How to breathe new life into Denver’s job market
Job creation in Denver is a critical issue that threatens our hope for a sustained economic recovery. Grant Thornton LLP’s most recent survey of CFOs found that only 29 percent planned to increase their workforce over the next six months, while 22 percent planned to reduce. While we have heard many suggestions for creating Denver jobs, we have yet to hear of the positive role that resuscitating the initial public offering (IPO) market can play on job creation.
The 1990s saw the net creation of more than 20 million jobs in the U.S. We enjoyed an average of 530 corporate IPOs per year (excluding funds, LPs, REITs and SPACs), the vast majority of which were below $50 million and nearly half of which came from traditional America (neither venture capital nor private equity sponsored). They inspired confidence and created a source of capital that led to equity investment in private companies, giving rise to a “virtuous circle” of capital formation, job growth, innovation and increases in tax revenues.
This small company economic engine went into decline as market structure changes – intended to save investors money – were amplified by dramatic advances in technology. Together those factors eroded the economic model that provided the incentives for Wall Street firms to support small public companies with critical equity research, sales and capital commitment. In fact, from 2000 to 2009, we saw an average of only 126 corporate IPOs per year – down over 76% from the prior decade and nowhere near enough to replace the 360 public companies that are lost annually to delistings.
Common sense dictates that when the number of IPOs declines, the availability of capital for job creation shrinks; when the number of companies delisted from stock markets exceeds the number listed, jobs are shed. This “circle of destruction” undermines investment in private companies – considered the “foundation of job formation” – leaving behind a “foundation for unemployment.”
Consider that by 2000, unemployment had fallen to a mere 4.0% after an eight-year decline that coincided with the robust IPO market. Unemployment began to rise in the next few years amid the bursting of the Dot-Com Bubble and the dissolution of thousands of businesses, but then ebbed once again from 2004-2007 as IPOs modestly reemerged. As we have seen, the credit crisis and the concurrent disappearance of IPOs in the past couple of years has been the backdrop for a sharp rise in unemployment.
In Grant Thornton LLP’s study, “A wake up call for America: A study of systemic failure in the U.S. stock markets and suggested solutions to drive economic growth,” the authors conclude that, had we continued to support an IPO market more akin to that of 1991-1996, we might have enjoyed as many as 22 million new jobs from the companies that never made it public – to say nothing of what a robust IPO market would have done for consumer confidence, private company investment and U.S. competitiveness.
The antidote is simple: Restore the ecosystem that supported the allocation of capital to small Denver companies. To do this we need to create a new stock market structure – subject to the same regulatory oversight and disclosure requirements that govern the NYSE and NASDAQ – that provides specifically for adequate economic incentives for Wall Street to return to the business of supporting small companies with research, capital and sales support. This new market would have minimum spreads of $0.10 for stocks below $5.00 per share and $0.20 for stocks trading at or above $5 per share, thus restoring incentives for brokerages to pursue profitability, while providing sufficient economics to support small cap liquidity.
The U.S. stock market once was the envy of the world – in large part because it fueled economic growth. Access to capital is the life blood of growing companies. Let’s commit to creating a new stock market that will support Denver’s small companies and capital formation, resuscitate IPOs, drive Denver’s economic growth, and close budget deficits – all at minimal taxpayer expense.
Resuscitating the IPO market for small cap businesses may not be the sole answer to Denver job creation, but it certainly should be part of every conversation.