Capitalisn’t: The ups and downs of IPOs

Apr 18, 2019

Sections Economics Finance

Many high-profile companies, including Pinterest, Airbnb, and Uber, are considering going public this year. On this episode of the Capitalisn’t podcast, hosts Kate Waldock and Luigi Zingales break down why these companies already have huge valuations, and whether rich people have an unfair advantage when it comes to investing.

Kate WaldockHello, Capitalisn’t listeners. Thanks so much for joining our program. We have a fascinating episode about IPOs today. But before we get into it, I just wanted to mention that you might be hearing some changes to the show sound. We have a new producer, Matt Hodapp.

But we want to know what you think. Do you like the changes? Do you hate them? Send us an email at capitalisntpodcast@gmail.com. That’s Capitalisnt without an apostrophe, dot podcast at gmail dot com.

Speaking of new producers, we want to thank Derek John, whose calm baritone voice you may have heard at the end of our episodes. Derek has been our producer. He’s been with us since the beginning, and he’s leaving us to go work for Slate full time. Slate, you’re incredibly lucky to have Derek. We know we were, and, Derek, we’re going to miss you a lot. A lot. And also, Emily, your awesome wife.

There’s an acronym you’ve probably heard in the news a lot lately: IPO. Just for the economically uninitiated, this stands for initial public offering, and it’s shaping up to be one of the biggest economic trends of the year, especially for tech companies.

Speaker 1: I think 2019 is setting up to be the most exciting IPO year since 2012.

Luigi ZingalesSlack, Pinterest, Lyft, companies many of us probably use on a daily basis, are all throwing their hats into the IPO ring.

Speaker 2: We’re talking like $200 billion in terms of potential IPOs coming out of the gate, in terms of valuations. And so, I mean, when you look at the big five that are coming out, from Uber, to Palantir, to Airbnb, to Lyft . . . 

Speaker 3: . . . Slack . . .

Speaker 2: . . . these are big numbers that are coming out.

Kate: For those of you who may not know, an initial public offering, also sometimes referred to as a stock market launch, is essentially when a private company decides to go public, to be listed on the stock exchanges for anyone to purchase shares.

Luigi: But this sudden interest in IPOs is a bit strange. In the past few years, IPOs have been on the decline. Still, with all the big tech companies considering going public this year, some are saying it could turn the IPO market around.

Speaker 4: I think the tech IPOs are really going to get the market moving, but we have IPOs across the board looking at the tech group, saying, “If they perform well, I’m going out, too.”

Luigi: I’m Luigi Zingales from the University of Chicago.

Kate: And I’m Kate Waldock from Georgetown University. And this is the Capitalisn’t podcast, a podcast about what’s working in capitalism today.

Luigi: And, most importantly, what isn’t.

On this episode, we are going to talk about why companies going public these days already have huge, multibillion-dollar valuations. And whether rich people have an unfair advantage when it comes to investing, because they have access to better companies earlier on.

Kate: So, here’s an interesting fact. The number of publicly listed companies is shrinking. In 1997, a little bit before the dot-com bust, there were 8,884 companies listed on US exchanges, mostly on the NYSE and NASDAQ. Since then, the number has fallen. So, right now, it’s less than half of that.

Luigi: But this phenomenon is a result of two underlying forces. On the one hand, we’re not just talking about domestic IPOs, we’re talking about foreign companies listing in the United States, which might be an indication that the financial markets in the United States have become less attractive.

And, second, there is a trend that the startups tend to not go public so early. It used to be the case that, if you wanted to make money in a startup, you were dreaming to do the IPO. The IPO was the jackpot. Today, you get valuations when you are purchased by Facebook or Google of $12 billion. You can hit a jackpot without doing the IPO.

So, Kate, why would a company go public in the first place?

Kate: There are a lot of theories behind this. But I’m going to talk about two main ideas. One is that you need capital as a startup, right? Let’s say you have some great project that you want to invest in. Let’s say that you’re Uber, and you want to start doing more research in driverless car technologies, but you need an extra $2 billion. What if the private equity markets don’t have $2 billion? That there’s just not enough capital in private equity? If that’s the case, then you might want to go public. That way, you can raise that much money, that huge amount, from public markets.

