,208 4,757,643 8,496,458
1,372 2,996,733 6,527,487 11,657,140
10.0%
500 1,322,139 2,964,342 5,475,569
750 1,983,209 4,446,514 8,213,354
1,000 2,644,278 5,928,685 10,951,138
1,372 3,627,950 8,134,155 15,024,962
17.8%
500 1,790,494 4,231,626 8,282,176
750 2,685,741 6,347,439 12,423,265
1,000 3,580,989 8,463,252 16,564,353
1,372 4,913,116 11,611,582 22,726,292
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Five hundred $100-million companies equals one $50billion Madoff, but the companies contributejobs,
innovation and tax revenues
WorldCom had a value of$181 billion
AIG had a value of$240 billion at its peak
Fannie Mae was at $90 billion Global Crossing was more than $80 billion
Enron was at $66 billion
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Recommendation Alternative public market segment
a public market solution that provides an economic modelthat supports the value components (research, sales
and capital commitment) in the marketplace. It wouldestablish a new, parallel market segment that benefitsfrom a fixed spread and commission structure.
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Recommendation Enhancements to the private market
a private market solution that enables the creationof a qualified investor marketplace consisting of both
institutional investors and large accredited investors thatallows issuers to defer many of the costs of accessingprivate capital as a precursor to becoming a public company.This market would serve as an important bridge to an IPO,notably in improving the market for 144A PIPO (pre-IPO)
transactions that require an issuer to list publicly in thefuture.
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Venture capital industry and entrepreneurialimplications; U.S. security interests
Pascal Levensohn founder and managing partner of Levensohn
Venture Partners, board member of the NationalVenture Capital Association (NVCA), and memberof the Council on Foreign Relations
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Today Innovation is Mobile and Global
Thrives In an Environment Which:
INNOVATION
Encourages Collaboration and Diversity
Is Defined by Resource Constraints and a Sense of Urgency
Promises Ample Rewards for Success
Today, innovation is mobile and global
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Innovative Solutionsfor Next Generation
Infrastructure
America is Late to Recognize These KeyInterrelationships
Government
Academic andResearch
Institutions
Corporations
VentureCapitalists
Entrepreneurs
Funding BreakthroughInnovation
Funding Breakthrough Innovation Licensing IP
IncrementalR&D
Developmentof IP
ProcessKnowledge &Best Practices
Core BuildingBlocks
America is late to recognize these key interrelationships
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Global Financial Crisis Exposes Structural Flaws in U.S. CapitalMarkets from Unintended Regulatory Consequences
Why is American Innovation in Crisis and at Risk ofLong-Term Decline?
Traditional Risk Capital Sources Drained from Public and Private
Equity Market Venture Capital Community Experiencing Systemic Liquidity Crisis
U.S. must rely on a new cycle of job creation to drive sustainablegrowth in our economy. While entrepreneurs can be successfulwithout VCs, venture capital is the most efficient job growth
creation engine in this country Serious Negative Implications for Americas Economic Growth for
the Security of Critical Infrastructure and for National Security
Why is American innovation in crisis and at risk of long-term decline?
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92% of Job GrowthOccurs Post-IPO
VC-Backed Company Employment Growth
1970s 1980s 1990s 2000s Overall
97% 94% 88% 76% 92%
Pre-IPO Post-IPO
0.48%
1.54%
All Companies VC-BackedCompanies
12.1M Jobs Created
VC-Backed CompaniesCreate Jobs Faster
Employment CAGR (2006 - 2008)
Venture Capital Fuels Job CreationVenture capital fuels job creation
Sources: Left: Global Insight, 2009Right: NVCA, Global Insight and Survey of Top 136 VC-Based Companies That Went Public 19702005
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Longer Time to IPO and M&A
Median Age at IPO
Median Age at M&A
1998
4.5Years
2008
9.6Years
1998
3Years
2008
6.5Years
The Recent Realities of Venture-BackedM&As and IPOsThe recent realities of venture-backed
M&As and IPOs
Source: Thomson Reuters, Dow Jones VentureSource Grant Thornton LLP. All rights reserved.
