I heard a shocking statistic the other day: the number of companies listed on the UK equity market has halved over the past 25 years. That’s 50 per cent fewer opportunities for investors – a huge reduction in choice. And it’s a similar picture in other developed markets such as the US, France or Germany. My colleague at Schroders who carried out this research, Duncan Lamont, says this dramatic fall occurred because of a lack of new company listings and more companies delisting, often because the company has been bought or is merging.
It’s not that new companies aren’t being created, but that they aren’t going public by listing on western markets. The research illustrates how companies are staying in private ownership because of "cheap" debt and better access to other lines of finance, as well as the relative cost and hassle of a public listing.
The pattern is different in emerging markets, with China having experience an increase of almost 3,000 per cent in the number of stocks over the past 25 years, and six other emerging Asian and European markets seeing the number of companies listed on their public markets almost doubling. In these markets, the benefits appear still to outweigh the costs.
But so what? Does it really matter for charity investors? I think so. Most charity investors have historically turned to listed equity markets as the way to participate in the growth of the corporate sector over the long term. But what if all of the growth companies are now staying in private hands? It is the private equity investors that benefit and those of us invested in the public markets are unable to access that growth. A declining number of stocks reduces the opportunity set and potentially the returns compared with history. In theory this means lower long-term returns for charities, foundations and endowments, which, more importantly, leads to reduced spending levels.
So what can charity investors do about it? I think there are three things that are worth considering. The first is whether private equity could be an option for your charity – can you tie up part of your money for five to 10 years, and are you prepared to pay higher fees in order to access potentially higher returns? A barrier for many charity investors is access, with private equity still relatively inaccessible for smaller investment values.
Second, consider your public equity market strategy. You’ll be better placed to capture excess returns through active management rather than owning every company in the index through a tracker fund, even if it is the cheaper option.
Third, look at your geographical spread. Declining stock numbers are largely a western market phenomenon. Perhaps looking to emerging markets will provide the necessary growth opportunities.
For long-term charity investors, declining numbers of listed companies in western markets should ring alarm bells and provoke discussion. Active management and asset allocation in equities, alongside an exposure to private equity where appropriate, should help to keep charity investors' returns growing ahead of inflation, which is important if they are to ensure that philanthropic spending can be maintained.
Kate Rogers is head of policy at Cazenove Charities