There’s another element to this, which is that some say that you could raise that equity at an even cheaper price. And the whole idea behind that is that, if you’re getting it from private investors, chances are that they’ve got this concentrated position in just your company, right? Because a few individuals are investing a lot of money in just one company. Whereas if you’re raising that money from public markets, it’s a bunch of people who hold diversified portfolios that are investing in a lot of stocks. And so, they’re not really exposed to your specific risk, and therefore you’re going to get a better price by raising money from public sources.

And the second thing is this liquidity issue. So, if you’re a founder, one of my mentors in grad school, his name is Aswath Damodaran, he likes to say, “You can’t buy a yacht with Facebook stock. You can’t buy a yacht with equity, you buy a yacht with cash.” And, once you’ve started a great company, and you’ve got stock that’s worth a lot, but if it’s still tied up in these private markets, you want that cash, right? You want to IPO, so that you can have liquidity for your equity, and then you can receive that cash to buy whatever you want.

Luigi: The first reason, we like to portray that as a main reason. I think that most of the time it is not. In a sense, most of the time companies have already done their most intense phase of growth before they go public. They raise the money in order to grow in the venture capital arena, where, as you said, it is more expensive. But also, where there is more of a kind of selection, because it’s not easy for capital markets to mentor and direct young entrepreneurs.

The money that you raise in the public market is cheap money, as you said, but it’s cheap money that comes with no advice, no mentoring, no relationship, not anything. And, when you are in the early phase of your company, you need all these other things. That’s the reason why, traditionally at least, startups tend to raise their money in the private equity market.

Kate: So, Luigi, why would a company not want to go public? What are the big costs of going public?

Luigi: I think that the two biggest ones are, number one, there is a cost of compliance with regulation. When you go public, number one, you have to disclose a bunch of stuff, because you want to put everybody on the same page. And so, you need to hire lawyers, you need to report in a particular way, and so on and so forth.

And with that comes an additional cost of risk of disclosure in the sense that, if you miss your earnings, and the stock price drops dramatically, you’re almost certainly going to have a security class action. Now, it might be dismissed if it is frivolous, but there is the risk of a security class action every time there’s a major drop in the stock price. And that’s, at the very minimum, distracting for the CEO, especially in the early phase of a company’s life.

The second issue that is often ignored but is quite important, is that you need to disclose your profits and your business model to investors. But you cannot disclose to investors in a private room because they’re public investors. You have to disclose in front of everybody. You’re also disclosing in front of potential competitors. People realize how profitable your business is, and, sure enough, they decide maybe to enter your line of business and compete with you.

These disclosure costs are pretty relevant costs, especially in the early phase of your company’s life, when you don’t have strong moats, as Warren Buffett likes to say, a strong source of comparative advantage that protects you from competition.

Kate: Right. So, we’ve discussed some of the reasons why a company might want to go public or stay private. But the issue that we want to get to is, why are way fewer companies going public today than we used to see in the ’90s?

There have been a few big changes to regulations that have affected the relative cost and benefits of going public. One of them happened in 1996. It was called the National Securities Markets Improvement Act. It did two things. It made it easier for private firms to sell securities to qualified purchasers, which are basically just rich people, because it exempted them from blue-sky laws that used to exist. It used to be the case that each state had its own regulations about private firms being able to raise money from investors. And you would have to comply with all of these different states’ rules, and that was incredibly costly. 

It also made it easier for private equity and venture capital firms to raise capital by increasing the maximum number of investors in a fund, before that fund would also have to meet certain disclosure rules.

Luigi: But let’s be clear here. What you are describing is a reduction in the cost of raising funds outside of public equity.

Kate: Right, exactly. So, this made it easier for you to raise private-equity funds.

Luigi: Just so that our listeners understand, there is a long tradition in securities markets to try to protect investors. They often are described as naïve, unsophisticated investors against fraudsters and people that try to swindle them.

