Chart of the day, equity and GDP edition

March 22, 2012

The Epicurean Dealmaker has been watching global equity markets metastasize:

Over the past few decades, the public equity markets have evolved from a relatively staid and selective backwater, a playground for pension funds, insurance companies, and the idiot sons of wealthy men, into a gigantic global pool of capital, driven and supported by huge amounts of money from literally everybody… I will leave it to an enterprising PhD student to research the data, but I suspect the aggregate amount of equity market capitalization as a percentage of GDP has swelled tremendously over the past three decades. Equities have gone mainstream, and as they did, the size of equity markets ballooned.

To illustrate his point, TED talks of a fund manager who invests in no more than 100 stocks at a time. When he was managing $100 million in the 1980s, he could easily invest $1 million in a company; by the time his portfolio had grown to $10 billion in the 1990s, his average investment was north of $100 million per stock. That, in turn, makes it very hard for institutional investors to buy small-cap stocks, and helps to explain why small companies can’t IPO any more.

But that’s just anecdote; I wanted data. So I found an enterprising PhD student Ben Walsh, and asked him what’s happened to equity market capitalization as a percentage of GDP. And he, in turn, found Google:

There’s definitely an up-and-to-the-right trend here, but it’s very noisy, and we’re not talking orders of magnitude: global equity capitalization is probably about 50% higher now, relative to the size of the global economy, than it was in the 1980s. That’s an interesting trend, and a welcome one. But I don’t think it explains much about the IPO market. After all, the effective minimum size for IPOs has gone up much more than 50% since the 1980s.

I do think that maybe the distribution arms of the big sell-side equity underwriters have reached the point at which it just isn’t worth it any more for them to deal with any but the biggest accounts; I have a feeling that retail investors had much more access to IPOs in the 1980s and even during the dot-com bubble of the 1990s than they do now. But this is much more a function of the consolidation of the investment-banking industry than it is a function of the size of the equity markets as a whole.

Which opens up an intriguing possibility: is there some way in which the internet might be able to spawn a small, light broker-dealer which could underwrite IPOs aimed at retail, rather than institutional, investors? Think of it as fully SEC-compliant crowdfunding, without any need for a JOBS act. And if not, why not?


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