We have capital markets for a reason. They allow you to raise capital to build a business and see it grow and reward shareholders.
But what happens if the capital markets can no longer fulfill that role?
That's what you are seeing right now and it's a little daunting to say the least. Let me explain.
Until recent history buyers of stocks included large institutions, small institutions and individuals. I know this seem sophomoric but bear with me. The large institutions traded and owned stocks. The smaller institutions bought stocks and largely owned them until something changed.
The smaller people bought and held as they were instructed to by everyone in the business. Bought and held. Not bought and do the homework.
Over the years the large institutions have pretty much traded themselves into oblivion, racking up fees that produced suboptimal returns. Hedge funds, meant to perform in good times as well as bad, particularly underperformed. No less a legend that Warren Buffett has repeatedly held this to be self-evident and wrote extensively about it in his annual letters.
The smaller institutions have tended to adopt a different mantra: the capital markets are too dangerous, let's err on the side of fixed income. Nobody ever got hurt in fixed income.
The small investor. The small investor knows two things: one, get out of individual stocks while the getting is still good and two, index, index and more index.
Meanwhile the money keeps pouring to the bond market from stocks. Why not, it's safe. And it's doing well.
That's all well and good except one thing: how are companies supposed to come public in this environment? Where is the money supposed to come from? Sixty percent of the money in this market is now indexed. Index funds can't buy individual stocks unless they are in the index. The S&P 500 is the magnet for most investors and they S&P 500 is, by nature, passively invested. It can't buy Uber (UBER) or Lyft (LYFT) or Peloton (PTON) even if it tried, and it can't because there is no "it."
The two trends that are most prevalent in this market, indexing and moving out of stocks into fixed income, are a total anathema to the chief capital market function.
That's fine if you have some offerings now and then that are large and enough individuals are interested in them and enough active managers bite. But if active managers continue to lose money to passive funds and individuals continue to freak out about owning stocks, who is supposed to pick up the Slack (WORK) , pun intended? Where are the buyers of Lyft when almost all money gets indexed? How can Smile Direct find investors when the investors aren't even investing, they are just by rote buying a list?
But, to me, we are in soon for a day of reckoning where private companies have to recognize that they may be better of being profitable entities that don't float stock or they should fodder for bigger companies that want to grow.
Let's face one thing, though. No one ever thought when we created a stock market that there would only be buyers of stocks in an index. It would be impossible to bring any company public because, per se, there would be no one to buy.
Guess what. If they keep pumping out junk - like the WeWork dodged bullet - there will be no place to put it and the capital markets will lose their principal function. Judging by the performances of these IPOs, doesn't it feel like we are almost there?