The idea underlying this protection is, if you want ordinary people to invest in the stock market, you need to guarantee that the stock market is not a place full of fraudsters. How do you guarantee this? You don’t want to take a position on whether this is a good or a bad business venture. That’s the business risk that everybody should face.

But you want to make sure that the people are honest. There was a tradition, first in state law, this is the blue-sky laws Kate was talking about, and later with SEC regulation, that was forcing people that raise funds in the public market to subject themselves to certain rules. And so, over the years, and the law that Kate described is just one step in a long process that started almost immediately after SEC regulation approval in the ’30s, was to say, “Wait a minute. If you are a rich and sophisticated investor, I don’t need to protect you. You are big enough, sophisticated enough, that you can buy at your own risk.”

Regulations started to make it easier for these sophisticated investors to buy equity without going through the formal process of an initial public offering.

Kate: All right. We have to take a quick break, and then we’ll be back, so stay with us.

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Kate: To recap, anybody can invest in public equity. Only rich people can invest in, not only private equity, but other sorts of asset classes that are deemed by the government too risky for regular people. By asset class, I mean the sort of things that you can invest in. So, real estate is an asset class, public stocks are an asset class, private equity is an asset class, bonds, debt is an asset class.

Luigi: Yeah, but Kate, sorry, you say that with what appears to me a salt of condescension. I see some logic in that, and it may have some negative consequences. But the idea that you want to make sure that ordinary investors are protected, and they don’t face fraudsters, is a good idea. And, honestly, I don’t think that you need to protect Warren Buffett. First of all, he’s more sophisticated than both of us. And, second, even if he were to lose a little bit of money, it would not be the end of the world. So, I don’t know why the government should be in the business of protecting Warren Buffett, but I do believe that the government should be in the business of protecting the small investors.

Kate: No, don’t get me wrong. I might sound like I’m unhappy about this, but that doesn’t mean that I disagree with it. I remember when I was . . . I think I was maybe 27 or 28. I was in the middle of my PhD in finance, and I was talking to one of my friends who was working for a hedge fund. And she was making a lot of money.

I think the accredited investor rule for certain asset classes is you have to have an income of $200,000 or more, which she met, and I obviously didn’t. And so, she was trying to make this argument that she should be able to invest in certain types of assets when I shouldn’t, because I didn’t make enough money, because I was an unsophisticated investor. And even though I was very frustrated by the situation, I think that, in general, there is some truth in this argument.

Luigi: And, by the way, there is a third rule besides your income and your wealth. If you are a professor of finance, you qualify as a qualified investor.

Kate: Really?

Luigi: Yeah.

Kate: We shouldn’t say that, because it’s a little self-serving.

Luigi: No, no. But it says you can qualify based on your professional knowledge.

Kate: The National Securities Markets Improvement Act made it easier for private equity to get bigger and private companies to stay private for longer. There was also something that happened in 2012 called the JOBS Act.

Barack Obama: And for startups and small businesses, this bill is a potential game changer. Right now, you can only turn to a limited group of investors, including banks and wealthy individuals, to get funding. Laws that are nearly eight decades old make it impossible for others to invest. But lots changed in 80 years. And it’s time our laws did as well.

Kate: This increased the maximum accredited investor threshold, right? What we just talked about. Rich people that you can raise money from. The threshold used to be 500, and that was bumped up to 2,000. This is pretty important.

So, when you think about Facebook’s IPO, and they IPO’d in 2012 . . .

Mark Zuckerberg: Going public is an important milestone in our history.

Kate: The reason they did so is because they bumped up against that threshold. At some point, they had 499 accredited investors who were holding that company stock, and if they wanted to raise any more money from a larger pool of people, they had to go public.

Mark Zuckerberg: But here’s the thing. Our mission isn’t to be a public company. Our mission is to make the world more open and connected.

Kate: And an interesting point is that part of this also had to do with their employee stock options. So, tech companies often like to compensate their employees with stock in the company, or with stock options that will become valuable later on. And, when those options vest or when the employee eventually has a stake in the equity of the company, they used to count towards this limit of 500 people.

