Felix Salmon has written a terrific, well-crafted op-ed that will rightly garner considerable attention:
Only the biggest and oldest companies are happy being listed on public markets today. As a result, the stock market as a whole increasingly fails to reflect the vibrancy and heterogeneity of the broader economy. To invest in younger, smaller companies, you increasingly need to be a member of the ultra-rich elite.
At risk, then, is the shareholder democracy that America forged, slowly, over the past 50 years. Civilians, rather than plutocrats, controlled corporate America, and that relationship improved standards of living and usually kept the worst of corporate abuses in check. With America Inc. owned by its citizens, the success of American business translated into large gains in the stock portfolios of anybody who put his savings in the market over most of the postwar period.
Today, however, stock markets, once the bedrock of American capitalism, are slowly becoming a noisy sideshow that churns out increasingly meager returns.
I’m definitely not an expert on these matters, but I’ll just say that I think the death of the stock market is mostly good news. My admittedly crude sense is private equity firms do a fairly good job of allocating capital efficiently. We have evidence, from Nicholas Bloom and John Van Reenen in the JEP and elsewhere, that they have a managerial edge over publicly-owned and family-owned firms. As Amar Bhide argues in his wonderful new book A Call for Judgment, a case can be made that the U.S. has relied too heavily on arms-length finance rather than relationship finance, the approach taken by VCs that have deep, long-term relationships with the companies in which they invest. (Indeed, he argues that public markets in the U.S. suffer from excessive liquidity.) Our securities laws make relationship finance difficult if not criminal in many domains, and it is far from obvious that this has been good for the real economy.
I do think there’s a decent case for loosening the rules for accredited investors, but Felix makes it clear in a follow-up post that he disagrees:
Finally, the “ultra-rich elite” I’m talking about is not the broad universe of people who are considered accredited investors by the SEC, but rather the tiny group of individuals who are given the opportunity to invest in private companies. If you’re well connected in Silicon Valley — if your name is Ron Conway or Vinod Khosla — then you have loads of such opportunities. But the rest of us don’t, whether we’re formally accredited investors or not.
I’m not making any policy recommendations in this piece — I don’t think that the rules about accredited investors should be weakened further, or that all Americans have some kind of automatic right to be able to buy a piece of Facebook. But I do think that the public stock market is less important now than it was in the past and that its decline is going to continue in future decades just as it has done since 1997.
I’m more in tune with Paul Boutin’s take on pre-IPO investments in Wired. To Felix’s point about Conway and Khosla, I suppose I don’t think there’s anything new or noteworthy about it. Relationship finance seems to be better as spurring innovation than arms-length finance. Arms-length finance and public stock markets might be a decent way for big entities raise money. But we do seem to be in a more volatile era, when what we might call the Conway-Khosla phase is where the money-making action is as new entrants rise faster and dominant firms decline faster.
But I could definitely be wrong, and I’m eager to see others weigh in.