Public Market / Private Market: Capital Raising Goes Back to the Future

The universe of U.S. publicly owned companies has been shrinking since the turn of the millennium. Fewer companies are choosing to list, and those that are listed have been issuing debt to finance share buybacks at unprecedented levels since the financial crisis.

Public markets have also been getting less liquid. Regulation, in the form of Basel III and the Dodd-Frank Act, has made it much more capital-intensive for investment bank broker dealers to “warehouse” securities on their balance sheets. Those inventories are used to make markets and provide liquidity to clients as they buy and sell stocks and bonds; as they shrink, the liquidity of the public markets dries up and the potential for gaps in pricing and higher volatility rises. Brokers, alongside alternative liquidity providers such as high-frequency and algorithmic traders, have turned to providing more “risk-based” market-making, but this can turn out to be illusory liquidity that disappears during bouts of risk aversion, just when it is needed the most.