off the charts

Companies flee stock markets, preferring private equity

Geschäftsmann mit Regenschirm steht zwischen steigenden und fallenden Aktienkursen PUBLICATIONxINxGE
Dodging the slings and arrows. Source: Imago

Despite doomsayers’ predictions, global stock markets are still setting records. The cumulative value of all of the world’s listed companies has reached an astounding $90 trillion. In the last decade, Germany’s DAX index has tripled in value, while the MDAX, favored by medium-sized industrial companies, has increased five-fold.

But companies are fleeing the markets, opting instead for private equity. In Germany, fewer firms are listing on the stock exchange and many are pulling out of the market altogether. Germany currently has 450 publicly-listed firms, down from 760 a decade ago.

Elon Musk’s recent musings about allowing Tesla to go private show this is a broader trend. In the United States, in the past decade, 10 percent of listed companies withdrew from the stock market. Before the year 2000, an average of 310 American companies were floated every year; that figure is 108 nowadays.

Asia is the only area of the world where stock markets are growing: 60 percent of the world’s flotations now take place there. In China, the number of listed companies has doubled in a decade. In Asia, a stock market listing is still the ultimate accolade for a company, according to Martin Steinbach, head of IPO and listing services at consultants EY.

But Douglas, a traditional perfume and cosmetics retailer, is a typical German example of the reverse. First listed in 1962, the company’s stock tripled in value in the first decade of this century. But in 2013, it was taken off the market by a consortium of family and financial investors.

In the same year, the German motor home manufacturer Hymer was delisted and rebought by its founding family. Since then, its capital requirements have been met by American financial investors.

IPO? Nein danke

Perhaps most tellingly of all, neither of Germany’s two best-known startups – the booming bus transit firm Flixbus and the car-trading platform Auto 1 – are considering an IPO. Both opt instead to use private equity funds.

The flight is not new. Research from the Cologne Institute for Economic Research shows that since the mid-1990s, western industrialized countries have seen a decline in the number of publicly-listed firms. Germany has a particularly small listed sector: the total value of all tradeable German firms amount to around 60 percent of GDP, well below the international average.

Price and complexity are factors in this decline. Listing can be expensive, requiring armies of bankers, lawyers, tax advisors and consultants. Increasing regulation has made the situation worse. Once on the market, filing requirements and investor relations take a massive toll in money and labor. No wonder some companies rethink: across Europe, 14 planned IPOs were cancelled in the first five months of this year.

Further, startup culture is not always a good fit with stock market funding. “The current generation of founders values strategic flexibility. They don’t want shareholders breathing down their neck,” says Klaus-Heiner Röhl, an one of the authors of the Cologne Institute report. Quarterly reports mean publishing hard facts about the business, which founders are not always keen to do. Better keep things private, in every sense of the word.

Against short-termism

For medium-sized German industrial firms, debt and bonds are still the favored forms of finance, not least since interest payments can be written off against tax. Many company owners also fear the stock market’s short-termism, seeing it as running counter to ideas of careful stewardship motivating many German business owners.

Kirchhoff, a major car supplier with annual revenues of €2 billion ($2.3 billion), recently considered flotation, but its family owner says he prefers to hand on the company to the next generation. “That’s the German way,” he told Handelsblatt.

The big beneficiaries of the trend have been private equity firms. For many companies, private funds offer a cheaper, simpler and less regulated model of financing. And they have no shortage of money: worldwide, financial investors are sitting on a cumulative cash mountain of $1.1 trillion.

This could become a problem for the wider economy, warn Martin Kenney and John Zysman, two California economists who have written on the “rise of the platform economy.” The stock market has always been the economy’s main tool for allocating capital, and its decline could see less discipline imposed on companies, with more value destroyed by inefficient businesses.

The trend toward private finance also poses problems for investors. Cheap money and low interest rates have increasingly forced small savers to turn to the stock market. If the action moves elsewhere, their choices may become more limited, and their share of profits cut back.

This can make it much harder to diversify risk. One workarounds for those looking to buy into unlisted German industrial firms is to buy shares in listed investment companies like Bavaria Industries, GBK and Blue Cap, all of which specialize in unlisted medium-sized companies.

germany ipos

A longer version of this article appeared in WirtschaftsWoche, a business weekly. The author, Michael Scheppe, a trained economist, can be reached at

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