And another thing that the JOBS Act did, in addition to upping this limit, is that they said, OK, employees that are compensated with restricted stock units, or certain type of exempt units, they don’t count towards this limit anymore.

Luigi: In this analysis, you describe two pieces of legislation that basically made it easier to raise private equity. We should also point out that there was another piece of legislation in 2002, Sarbanes-Oxley, that increased the cost of public ownership by mandating a number of requirements. And so, at the same time in which private equity became easier to get, also public equity became more expensive to raise.

Kate: All this additional compliance and regulatory burden does sound pretty complicated and pretty costly. And people started noticing that after 2000, the number of IPOs was decreasing. So, part of the JOBS Act, it reduced the burden of Sarbanes-Oxley on small companies.

Barack Obama: Because of this bill, startups and small business will now have access to a big new pool of potential investors, namely, the American people.

Kate: The idea was that this regulatory burden was just too high for them as a fraction of their value. It was preventing them from going public. It was sort of too little, too late. And, at the same time, the JOBS Act, on the other side, was making it much easier for private equity to get bigger.

In fact, after the JOBS Act, according to McKinsey, the capital invested in private tech companies almost tripled from 2013 to 2015. So, even though part of the JOBS Act was designed to make public equity more attractive by reducing this SOX burden, Sarbanes-Oxley burden for small companies, what ended up happening was that increasing the threshold of accredited investors, that part mattered much more.

Luigi: But I think that it is not a competition of where you raise more money. I think that the ultimate purpose is to facilitate the growth of the economy. And so, the question is, are we imposing an undue burden in one market or the other? And, if so, we should reduce that burden, or are we not imposing the checks and balances sufficient to make that process a healthy process? In a sense, some of the stuff introduced by SOX, by Sarbanes-Oxley, was in my view useful to make the investment in public equity more reliable.

Public equity is where most of us invest our savings, time and savings. So, a loss of trust in the system can be quite devastating for the overall economy. And so, I think we need to protect that channel. If there is a Wild West for some rich people, I’m not so worried about that, are you?

Kate: No. Your point is good, which is that, at the end of the day, what we want is for the right investments to be made, so that the economy can grow. But I also think there’s this interesting other angle, which is that, if only rich people are allowed to invest in the good stuff, that can exacerbate a huge inequality problem that we have today. So far, what we’ve talked about has been pointing in this direction of, yeah, it does sort of seem like only the rich people can access private equity markets. And that seems unfair.

Luigi: First of all, it depends on the . . . private equity, because the average return in private equity, and even venture capital, is not that spectacular. If you can invest in Kleiner Perkins, which is one of the best venture capital funds, the track record is fantastic. Lucky you. Short of being the Yale endowment fund and a few other rich individuals, you don’t get to invest there.

So, many of the people who invest in private equity, I think invest in cleverly sort of moderate-quality deals. So, I don’t see this as necessarily a big advantage to them versus the ordinary investor. What I’m more worried about is two things.

Number one is how nontransparent private equity is. So, indirectly, some of our pension money and, particularly if you’re a public employee, is invested in this stuff. But we don’t know, really, how good their return is, because they don’t disclose very well the risks they are taking and all this stuff. So, from a public policy perspective, I am worried that there is too much opacity in that world.

The second is, I’m worried that there is too much, let’s call it quid pro quo, not to use a more direct name, in that world. In a sense that, imagine that . . . I’m a CEO of a company, and I invested my own private money in a venture capital fund. And that venture capital fund comes to me and offers me a startup. I, CEO of that company, end up overpaying for that startup.

Now, why did I overpay? Because I overpaid with other people’s money. And, why do I want to overpay with other people’s money? Because, at the end of the thing — I’m a CEO, in some sense I’m responsible — is because I get a special deal to enter into this VC fund.

So, that’s the kind of quid pro quo that I’m worried about. And, unfortunately, there is no monitoring of this. No transparency, nothing.

Kate: Do you think that these are CEOs of public companies or private companies that are doing this?

