Financial Times Europe - 19.08.2019

Monday 19 August 2019 ★ FINANCIAL TIMES 19

Opinion

T

he coming week marks the

15th anniversary of Google’s

initial public offering — the

first concerted effort to

break the hammerlock that

investment banks have always held on

stock offerings. That attempt failed. But

now, due to mounting frustrations,

advances in technology and changes in

the capital markets, investment banks

are about permanently to lose the gate-

keeping position they have jealously

protected.

Google’s IPO was the first time a large

technology company had expressed

public frustration at the way investment

banks cloaked IPOs in secrecy, making

it impossible for either issuer or buyer

to figure out what was happening

behind the curtain. Instead, Google’s

management asked the banks to run an

open auction — much as eBay conducts

ing which management teams rush

through 30-minute slide-decks in front

of investors, look antiquated compared

with comprehensive business reviews

or lengthy YouTube videos — duly vet-

ted by the US Securities and Exchange

Commission and available for all.

Some banks are mounting a rear-

guard action. They claim that only size-

able or well-known consumer compa-

nies have the heft and following to stage

a direct listing. They cling to the vain

hope that less high-profile businesses

will be unable to manage for themselves

or that managements without a lot of

cash on their balance sheets will lose

their nerve. This is despite the fact that

hundreds of companies operating in

obscure niches are publicly traded.

During the next couple of years, com-

panies already well advanced with plans

to go public will probably use the con-

ventional approach. But, for all others,

the choice of a direct listing or a tradi-

tional IPO has become a test of two

attributes: courage and intelligence.

The writer is a partner at Sequoia Capital.

These views are his own

company wants; gruelling two and

three-week roadshows; and — the final

indignity — selection of who is permit-

ted to price and buy the shares.

Buyers have been just as frustrated.

Genuine long-term shareholders want-

ing to buy large amounts of a company’s

stock have been stymied because the

banks allocated shares to their favoured

clients the way fishermen chum the

waters. The result: these buyers usually

flip their initial shares for a short-term

profit and wait for a market pullback to

build the position they want.

The world has changed. There has

been a blurring between the public and

the private markets. Young companies

are staying private far longer than their

predecessors: by now, many of the man-

agements have ample experience rais-

ing large amounts of money without any

intermediaries. Similarly, the usual cus-

tomers for IPOs — mutual funds and

hedge funds — are seeking out inde-

pendently the most promising private

companies, and alternate market mak-

ers are raising their hands.

Technology also favours the direct

listing. The traditional roadshow, dur-

rthy, chief financial officer at Spotify

(and previously CFO at Netflix), to buck

the system, shining a light on the tactics

that the banks have used to frustrate

and exasperate everyone but them-

selves. Bill Hambrecht, a San Francisco

investment banker who helped take

Apple public in 1980, spent much of the

1990s making similar arguments to Mr

McCarthy — but he failed because his

former competitors and collaborators

made him a pariah in the manner that

the mob treats a turncoat.

Mr McCarthy’s complaints against

traditional IPOs included an inflexible

commission structure; a tendency to

dictate how much money a company

should raise; an arcane instrument

known as the “greenshoe”, which allows

the banks to raise more money than the

a sale — to determine an eventual price.

No other company followed suit, largely

because the banks closed ranks and suc-

ceeded, in a disinformation campaign

worthy of the NRA gun lobby in the US,

in portraying the IPO as a flop.

Now, years later, the groundswell of

dissatisfaction is about to erupt into

action. This new approach, dubbed a

direct listing, has so far been employed

by only three companies: the music

streaming service Spotify and p ayments

company Adyen (both of which started

outside the US), and Slack, a San Fran-

cisco software company.

These direct listings, largely control-

led by the company that is selling

shares, occurred because the shrewd

and the brave caught on to the idea that,

for stock offerings, investment banks

occupy the same position in the invest-

ment universe as a scalper does in the

theatre world. No actor, theatre owner,

producer or audience member enjoys

knowing that a ticket tout has run off

with money that should belong to them.

The same goes for the people involved

with private companies.

It took the backbone of Barry McCa-

Investment banks lose their stranglehold on IPOs

Companies’ dissatisfaction

is about to erupt into action

with a new approach

dubbed the direct listing

B

rexit has turned into a hos-

tage situation. Boris Johnson

is the kidnapper, Ireland is

the captive and the backstop

is the ransom. The British

message to the EU is, “Drop the back-

stop or we’ll kill the hostage in a no-deal

shootout”. Doubtless the UK could

inflict much harm on Ireland, particu-

larly in agriculture: near 70 per cent of

UK beef imports come from Ireland, for

example. And crashing out could badly

interrupt Ireland’s global supply chain.

