Facebook hype versus the reality of public markets

Despite all the hype of today’s Facebook IPO, there seems to be a lot of negative publicity for “going public”. Skeptics may be proven wrong, as they were when Google went public, but many believe Facebooks’s IPO will simply create problems for the world’s top social network. And a lot of this is a reflection on public markets, not Facebook.

The Economist describes public companies as “endangered” and sees Facebook’s approach to listing publicly as indicative of the declining value of going public:

Mark Zuckerberg, Facebook’s young founder, resisted going public for as long as he could, not least because so many heads of listed companies advised him to. He is taking the plunge only because American law requires any firm with more than a certain number of shareholders to publish quarterly accounts just as if it were listed.

And closer to home, a large institution that is doing rather well – the Canada Pension Plan Investment Board – at least partly attributes its success to turning its back on public markets:

[CPPIB chief executive officer David] Denison said CPPIB continues to increase the proportion of its private equity holdings and reduce its public stock portfolio, where returns are lower and far more volatile. Private assets have climbed to 36.6 per cent of CPPIB’s holdings from 31.6 per cent at the end of fiscal 2011.

The fund’s private equity holdings in Canada, for example, earned 8.1 per cent last year, while its Canadian public equities lost 10.7 per cent. By contrast, CPPIB’s foreign private equity holdings in developed countries gained 12.1 per cent while real estate holdings earned 13 per cent and infrastructure climbed 12.8 per cent.

Why are public companies not faring so well?

According The Economist, bad regulation is mainly to blame. So governments must improve how public companies are regulated:

Public companies built the railroads of the 19th century. They filled the world with cars and televisions and computers. They brought transparency to business life and opportunities to small investors. Because public companies sell shares to the unsophisticated, policymakers are right to regulate them more tightly than other forms of corporate organisation. But not so tightly that entrepreneurs start to dread the prospect of a public listing. The public company has long been the locomotive of capitalism. Governments should not derail it.

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