Luigi: Of public companies. In fact, one CEO told me that he was offered precisely that deal and he refused. So, I know that this is something that goes on. I don’t know how widespread this is, but it is definitely there.

Kate: But then, that’s fraud.

Luigi: You know, what is the limit of fraud with this sort of, I scratch your back, you scratch my back? And it says, if I willingly overpay, sure, it is fraud, but as we know, there is a pretty wide range of valuations. So, if I choose the upper end of the range of valuations, I don’t think anybody can sue me because I am within the range. But clearly, I’m doing a favor to your venture capital fund.

And, if you offered to me the possibility of entering in a fund where nobody else can enter, you’re still doing something that is legal, but you’re doing a favor to me. These kinds of deals are the ones that makes rich people richer, because you give them a set of deals that other people don’t have.

Kate: OK. On the surface, it seems like private equity is unfair to ordinary investors. But we’ve talked about how private equity markets have opened up, right? Some people can access private equity markets through their pensions, and also there are ETFs that allow you to invest in private equity markets. Whether or not I recommend them, that’s a different story, but they do exist.

Also, returns aren’t actually that much better than the S&P 500, if you’re looking at private equity as an asset class as a whole. And, also, there are some economic benefits to the private equity system. Small firms can get monitoring and advice, and this can help them invest better. So, maybe that’s not the real problem.

OK, we’re going to take a short break. We’ll be right back.

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I want to go back to this point about companies that are IPO-ing this year. 2018 was a bad year. It was one of the worst years, at least in the past few years, for the private equity space in terms of fundraising, and, in particular, the stock market did pretty badly in December.

I think once these large startups, or these firms that were private that had really big valuations and still need a lot of capital, once they realized that fundraising was getting tough in the beginning of 2018, and then they started thinking about IPO-ing, and then, all of a sudden, in December markets were really terrible, they were like, “Uh-oh. If we rely on the private equity space, and we need more capital to invest later on, we might not be able to raise it, if there’s a recession or something.” So, I don’t think it’s a coincidence that a lot of these IPOs were announced in December of 2018.

Luigi: And wait. You are forgetting the government shutdown. And then, in the later part of the year there was a government shutdown, so the SEC was not processing the IPOs. So, part of the accumulation of this is the result of the shutdown at the end of last year, beginning of this year.

Kate: Right. So, we saw Lyft’s IPO that happened at the end of March. At least in terms of first-day trading, it was very successful, but it sort of seems to me like the opposite should be true. That, back in the day when private companies went public, it was because they were forced to, right? Because they really needed that extra capital. Either the capital didn’t exist in the private world, or they just had too many investors, and they were forced by regulators to go public because of this 500-investor rule.

And that doesn’t exist anymore. Right? If Lyft were bumping up against the 2,000-investor limit, that would be one thing, but I don’t think that they are. And so, if they are going public, and the costs of going public are pretty high, as they seem, isn’t that a sign that Lyft is a bad company? It’s a sign that they couldn’t have gotten that money from the private equity world, which is why they’re forced to go public, because they’re not as good as they used to be.

Luigi: I think you’re making a very good point here. And this is not a point that might be obvious to all the listeners. It’s the idea that, when there is a lot of asymmetry of information, if you give more choice, there is more risk of people selecting what they bring to market. And, as a result of selecting, they’re only bringing stuff that is way overvalued. In our jargon, it is called the lemon discount, because you only bring to market the lemons, and you keep for yourself the better stuff.

Kate: A lemon’s like a turd, by the way.

Luigi: I think that there is definitely that risk, but it’s also true that both Lyft and Uber, which is considering going public, they now have reached such large valuations that even the original investors want to diversify away.

Once I invited to my class an alum who started a telecom company in the late ’90s. And he went from being worth zero to being worth $100 million. And then, he was able to sell some, but the CEO did not sell anything and went back to zero again.

Kate: Oh, no.