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2000s1990s
(92 00)
Number of Venture-Backed IPOs vs. M&A Exits
Lack of IPOs is harmful to job creation and the economy
M&A87%
(01 08)
IPOs56%
M&A44%
1,776IPOs
392IPOs
IPOs13%
Dramatic Decline in IPOs in the 2000sDramatic decline in IPOs in the 2000s
Source: Thomson Reuters/NVCA Grant Thornton LLP. All rights reserved.
k d d $
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19721972$3.0MM Raised$3.0MM Raised14,824 Employees Today14,824 Employees Today
19811981$7.0MM Raised$7.0MM Raised13,200 Employees Today13,200 Employees Today
19881988$27.0MM Raised$27.0MM Raised5,800 Employees Today5,800 Employees Today
19881988$30.2MM Raised$30.2MM Raised76,500 Employees Today76,500 Employees Today
19891989$16.6MM Raised$16.6MM Raised9,100 Employees Today9,100 Employees Today
19861986$16.3MM Raised$16.3MM Raised20,000 Employees Today20,000 Employees Today
19861986$41.3MM Raised$41.3MM Raised42,100 Employees Today42,100 Employees Today
19711971$8.3MM Raised$8.3MM Raised83,900 Employees Today83,900 Employees Today
19861986$36.2MM Raised$36.2MM Raised84,233 Employees Today84,233 Employees Today
19951995$39.5MM Raised$39.5MM Raised7,645 Employees Today7,645 Employees Today
19831983$12.1MM Raised$12.1MM Raised12,600 Employees Today12,600 Employees Today
19891989$19.0MM Raised$19.0MM Raised17,600 Employees Today17,600 Employees Today
19901990$28.8MM Raised$28.8MM Raised3,415 Employees Today3,415 Employees Today
19721972$0.9MM Raised$0.9MM Raised50,072 Employees Today50,072 Employees Today
19961996$38.9MM Raised$38.9MM Raised13,600 Employees Today13,600 Employees Today
17 Venture-Backed Companies Raised $367M;Provide 470K U.S. Jobs Today17 venture-backed companies raised $367M and
provide 470K U.S. jobs today the vast majority ofthese companies could not go public today!
Source: Jefferies & Co.
19931993$34.5MM Raised$34.5MM Raised8,200 Employees Today8,200 Employees Today
19861986$6.1MM Raised$6.1MM Raised7,544 Employees Today7,544 Employees Today
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New 501(c)(6) established October 2009Coalition for Restoration of U.S. Listings and Markets
What are Private Sector Leaders Doing About This?
Active leadership from David Weild, former EVP NASDAQ, PatrickVon Bargen, former Deputy Chief of Staff, SEC, Steve Bochner,CEO, Wilson Sonsini, Pascal Levensohn, and others
Targeted reform of technical securities regulations to restorepositive economics for risk taking on behalf of small company IPOs
Reaching out to Congressional leadership for support
Reaching out to our nations largest pension plans for support
Raising awareness with the media
What are private sector leaders doing about this?
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The private market, implications for business, andchanges needed to accelerate growth
Barry Silbert founder and CEO of SecondMarket, the industry
leader in private company stock transactions
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SecondMarket the largest centralized marketplacefor illiquid assets
hybrid marketplace
offices in NYC and
Silicon Valley 5,000 participants
managing over $1trillion
~$25 billion for sale ~$2 billion in
transactions in 2009
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Significant interest in private company shares fromleading privateandpublic investors
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A robustIPO market
drives capital
(equity plus credit) into
the private market
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Regulatory considerations to be addressed toaccelerate growth and participation
key considerations: amend general solicitation rules: vetting should occurbefore
purchase, rather than before marketing
amend 144A rules to include both QIBs and accredited investors
review investment intent rules to allow for more active marketmaking
add exemption to 500 shareholder limit for accredited investors
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