Nearly half of the 475,000 Irish freight

containers of cargo per year going

through British ports go to the EU.

That said, the Irish economy is much

less dependent on the UK than many

Brexiters imagine. Tactically, Dublin

knows that “no deal” is only “no deal”

for now. The UK must eventually do a

trade deal with the EU because 46 per

cent of UK exports go to the EU and 53

per cent of UK imports come from the

EU. No matter how the hostage drama

turns out, and no matter what the politi-

cal and economic fallout, the UK will be

back at the table soon. The more chaos

at British ports, the shorter the self-im-

posed mercantile lockout.

In the meantime, London’s new Brexit

strategy is to inflict as much commercial

damage on Ireland as possible. Given

that Ireland didn’t ask for, or vote in, the

Brexit referendum and, in recent dec-

ades, has been an impeccable neighbour

and a calm, dependable partner in the

British-created tinderbox that is North-

ern Ireland, this new aggression seems

unjustified. However British sensitivity

towards Irish concerns has never fig-

ured highly in Anglo-Irish affairs.

Part of the new British approach has

been a relentless campaign to paint

itself as the victim of Irish inflexibility,

simultaneously emboldened by a Rule

Britannia assurance that Ireland can,

and will, be brought to heel. This unsta-

ble combination of whingeing victim-

hood twinned with pompous self-regard

has characterised much of Britain’s

negotiations thus far. What has been

absent are economic facts.

Here they are. In 1953, when Winston

Churchill was prime minister for the last

time, 91 per cent of Irish exports went to

the UK. Today, that figure is 11 per cent

and falling. Far from being the poor,

dependent outpost relying on British

largesse — as depicted by Brexiters —

the Republic of Ireland is an outward-

looking, dynamic, trading entrepot.

Today, Irish firms in the UK employ

more people than UK firms in Ireland.

Small countries must overcome the

tyranny of geography. They live and die

by the quality of their strategic thinking.

Part of the Irish strategy in joining the

European Economic Community was to

break its dependency on the UK, seek-

ing new markets in richer, continental

Europe. And Ireland has been far more

successful in diversifying from the UK

than the UK has been in diversifying

from Ireland. Today, little Ireland

remains the UK’s fifth largest export

market. Furthermore, the UK runs a

large trade surplus with Ireland — in

fact, its second-largest trade surplus

after the US. Strangling Ireland would

hurt UK business much more than the

other way around.

Ireland buys more from Britain

because Ireland is much richer. Rich

people buy stuff. On a conservative esti-

mate, the Irish are now over 25 per cent

richer than their UK counterparts. Irish

income per capita rose from €13,934 in

1995 to €40,655 in 2018 — growth of 192

per cent. In contrast, UK income per

capita rose from £21,716 in 1995 to

£30,594 in 2018 — growth of roughly 41

per cent. Ireland is growing nearly five

times faster than the UK every year.

Ireland is also a far more globalised

economy. When Britain pulled out of

Ireland, it took its capital too. It’s taken

us a while to catch up, but eventually we

deployed fresh American capital by

using our tax system, transforming the

economy. This export-orientation

ensured that Ireland is today a formida-

ble trading machine. Based on the most

recent data, the value of all goods and

services exports per employed person in

Ireland was €126,630 per year, com-

pared to just €17,627 in the UK. Total

trade in Ireland was 178 per cent of Ire-

land’s gross domestic product, which

was significantly higher than the EU

overall (77 per cent) and the UK (54 per

cent). If there is a Singapore of Europe, it

wears green not red, white and blue.

As Ireland and the UK are in competi-

tion with each other for mobile capital

and talent, arguably Brexit will be posi-

tive for Ireland. Which looks more

attractive, the country that is open to

everyone, with fully free access to the

EU and no barriers to work, or the coun-

try that needlessly erects tariffs and

borders against the trading bloc with

which it does half of its trade?

Ireland can’t stop the UK if it intends

to go down this route, but the EU single

market and customs union are far more

important for us. We understand the

yearning for sovereignty, identity and

independence, believe me. But just one

piece of advice: the first 70 years are the

hardest, after that it gets easier.

