Feature: Spacs have emerged as attractive way to score exits but investors recognise the use and abuse of this tool

The US stock market is the most liquid public market and the world. It has demonstrated not only enviable returns over the past decade but extraordinary resilience after the pandemic’s shock over financial markets in February-March 2020. The latter only attests to the markets ability to immediately discount the effects of injected additional liquidity by the Federal Reserve and the expected economic recovery. After all, there tends to be a bull market most of the time in US stock exchanges, or at least that has been the case of the past few decades. However, there is one thing that remains truly puzzling about this public market which has such a strong tendency to go up – the number of listed companies in it went down for quite some time over the past two decades. According to data, cited by MarketWatch, the number of companies on the New York Stock Exchange and Nasdaq reached an all-time high at around 8,000 during the second half of the 1990s, amid the dotcom boom, but has steadily declined since. According to data of Credit Suisse, cited by MarketWatch, the number appears to have bottomed at around 3,600 in 2016 and stood at around 6,000 by October last year. Economically, it makes sense for companies to raise equity capital on public market whenever there is a bull market, as higher implied valuations allow them to raise more cash per share than they otherwise could. Even though the trend appears to have somewhat reversed, it is still a pertinent question to raise: what has happened? The answer may have to do partly with low interest rates, which major developed economies have enjoyed since the end of the global financial crisis. Low borrowing costs may have incentivised companies to raise more debt rather than equity financing. Share buybacks, which became somewhat controversial for certain public entities in the beginning of the covid-19 crisis, have probably also had their fair share of contribution for stirring the bull market. In a paper by S&P Global, entitled “Examining Share Repurchasing and the S&P Buyback Indices in the U.S. Market”, authors Zheng and Luk found that, from 1997 onward, share repurchases have effectively overtaken the role of dividends as the dominant form of corporate payout in the US public markets. The logic behind repurchases is rather simple and lies on basic arithmetic – over time the total number of shares outstanding of a listed company is shrunk, assuming the market is generally…

Subscribe to go deeper

GCV subscribers get access to all our proprietary data and deep-dive articles, as well as the global directory of CVC investors.



Not sure if you have a subscription?