Why are more companies staying private?

Meeting of SEC Advisory Committee on

small and emerging companies

15 February 2017

Page 1

Public listings are on the decline since mid-1990s

• The number of public companies has decreased by more than 50% since the 1996 peak. This

decline is mainly due to M&A activity among public companies and delistings for cause

(noncompliance) offset by IPO activity.

• Over this period, very few companies voluntarily went private.

• Delistings for cause have decreased since 2005 which suggests that higher listing requirements and

SOX reforms have had an effect on the quality and sustainability of listed companies.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

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1975

1976-1

98

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1976-1

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1976-1

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Source: Craig Doidge (Rotman School of Management at the University of Toronto), G. Andrew Karolyi (Johnson Graduate School of Management at Cornell University), and Rene M. Stulz (Fisher School of Business at The Ohio State University), “The U.S. listing gap,” The National Bureau of Economic Reseearch, May 2015, © 2015, NBER. Data include US domestic companies listed on NYSE and NASDAQ excluding investment funds and trusts.

Page 2

More than 90% of IPOs listed on domestic exchange Trend continues; 6% of global 2016 IPOs were cross-border listings

1996–2016 domestic IPOs as percentage of annual global IPOs

A foreign listing is where the domicile of the primary exchange (or the secondary exchange for dual listings) differs from the listed company domicile. For dual

listings, all funds are allocated to the primary stock exchange. Deals by Chinese companies on HKEx are not considered foreign listings.

Sources: Dealogic, Thomson Financial, EY research.

96%

92% 92% 93% 93%

98% 98% 97%

93%

90% 89% 88%

91% 91% 90%

94% 93%

91% 90%

92% 94%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Page 3

178

91

44

23

96

0

50

100

150

200

NYSE &Nasdaq

London(Mainboard &

AIM)

Australia(ASX)

Hong Kong(HKEx &

GEM)

Other

China 22%

Israel 15%

United Kingdom

11% Bermuda

5%

Canada 5%

34 other countries

42%

From 2012 to 2016, US exchanges were the preferred markets for cross-border listings

Number of IPOs Capital raised (US$b)

A foreign listing is where the domicile of the primary exchange (or the secondary exchange for dual listings) differs from the listed company domicile. For dual

listings, all funds are allocated to the primary stock exchange. Deals by Chinese companies on HKEx are not considered foreign listings.

Sources: Dealogic, EY research.

US$66b

US[VALUE]b

US[VALUE]b

US[VALUE]b

US[VALUE]b

$0

$10

$20

$30

$40

$50

$60

$70

NYSE &Nasdaq

London(Mainboard &

AIM)

Hong Kong(HKEx &

GEM)

Singapore(SGX &Catalist)

Other

Includes Alibaba’s

US$25b IPO

2012–2016 top stock exchanges for cross-border listings

Page 4

And very few US companies are listing abroad

$0.02 $0.04 $0.45 $0.49 $0.36 $0.70 $0.17 $0.01 $0.28 $2.23 $0.02 $0.37 $0.24 $0.36 $0.02

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IPO

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Cap

ita

l ra

ised

(U

S$b

)

Capital raised (US$b) Number of deals

Based on IPO activity on non-US exchanges by US domiciled companies, excluding dual listings

Source: Dealogic

Samsonite IPO in

Hong Kong

Page 5

There has been an upward trend in VC-backed company formations ...

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Second round 206 175 206 235 376 463 556 887 1,414 989 638 507 492 491 592 606 629 640 626 632 642 783 834 932 817

First round 288 290 339 473 682 814 969 1,832 2,792 1,005 646 618 724 867 912 1,124 1,103 794 978 1,257 1,370 1,439 1,507 1,497 1,299

Seed 74 86 97 112 187 154 158 320 293 146 98 80 105 107 168 218 206 186 272 465 524 494 397 292 187

0

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Venture capital includes all investments made by venture capitalists or venture capital-type investors, i.e., those making equity investments in early-stage

companies from a fund with multiple limited partners.

Source: Dow Jones VentureSource.

