In the public eye

An article in the NY Times this morning about women lured into questionable surgeries so they can be potential high-return participants in class action suits got me to thinking about public vs. private markets and where we stand right now. The article details how alliances of law firms and hedge funds and other private funding vehicles track down and then convince women to have vaginal mesh implants removed, because women who have had them removed can recover large settlements in suits, whereas if they haven't had the procedure, they don't get much $.

Meanwhile, the number of publicly-listed companies in the US has declined by about half from 1996, from 7300ish to 3700ish.  Estimates of global assets in hedge funds and private equity funds stands at about $8 trillion (note that a large chunk of the former is in publicly traded securities). The best estimate is that there are now 233 "unicorns", privately held firms with valuations in excess of $1 bln. The best known of them in the West include household names like Uber and AirBnb.  It is impossible to guess how big the universe of small, privately-held speculative investment opportunities there are out there, but participating in private deals is de rigeur amongst people with money these days, it is a mark of status.

Now, what do these two things have to do with one another, you may ask? The fact that it is cool to invest outside of public markets, combined with the decline of public markets, encourages shitty things to happen in the shadows, like cold-calling working class women and telling them they might die next week if they don't come get some questionable surgery, so they can get cash in a settlement which you then take from them. Securities regulators and the transparency mandated by their reporting requirements acts as a general force for good in the world. They don't stop this stuff, but they funnel cash towards less evil behavior, in aggregate.

But it's complicated. Companies don't list on exchanges because the cost of compliance with regulations is high. We can't force them to list if they can get money elsewhere. One of the biggest and most onerous of the filing requirements is Sarbanes-Oxley (SOX), which came in after the scandals at Enron, WorldCom, Adelphia, Tyco and others back in the 2001-2002 timeframe.  A friend of mine from a large consultancy referred to SOX as the "universal consultant's employment act" at the time, because figuring out how to comply and then complying was such a huge undertaking.

I don't necessarily favor getting rid of SOX, I'm just citing that as an example, but balancing the costs of regulatory compliance with other downstream knock-on effects is not simple.