The writer is an economist, author and

broadcaster

Whingeing victimhood

and pompous self-regard

have characterised the UK’s

negotiations thus far

Punishing Ireland’s economy will backfire on Brexiters

David

McWilliams

L

ater this month, the G7 heads

of state and government meet

in Biarritz in France to dis-

cuss the fight against global

inequality.

This is no routine summit. Only a

small and committed core of nations is

capable of addressing the forces threat-

ening the world order. Prosperity has

increased dramatically in recent dec-

ades, but not for all, while global institu-

tions leave much to be desired.

The UN General Assembly, with its

193 members, has slowly sunk into irrel-

evance, while the G20, the G7’s larger

cousin, has not delivered real change.

Indeed, how could a body that includes

authoritarian strongman leaders such

as Recep Tayyip Erdogan of Turkey,

Russia’s Vladimir Putin, Jair Bolsonaro

of Brazil, China’s Xi Jinping and Moham-

med bin Salman of Saudi Arabia (which

will host next year’s summit) possibly

do so?

This is a time for hard decisions, not

wishful thinking. And realistically, the

G7 is the only forum in which to take

them. All its members are solid democ-

racies with comparable levels of educa-

tion and prosperity. The governments

of the seven may strongly disagree on a

number of issues, but all were fairly

elected in countries with constitutional

checks and balances.

Inequalities, real or perceived, have

brought most developed countries to

the boil in recent years. For the past nine

months, for example, France has been

the setting for the angry, often violent

gilets jaunesrevolt by citizens who feel

that they have been left behind. Voices

from the extremes are growing louder in

the other countries of the G7 too, even in

traditionally peaceable Japan. Business

as usual, therefore, is not an option.

“I’m a capitalist, and even I think cap-

italism is broken”, Ray Dalio, chief exec-

utive of Bridgewater Associates said

recently. And he is not alone among

those who used to be called “masters of

the universe”. Larry Fink, the legendary

chairman and chief executive of Black-

Rock, the asset manager with some

$6.5tn under management, believes

sustainable companies will outperform

the rest in the long run: “They will

attract better people — and savvier cus-

tomers — because they are better capi-

talists, committed to a fairer society.”

This is an opportunity for the G7. It

can, and should, lead by example. In

July in Aix-en-Provence, Medef, the

French employers’ federation, hosted

the B7 — business leaders from the G

countries. Geoffroy Roux de Bézieux,

the chairman of Medef, chose to involve,

for the first time, the G7 labour organi-

sations — the L7.

Together, the two groups signed a dec-

laration on social cohesion and the fight

against inequality. “We believe that the

global economy cannot be inclusive and

sustainable if it excludes a large part of

the population from... the benefits of

growth,” the declaration reads. This is

essential, it goes on, if we are to “restore

confidence in order to prevent the risk

of a growing share of the population

feeling vulnerable and losing faith in

democracy and the global economy”.

This new awareness is cause for cau-

tious optimism. In 1944, the future win-

ners of the second world war gathered at

Bretton Woods to plan a global financial

governance system that would prevent

a recurrence of the crises of the 1920s

and 1930s, promising stability after six

years of bloody conflict. But no mention

was made then, and barely a thought

given, to the social and employment

dimension. The assumption was that

prosperity for some would, eventually,

mean at least modest prosperity for all.

The B7/L7 declaration goes much fur-

ther. For the first time, it suggests co-or-

dinated action with no stakeholder left

behind. The interests of management

and workers are, in the long run, the

same.

Together, business leaders and labour

organisations are daring the G7 leaders

who will gather in Biarritz on Saturday

to flex their collective muscle.

The writer is president for European and

international affairs at Medef, the French

employers’ federation

The interests

of workers

and managers

are aligned

Bernard

Spitz

Inequalities, real or

perceived, have brought

most developed countries

to the boil in recent years

downturn. There will probably be more

attempts by Mr Trump to wrongfoot the

opposition, such as the decision to delay

new tariffs on Chinese goods until

December so that consumers won’t be

hurt during the Christmas shopping sea-

son. (None of this makes a real trade

deal more likely.)

Meanwhile, American consumers are

already hurting and that could have big

implications for Mr Trump’s 2020 re-

election campaign. Momentum in job

growth in swing states such as Michigan,

Ohio and Pennsylvania is slowing.

One recent report conducted by lib-

eral pollster Stan Greenberg showed

that a third of working-class white

women in some conservative areas are

starting to turn against the president,

irritated by his frequent boasts about

the booming US economy. “Maybe in

New York City,” said one woman from

Wisconsin. “But not here.”

