The initial public offering (IPO) market is in a bloodbath.
Recently, Goldman Sachs published a report that found companies going public this year are expected to produce the lowest profits of any year since the dot-com bubble. The Wall Street titan said that fewer than one-quarter of firms that have filed IPOs 2019 will record a profit, which is the lowest since 1999 when it was 28 percent.
What’s worse is that these publicly-traded companies are not just suffering short-term losses, but many of them do not anticipate to make a profit for several years.
Ouch.
But Goldman Sachs says there is another problem at hand: New IPOs are offering multi-class voting share structures, such as Class A (generic common stock) or Class B.
The main problem is that these varying classes might prevent these stocks from being added to indexes, like S&P, Dow Jones, and FTSE Russell, which are usually tracked by passive investment managers.
Bank strategists wrote in their analysis:
“Using multi-class voting to insulate management from its own shareholders comes at a significant long-term cost. Firms restricted from joining major indices will not fully benefit as capital flows into passive funds that now represent more than 50% of total U.S. mutual fund and ETF assets.
“A sunset provision on dual-class stock is one potential solution to the corporate governance dilemma. Phasing out high-voting stock after 5-10 years would allow firms the opportunity to eventually be included in the major indices while providing some shareholders more control in the near term.”
The IPO market is a mess, not even beefless beef juggernaut Beyond Meat can save it.
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