Luigi: So, the ride from zero to $100 million is fun, but the ride from $100 million to zero is pretty painful. There is a need to diversify. Once you start to accumulate an enormous amount of money, that’s a compensating factor that pushes entrepreneurs to actually try to sell, even venture capitalists to try to sell. Because, remember, many VCs that invest in these deals have a fund that has a 10-year life.

And they want to distribute their stocks to investors before the end of the 10 years. Because they get the money as a function of the realized return during those 10 years. So, there are pretty strong incentives, actually, either to bring companies to market or to sell them off somewhere else.

Kate: I think another point is whether it’s problematic that these huge, money-losing companies are able to sustain such massive valuations. 

I think there are two sides to this argument in a very simple sense. One is that people are just forward-looking, right? You can be losing a lot of money today, but if you’re making good investments, if you’re building good machines, or if you’re doing research and development that hasn’t actually generated cash flows yet, the idea is that, in the future, you will make these cash flows. And that’s what’s generating the current high valuation.

So, that’s totally fine. So, to the extent that a company like Lyft or Uber has a really high valuation, because maybe they’re going to be inventing these really cool driverless cars in 10 years, that’s great. And it’s also a sign that markets are long term, right? They’re not as short term as people claim they are.

On the flip side, part of what worries me is that this isn’t the full story. That maybe these money-losing companies are sustaining these high valuations because people believe that they’re going to become dominant players in a market. That they are losing money because they’re engaging in predatory pricing, right? They are pricing their products below where potential competitors are pricing those products, in order to push those competitors out of the market, so that they’re the only person left in the market, or the only company left in the market, and then they’ll be able to charge monopoly prices later on.

This would happen in a system where you believe that the antitrust regulators won’t eventually go after you for doing this. And, I hate to say it, but I’m a little bit worried that that’s also what’s going on, at least with companies that sort of have Amazon’s business model.

Luigi: I think you’re absolutely right, and particularly in a world of network externalities, and where digital platforms basically take the entire market if they succeed. So, my bet on Uber or Lyft is a bet that they eventually are going to consolidate and be only one game in town. And they’re going to make a lot of profits as a result of being the one game in town.

This is a situation in which even antitrust will be challenged, because they said, “Oh, there are so many efficiencies of consolidation. And, why should you challenge us now that we are so efficient?” So, I think that investors are farsighted, but they are not so farsighted in the technology. We can make a bet, I don’t believe that driverless cars will take over the world in 10 years. But I do believe there will be a consolidation in the driver market or whatever the market is called. And they’re going to make extra profits.

Jim Cramer: Thirty-nine percent of this market is Lyft, 60 percent is Uber. After these deals are done, they’re going to raise prices, after they’ve wiped out all the yellow cabs everywhere. That’s what you do. Now, people are never going to say that, but I just thought that with two different companies going at it, they’re going to end up with good pricing power.

Kate: I think we’re in agreement that the government, as patronizing as it may be, and as annoying as it may be, when you’re a student who’s only making a couple of thousand dollars to live on, there is some role for the government to try to protect everyday investors from investing in stuff that’s really risky and really opaque. But there’s still this issue of, if firms are getting $25 billion and $40 billion valuations without going public, are there other reasons that we should be worried?

Luigi: What should we worry about?

Kate: Well, let’s say that firms never go public. Let’s say that public equity just disappears, and all firms remain private forever. I think a potential source of social concern is that risks could build up inside these companies that we don’t know about. And I guess you could argue that we wouldn’t know about them anyway, right? It’s not necessarily information that would have been disclosed according to public equity disclosure rules, but the more information, the better.

Let’s say that ride-sharing firms are using some sort of technology that’s easily hackable by some foreign country, and there’s no way, if all of these companies remain private forever, for us to ever really pick up on that vulnerability. But once these companies go public, there’s more disclosure, maybe somebody would realize that this vulnerability exists. I think the government should have some role in knowing what sorts of companies exist in the economy, and, in particular, monitoring potential vulnerabilities that could lead to big crashes or a big crisis.

Luigi: I was in a meeting few days ago in which we were discussing cyber threats, and an expert told me, “Just assume that everything that is online is known to the Chinese and the Russians.” I think that the so-called vulnerability, I take it for granted. It’s not even an issue.