Total 568 551 642 820 1,245 1,431 1,683 3039 4,499 2,140 1,382 1,205 1,321 1,465 1,672 1,948 1,938 1,620 1,876 2,354 2,536 2,716 2,738 2,721 2,303

Page 6

... however, IPOs have not kept pace

218

393

554

448

402

624

488

358

511

404

91

88 84

238 208

204 214

35

65

162

124 133

226

291

174 111

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11

20

12

20

13

20

14

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15

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16

Number of IPOs

Capital raised (US$b)

Capital raised(US$b)

Number of deals

“Dot com” and human

genome “bubble”

Global financial

crisis

Based on IPO activity on US exchanges including cross-border deals, excludes special purpose acquisition companies (SPACs) and business development

companies (BDCs).

Sources: Dealogic and EY Analysis.

Page 7

US IPO listings by US domiciled companies

$16 $27 $37 $21 $21 $30 $32 $38 $66 $63 $38 $22 $14 $40 $34 $35 $36 $26 $17 $37 $34 $41 $54 $55 $28 $15

215

377

527

413

374

572

448

323

476

351

86 83 79

208 179 171 160

26 48

109 101 121

188

224

133

90

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100

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Cap

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(U

S$b

)

Capital raised (US$b) Number of deals

Based on IPO activity on US exchanges by US domiciled companies, excludes special purpose acquisition companies (SPACs) and business development

companies (BDCs).

Source: Dealogic

Page 8

Acquisitions of US private companies remain robust

1,953

3,959

5,774

5,425

4,660

3,598

3,118

2,791

3,721

4,438

5,967

6,502

4,526

3,022

3,821

4,799

5,989

5,135

6,028

5,333

4,817

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

registered IPOs $30mm+. Excludes BDCs, SPACs, MLPs and REITs.

Nu

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of

dea

ls

Sources: Dealogic and EY Analysis.

Page 9

Dual-track exit strategies remain common Acquisitions of US private companies with values >US$100m

Sources: Dealogic and EY Analysis.

182

241

282

321

400

178

127

167

298

375

410

440

260

157

302 333

369

312

478

433

387

0

100

200

300

400

500

600

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

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Page 10

Acquisitions of US publicly traded companies have fallen along with the number of public companies

462

696

766

905

752

608

443 443

361

406 426

466

269 242

300

242 253 240 251 276

296

0

100

200

300

400

500

600

700

800

900

1,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Sources: Dealogic and EY Analysis.

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Page 11

Why are more companies staying private? In short: ‘Because they can’

Why go public?

► Access source of (typically) lower

cost capital

► Currency for acquisitions

► Shareholder risk diversification

(especially true in biotech)

► Liquidity for founders, investors and

employees

► Brand identity Why stay private?

► Increased availability of private

capital: larger amounts, from

different pools at higher valuations

► More disclosure equals potential

loss of competitive advantage

► More operating flexibility: short-term

mentality of public investors and

activists

► Regulatory burden and risk

► Other: class-action lawsuits, short

sellers, proxy fights, lack of analyst

coverage, etc.

Page 12

Factors that may explain why companies stay private longer

• Venture capital, private equity (PE) firms and sovereign funds have

substantially increased available capital to invest and are struggling to

invest the money they raise. PE exits are more likely to be strategic sales

rather than IPOs.

• McKinsey showed in a recent study that the capital invested in private tech companies

grew from US$11b in 2005 to US$75b in 2015 and almost tripled from 2013 to 2015.

• Uber was able to raise more than US$8b from PE firms and sovereign funds and

US$3b of private debt over 7 years whereas Facebook “only” raised US$2.4b of

private equity over the same period of time a few years before.

• Interest rates are at an all-time low, which provides private companies with

opportunities for direct financing at a low-cost (through debt) and provides

strategic buyers with low cost capital to acquire private and smaller public

companies.

Page 13

Factors that may explain why companies stay private longer

• Light-asset models: with the digital transformation, start-up companies’

business models require less capital than the old industrial economy, which

reduces the need to seek public funding.

• The JOBS Act of 2012 increased the accredited investor limit for registering

with the SEC from 500 to 2,000 and excluded employees receiving exempt

equity awards. This change allows private companies, especially in the tech

industry, to remain private longer, as long as their financing needs can be

otherwise covered through private debt and PE capital.

• Google and Facebook decided to undertake their IPO process when they reached the

500 investor limit.

• Decimalization, tick size changes, reduced availability of analyst coverage

and related effects on trading profitability reduce the incentive of

intermediaries to take small, private companies public. Public investors have

a preference for larger deals with more public float/liquidity.

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