Some time ago, when this rookie correspondent was busy covering the great British corporate collapses of the early 1990s for Britain’s Daily Telegraph (Polly Peck, Maxwell Communications, Brent Walker, and the like) the newspaper compiled a box-checklist of warning signals to help investors avoid the obvious traps.
Sample questions included: is the boardroom packed with decorative names; does the management mix public and private interests; is the corporate structure overly complex; do executives tend to zip around in corporate jets; and, crucially, is there one dominating and controlling shareholder, leaving minority investors at risk of abuse?
Well, the checklist didn’t get published. A savvy editor had pointed out that when it came to ticking boxes, the paper’s proprietor, Conrad Black, ticked every one.
Moving on a few years, plenty of investors still heed what remain pretty timeless warning signs — except, it seems, the last one.
It used to be the case that companies with a small free float of stock and a big, dominating owner/manager traded at a discount, since investors needed compensating for the extra (and very obvious) risk. Indeed, Britain’s entire regulatory framework for M&A — the Takeover Code — was founded on the principle of protecting minority shareholders.
But now such entrants to the public markets – those offering outside investors just a sliver of ownership – seem to be welcomed with open arms.
Russian listings in London are an obvious example, ratcheting the apparent risk higher by using regulation-lite Global Depository Receipts. And hedge funds now seem to have adopted the same financial fashion, offering the markets tiny free floats of stock in return for the full panoply of promotion and prestige that a market listing brings.
Fortress Investment Group, priced at the top of its indicated range and reportedly over-subscribed to the tune of 25 times, may be the first full blown alternative manager to make its way onto to the New York Stock Exchange. But in releasing just 8.6 per cent of stock for public consumption, it is the latest in a growing line of firms creating inherently illiquid markets in their own stock.
Is there anything wrong with this? Not in a legalistic sense, clearly, and there is no suggestion here that any of these companies is necessarily headed for the rocks.
Perhaps we should not be surprised that Russian oligarchs, dipping their toes in London’s capital markets, are reluctant to release control. They are still learning and adapting to the Western version of market capitalism, as opposed to their mutant, home-grown variant.
But asset managers — alternative or otherwise — are a different case. These are businesses whose very existence relies on open, transparent, efficient markets, where assets are freely traded and accurately priced.
The hedge fund sector and private equity industry, in sizing up the idea of listing publicly, talks of accessing “permanent capital.” But it is difficult to avoid the suspicion that in many cases the public markets are simply being used as a private pricing and valuation service, rather than a genuine mechanism for allocating capital.
Perhaps the most extreme recent example of this came in December with news that Thomas Peterffy was floating his Interactive Brokers Group. Using an arcane two-tier ownership structure that kept 95 per cent ownership in his hands, investors were invited to join an auction for the remaining 5 per cent to raise upwards of $500m.
IBG is a electronic brokerage that possibly counts as the most automated securities firm in the US. Mr Peterffy is a highly regarded Wall St veteran. But neither his fortune nor his firm would exist if everyone else used the public markets for what really amounted to personal estate planning purposes.
Meanwhile on Friday, as trading in Fortress first got underway in New York, the share price all but doubled.
That’s not a surprise. But, for the markets as a whole, it does not feel healthy.