Kate: OK.

Luigi: And, the second point is, I’m not so sure that by going public, you have all this visibility on all these threats in the sense that, did we know that Equifax had been completely sort of hacked by people, or Target? I think we know that after the fact, not necessarily before. And we know it as consumers, not necessarily as investors.

I think that, yeah, there is a little bit more visibility when you’re public, but I’m not so sure that that is the most important thing. I think that the concern is, if we don’t have a good sense of the set of assets we can invest in, and their return, and their correlation, the investment decisions of the pension funds, et cetera, will not be done well.

And that is to me a first-order concern. Because a 1 percent difference in return on our pensions, means the difference between retiring happy, over 30 or 40 years, makes a difference between having a healthy retirement with enough money to live or being poor.

Kate: But isn’t return something that you can just infer based on what they’re paying out? If I have my money in a pension fund, and that pension fund is invested in private equity, maybe I don’t know what they hold, but I know how much money I have in my account based on if I want to withdraw that money from my account, let’s say I’m retired, I can do it. And I know—

Luigi: Oh, certainly. You, Kate, if you are the Kate retirement fund, a big fund, and you invest in this, you have the return on that particular private equity fund. However, if I am a different fund and I want to decide whether to invest in the fund you invested in or not, I need to have a reliable disclosure of that return, and the reliable disclosure of all the other returns in order to make a comparison. This is what is not so available in private markets. Now, there are companies that are trying to provide these, et cetera. But even—

Kate: Yeah, exactly.

Luigi: Yeah. But even a very simple number, like the internal rate of return, you think that is a mathematical concept that should be objective. In fact, you can manipulate it very easily by changing a bit the timing in which you are sending the cash flow, or how you factor in the extra investment, and so on and so forth. And, because a 2 percent extra return in the IRR makes a difference between raising a lot of funds or not being able to raise the funds, people are prepared to do anything for it.

I think that the beauty of the SEC disclosure is, you have a system that tries to provide objective information to everybody, and punishes the one that lies . . . In addition to that, you have a standard. The SEC said, “You have to disclose in this way.” It’s annoying, but it’s a standard that makes it very easy to compare what you do versus what I do. And lack of standards in investment is an issue.

Kate: OK. So, we can’t just say, this year’s IPOs are capital-is or capitalisn’t, because we’ve talked about 10 different things. But let’s divide this out into different categories. So, in terms of their effect on market efficiency, and, I don’t know, inequality, is this capital-is or a capitalisn’t?

Luigi: The coming back of IPOs this year, I think that, in the point of view of the market, that’s a capital-is. I think that, at first pass, I will say this is a good sign that the capital market is working in providing capital, even for very long-term projects. Many people accuse the stock market of being short-termist, but, in fact, the valuations they give to Lyft and other startups that are not profitable are very generous. So, it seems that the market is actually very long-termist.

Kate: Yeah, I agree, from a market efficiency perspective, I think that this is fine. I think that this is a capital-is. These are companies that are going public after already generating huge valuations. But I’m OK with the fact that private equity markets are now very large and very liquid. Venture capital and private equity funds can provide meaningful advice and mentorship to these firms, that’s valuable. And there’s some research that shows that private firms actually invest better.

Luigi: Where I would be more in the direction of capitalisn’t, is an expectation of winner takes all. We know from evidence on even traded securities that the vast majority of publicly traded companies don’t make any money. All the profits are made by a few companies at the top. So, the inequality that we discuss in people seems to also be an inequality in firms that tends to reward the bigger and the winners.

Kate: Yeah, I agree with you on that one too. This is boring, we’re too much in agreement.

I also think that from an inequality perspective, at least in terms of regular people, not necessarily being able to invest in private equity, I don’t think that that’s such a big problem, or at least it’s not as big a problem as meets the eye. Partially for this reason that private equity comes with its own efficiencies, partially because regular people can have access to the private equity space for ways we discussed earlier. And partially because private equity returns maybe are not that much greater than regular public equity returns.