Business

IPOs a key to jobs

IPOs, PDQ!

Americans who are frustrated by the seemingly glacial pace of jobs creation since the Great Recession might consider taking up that chant.

At least that’s the consensus of insiders like Robert Maltbie of California-based Singular Research and Kathleen Shelton Smith, a principal of Renaissance Capital.

The strength or weakness of the IPO (initial public offering) market, Maltbie says, is naturally important to the individual investor, but it is downright vital even to people who don’t invest in the stock market.

“About 80 percent of our job growth comes from the creation of small companies, and it is one reason we haven’t seen enough job growth,” Maltbie says.

Over the past three years, IPOs have been dogs compared to the rest of the market. Their average annual return over three years was a measly 1.8 percent, compared with 8.5 percent for the S&P 500, according to the FTSE Renaissance IPO Composite Index. Last year, IPOs had a nice return: 11.7 percent. But once again they were outpaced by the S&P 500, which returned 13.4 percent.

When IPOs are underperforming the stock market as a whole, as measured by indexes such as the S&P 500, investors generally shun them, Smith says. “The public has avoided this market because the returns have been poor,” she said.

Exhibit No. 1 in 2012: Facebook, one of the most-hyped offerings of stock since the days of the ticker tape, has managed to lose about a third of its value in roughly 10 months.

Nevertheless, the strength or weakness of the overall IPO market is closely connected to that of the whole economy — especially when it comes to jobs. The more companies that grow and go public to grow more, the more workers get hired.

And yet, a series of changes to rules and laws are making launching IPOs more difficult for — and costly to — the companies that want to go public.

Maltbie, along with trading groups such as the Security Traders of New York (STANY), warn that measures like the Sarbanes-Oxley Act (which sets new standards for public company boards and management) and the creation of new market rules known collectively as Regulation NMS have raised the bar too high for many small and midsize companies.

“Some of our stalled growth could be directly due to some of the changes to the marketplace in the last five years,” says Patrick Armstrong, a New York Stock Exchange floor broker and executive with Prime Executions who is also the president of STANY.

Armstrong warns that access to capital for small firms is “fundamental to our economic growth.”

That point is also emphasized in a recent study of the IPO market by certified public accounting firm Grant Thornton.

“US economic growth will be lower as returns languish without a functioning IPO market,” according to the report, titled “Why Are IPOs in the ICU?”

The report says that unless the country’s IPO market improves, “the US will lose its competitive advantage in developing, incubating and applying new technologies.”