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John Neis
At Venture Investors Health Fund, we are always paying attention to liquidity opportunities. Lack of liquidity has plagued the industry for the last few years because without distributions to limited partners, it becomes difficult for them to maintain their target allocation to venture capital without reducing commitments to new funds. The trend for IPOs has been positive this year, but it is like saying that western Nebraska is at a higher altitude than eastern Nebraska. It is true, but it is not the Rocky Mountains. The financial markets have always been adept at adapting to conditions. There are growth funds managing billions capable of rounds of hundreds of millions, amounts once only available through an IPO. Secondary activity is at an all time high and discounts have narrowed. That helps. Most venture capital firms are Exempt Reporting Advisors, capping their secondary participation at 20%, and if they exceed that, they must become a Registered Investment Advisor with a cost and regulatory burden that small firms can't afford. If the DEAL Act was passed, it would raise that to 50%, further improving liquidity. It alone isn't enough. In the 1990s, it was commonplace to do an IPO that raised $60M, resulting in a $300M market cap, with three respected analysts following the stock that had solid trading volume. Those days are long gone. The regulatory and reporting burden has increased substantially and the cost of being a public company has skyrocketed. The size of required filings has grown enormously, filled with required language that nobody reads except those preparing it and the regulators. Who is that benefiting? At the same time, the regulatory changes for investment banks made these small IPOs less attractive to underwrite. It is easy to understand why a company like HistoSonics, Inc. pursued private financing that offered secondary liquidity for some of its investors instead of going public at this time. They avoid the cost and distraction of being public, allowing them to focus solely on growing the company. However, other companies would benefit from a more accessible public market. The average investor would benefit too. We have half the number of publicly traded companies today versus 25 years ago. Individual investors used to be able to participate in the most promising emerging companies in their most dynamic growth phase by investing in new IPOs. Now most of these companies remain privately financed and are inaccessible to the average Joe. Some have suggested letting 401(k) plans invest in funds, but I am wary of allowing illiquid investments by those who rely on liquidity. The better answer is to make smaller IPOs more viable again. It is time for a thorough review of all of the regulatory burdens that have been added in the last 25 years. How many are really protecting the small investor, and how many are just needlessly stifling innovation by restricting liquidity and access to capital?
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