For Mr Trump, and the US public at

large, the summer of fear may turn into

a winter of political discontent.

[email protected]

historic predictor of trouble in bigger

companies. At the end of a recovery

cycle, capital tends to crowd into large

companies and smaller firms suffer.

As the markets finally come to terms

with increased political risk, currency

risk, credit risk, and the growing likeli-

hood of leftwing governments, it’s clear

that the shifts and the shocks are com-

ing fast and furious. No wonder that eve-

ryone is now left asking, “What comes

next?”

The answer, I believe, is very likely to

be a synchronised global recession,

punctuated by a step-by-step market

downturn — one in which there may be

the odd rally, but the general direction is

down. This could last for some years. In

the next few weeks, I would expect new

lows in bond yields, a deepening of the

yield curve inversion, higher prices for

“safety” assets like the yen and swiss

franc, and a continued bull market in

gold.

I would also expect more tough talk

from Donald Trump. The US president’s

persistent bashing of China and the Fed-

eral Reserve will follow any market

biggest economic shift of our lifetimes.

Why is this new reality taking so long

to sink in? Because we have spent dec-

ades of living in the old reality — the

post-Bretton Woods, neoliberal one.

Unfettered economic globalisation and

years of easy monetary policy have

buoyed asset prices and favoured capi-

tal over labour, seemingly indefinitely.

Our senses have been numbed by tril-

lions of dollars released by central

banks, by algorithmic trading programs

that buy on the dip and thus diminish

the sense of long-term political risk, and

by record passive investing.

All this has combined to dampen the

signals that are now, finally, blinking

red. Witness the recent downturn in

bank, transport, and industrial indices,

as well as the fall in small-cap stocks, a

As strategist Louis-Vincent Gave of

Gavekal pointed out in an investor note,

the “fingerprints of many culprits can

be detected” in the manufacturing sec-

tor’s troubles, from an automobile sec-

tor facing structural challenges, to the

Boeing 737 Max fiasco and its effect on

global supply chains, to the lack of any

big new product launches in the tech-

nology sector, to lacklustre corporate

investment, a weak energy sector and a

slowdown in China. All that is required

is one big sovereign default or a cascade

of corporate bankruptcies and we could

see the market in free fall.

Politics, of course, hasn’t helped. But

again, none of the recent developments

have been very surprising. Take Argen-

tina, which suffered a 48 per cent one-

day market drop last week after its pres-

idential primary election saw the Per-

onist opposition comfortably ahead.

The question is why investors were, as

the oldCasablancaline goes, “shocked,

shocked!” to find that a country that has

been a serial defaulter would swing back

to the left.

This raises other questions. What

might happen in the UK if a general elec-

tion, before or after a no-deal Brexit,

allows Jeremy Corbyn to take power?

What might the future of Italy’s turbu-

lent politics hold? What could be the

impact of an Elizabeth Warren or Bernie

Sanders victory in the US primaries? As

a r e c e n t 1 3 D G l o b a l S t r a t e g y

and Research note put it, such events

would “fit perfectly into the cycle

from wealth accumulation to wealth

distribution”, which I believe will be the

P

aradigm shifts tend to hap-

pen slowly, and then all at

once. That’s the lesson I’ve

taken away from the recent

market turmoil. As I wrote

last week, the surprise is only that the

upset didn’t come sooner.

Pundits may have pegged the worst

Dow drop of the year to fresh bond yield

curve inversions in the US (a historic

predictor of downturns) but the under-

lying signs of sickness in the global econ-

omy have been with us for a long time.

The question was when the markets

were going to put aside the complacency

bred by a decade of low interest rates

and central bank money dumps, in the

form of quantitative easing, and

embrace this new reality.

Consider that since January 2018

every major economy except India’s has

seen a deterioration in its purchasing

managers’ indices. PMIs are one of the

best forward-looking indicators of eco-

nomic conditions for the manufacturing

sector, which is a bellwether for overall

economic activity. The slowdown in the

eurozone has been dramatic — particu-

larly in places such as Italy and Ger-

many, where the economy is now offi-

cially shrinking.

Markets are

adjusting to a

turbulent world

After decades of living in

the old, neoliberal reality,

the shifts and shocks are

coming fast and furious

Michael

Moritz

ECONOMICS

Rana

Foroohar

AUGUST 19 2019 Section:Features Time: 18/8/2019 - 17: 58 User: nicola.davison Page Name: COMMENT USA, Part,Page,Edition: USA, 19, 1

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