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The previous article in this series argued that, contrary to popular belief, the Facebook IPO was actually fantastically successful - Morgan Stanley sold the stock precisely at its peak. They realized the maximum amount of money for Facebook and the initial investors, who became billionaires, while the buyers lost about 20% as the stock slowly drifted down.
The IPO was a stunning success for Facebook and for its earlier investors, but it also shows just how badly the current American regulatory morass harms individual investors. Instead of raising money by selling stock when it was small, Facebook put off its IPO until it could sell billions of dollars worth. Facebook had to be big to be able to cover the $100 million fee they paid Morgan Stanley for underwriting the IPO.
Back in the day, start-ups raised money when they grew to the $50-100 million range. They'd use the money to grow the business further, and most job creation came just after the IPO.
Our laws are now so complicated that a small firm can't afford the underwriting fees to go public nor can it afford the extra reporting which is now required of public companies. Instead of selling stock and letting the public in on its early growth phases, Facebook raised money from private, well-connected investors. These wealthy folks and insiders made out handsomely indeed. The New York Times explained just how brilliantly the IPO worked out:
Because Morgan Stanley aggressively priced the stock, at $38 a share — Facebook maximized its take, at $16 billion.
Instead of going to Facebook, a lot of that money went to insiders - Mike Zuckerberg got $1 billion in cash by selling a few of his shares. Back when IPOs were done at an earlier stage of company growth, it wasn't possible for insiders to realize that sort of gain so early. They had to wait and bring the smaller investors along with them before cashing out big. Modern laws intended to protect investors only mean that rich folks get the early gains and leave smaller investors scrambling for crumbs when the IPO finally happens.
Besides locking smaller investors out of start-up gains, our laws are chopping the number of public firms in which individuals can invest. The Economist reports:
The number of public companies has fallen dramatically over the past decade—by 38% in America since 1997 and 48% in Britain. The number of initial public offerings (IPOs) in America has declined from an average of 311 a year in 1980-2000 to 99 a year in 2001-11. [emphasis added]
So where has all the investment gone? Wealthy people and pension funds have poured money into the secret world of private equity financing. The New York Times reports:
The [private equity] industry has exploded in scale and scope in recent years with some $3 trillion in global assets. The 2,600 private equity firms in the United States are invested in 15,300 companies and employ about 8 million people, according to the Private Equity Growth Capital Council, the industry’s lobbying arm. Some of the largest private equity firms — the Blackstone Group, the Carlyle Group, and Kohlberg Kravis Roberts & Company — oversee global empires that rival some of the mightiest public corporations. ...
As for the notion that the buyout titans are enriching only themselves, they are quick to point out that their biggest investors are public pension funds that are seeking high returns to pay benefits down the road to state and municipal retirees. [emphasis added]
Why are pension funds, particularly government employee pension funds, investing in private companies? Public companies suffer from so much regulation that pension funds have recognized they won't generate enough profit to cover promised retirement benefits. Private companies aren't subject to nearly as much government regulation and thus can offer better returns.
President Obama has made private equity an issue in the Presidential campaign by accusing Mr. Romney of "vulture capitalism." If we're going look at job creation or destruction which is associated with the deals Bain Capital put together, fairness requires that we look at Mr. Obama's record of creating jobs by making green "investments" at taxpayer expense.
The Wall Street Journal argues that a profit-driven investor class is better than crony-driven public "investments." Mr. Obama's stimulus bill gave tens of billions to our Department of Energy to spend on loans, grants, and loan guarantees and promised to create millions of green jobs.
Solyndra received a $535 million loan guarantee in spite of warnings from government auditors. It went bankrupt, 1,100 people lost their jobs, and executives were given $370,000 in performance bonuses.
So, take your pick. Mr. Obama's knock on free enterprise is that it is driven by "profit," and that this experience makes Mr. Romney too heartless to be president. The alternative is an Obama capitalism that is driven by political favoritism, government subsidies, mandates, and billions in taxpayer underwriting—and that really is a path to bankruptcies and layoffs. If the president wants to put all 3,545 green stimulus jobs he's created up against Bain's record, he should feel free.
To be fair to Solyndra, in an earlier time they'd have raised money via an IPO which would have let individual investors judge their prospects and buy stock without risking taxpayer funds. With that door closed by regulations, one can hardly blame them for using their political connections to get the government to guarantee their loans.
Guaranteed loans are better than selling stock in some ways - once they'd paid back the loans, the owners could keep all the profit, whereas they'd have to cut investors in on the gains. So why not take the government's money? They'd get all the gains and the government would cover the losses.
That's crony capitalism Obama style. The government has created a situation where start-ups can't raise money by appealing to individual judgments about their prospects for profit. As with Facebook, start-ups without political connections involve wealthy investors who want to cash out when the long-delayed IPO finally happens. Either way, small investors lose.
Our government is destroying the major engines of our growth, stock markets and public companies. Do we really want to go any further down the road to crony capitalism, Obama-style?