(Oct 1): Initial public offerings haven’t been doing so well lately. Goldman Sachs Group Inc. says many of them might suffer longer-term headwinds as well.
Many new entrants have been employing multi-class voting share structures – including seven of the 10 largest IPOs so far this year, strategists led by David Kostin wrote in a note Sept 27. That could prevent them from being added to indexes managed by the likes of S&P Dow Jones and FTSE Russell. That would mean missing out on flows from passive investment managers tracking those benchmarks.
“Using multi-class voting to insulate management from its own shareholders comes at a significant long-term cost,” the strategists wrote. “Firms restricted from joining major indices will not fully benefit as capital flows into passive funds that now represent more than 50% of total US mutual fund and ETF assets.”
A potentially banner year for US IPOs is showing signs of cooling. Firms like Uber Technologies Inc. and Lyft Inc. have struggled after their debuts, while SmileDirectClub Inc. had the worst opening trade for a big IPO in more than a decade.
The disappointing run in addition to an uncertain economic environment could put a freeze on offerings over the rest of this year and possibly into next year, as well. That’s even before layering on the “secular headwinds,” as Goldman calls the index-inclusion issue.
Goldman acknowledges the pro multi-class structure argument that the set up allows management to focus more on strategy and value creation without being distracted by activist investors seeking short-term gains.
“A sunset provision on dual-class stock is one potential solution to the corporate governance dilemma,” the strategists wrote. “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.”
