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Capital Formation, Economic Growth and Public Equity Markets Brussels Exchange Forum 25 April 2014. Mats Isaksson Head of Corporate Affairs, OECD. How growth happens !. Capital Formation 56% Labour Growth 20% Productivity 24%
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Capital Formation, Economic Growth and Public Equity Markets Brussels Exchange Forum 25 April 2014 Mats Isaksson Head of Corporate Affairs, OECD
How growth happens ! • Capital Formation 56% • Labour Growth 20% • Productivity 24% (Jorgensen, 2006 for G7 countries 2000-2006)
Capital for what? • Starting • Market expansion • Research & development • Remuneration • Machinery • IT equipment • Acquisitions • etc.
Not all capital is equal • Credit card • Overdrafts • Trade credits • Bank loans • Bonds • Equity
What makes equity unique? • It is the only standardized financial instrument that can handle entrepreneurial uncertainty. • Taking on uncertainty is the only genuine source of economic progress. (As opposed to managing risk.)
Sources of equity • Personal wealth • Private pools of capital • Retained earnings • Public equity
Public equity • The transferability of shares • Separation between investment horizons
What we should expect from stock markets • Serve as venue where growth companies effectively can access equity capital. • Produce information from many independent sources so that capital is allocated effectively among competing ends. • Engage shareholders in the monitoring of corporate performance.
But how is the performance of these functions affected by recent changes in the corporate and financial landscape?
Changes in corporate characteristics - 1 • New trends in capital formation: Human capital and intangible assets • Alternative corporate structures (PTPs, MSPs) • Acquisitions by large established companies.
Changes in corporate characteristics - 2 Share of young companies • More difficult for companies to grow and develop as independent companies. • On average, Google has acquired more than one company every week since 2010 (Business Insider). Source: U.S. Department of Commerce
Changes in the stock market business model - 1 Trade vs. supply • Source: OECD calculations based on data from Thomson Reuters New Issues Database, DataStream, stock exchanges’ and companies’ websites. Trade volume data are from World Federation of Exchanges. • Trade volume increased three times than the primary market volume between 2004 and 2007.
Changes in the stock market business model - 2 • Demutualisation and self-listing trend • Market fragmentation; multi-lateral trading facilities, dark pools etc. • Low visibility for smaller companies • Higher market concentration
Changes in intermediation - 1 • Institutional Investors have more than doubled their assets under management in the last decade. • 85 trillion in AUM • 32 trillion in public equity
Changes in intermediation - 2 Their Equity Holdings Total assets under management and allocation to public equity by different types of institutional investors. Source: OECD Institutional Investors Database, SWF Institute, IMF, Preqin, BlackRock, McKinsey Global Institute • Concerns about the accuracy of estimations in the data. • The combined holdings of all institutional investors; USD 84.8 trillion in 2011. • Traditional institutional investors; USD 73.4 trillion (USD 28 trillion in public equity). • Alternative institutional investors; USD 11.4 trillion (USD 4.6 trillion in public equity).
Changes in intermediation – 3 Complexity – The CalPERS Case Source: CalPERS Comprehensive Annual Financial Report, Financial Year Ended June 30, 2012 and CalPERs Annual Investment Report, Financial Year Ended June 30, 2012,
Changes in trading techniques and financial products • Increase in indexing (play safe – collect fees) • Exchange traded funds (increased in volume by 1 500 % in last decade) • High Frequency Trading (where the fast beat the smart) • Co-location (jump the queue)
OECD countries: IPO numbers and volume Source: OECD calculations, based on data from Thomson Reuters New Issues Database, Datastream, stock exchanges’ and companies’ websites. • Downward since 1990’s. Both in numbers and volume. • “Recovery” before the financial crisis. • Average Volume 1993-2000: USD 134.3 bn • Average Volume 2001-2012: USD 69.8 bn
Number of listed companies Source: World Bank World Development Indicators • Some of the largest OECD stock markets have lost half of their publicly listed companies in the last 10 years.