More small caps may look to flee the ASX as they get too tangled up in red tape
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An over-regulated environment is seeing an increasing number of listed companies think seriously about fleeing from the ASX.
PwC Australia CEO Luke Sayers suggests the regulatory burden on listed companies is encouraging short-term thinking.
In an opinion piece published on LinkedIn, he argued that gradually more companies may look to go private as a result.
Sayers told Stockhead the situation was even more applicable to small caps than large caps.
“I think with smaller caps, the cost and impacts of regulation and compliance can become even more significant relative to their size and scale,” he said.
“So there can be an even greater propensity to return to private company status.”
In his initial opinion piece, Sayers argued it was difficult for listed companies to focus on medium to longer term pay backs. This was particularly relevant if pursuing them could hit the short-term bottom line.
“If you are a public company that must regularly report results to the market, the ‘system’ overwhelmingly encourages decisions that prioritise short-term returns,” he explained.
“It is hard, for example, to ask investors towards the end of the accumulation phase of their life to be happy with slower growth in the short term, for the promise of a medium to longer term payback.
“Or, to take a hit to the bottom line for the benefit of a cause or societal issue that may feel less than immediately relevant to them.”
He also argued that even if shareholders could be convinced, analysts may not, especially if earnings took a hit.
As a result, company incentives are designed to deliver short-term growth, often at the expense of other metrics.
And with levels of private equity at decade-long highs, Sayers said companies may opt to go private.
“This will give them more freedom to think long-term and make hard choices about their future direction,” he said.
“It is incredibly risky as a leader in a public business to do or say anything outside of a very small box of acceptable behaviour, and very difficult for large businesses to have the agility they need to survive and thrive in the face of so much change.
“I do not claim to have the answer to this dilemma, but I believe one of the outcomes will be a flight to private.”
The downfall to more companies going private is that the average Australian investor would have less opportunity to invest in those companies and reap the rewards, according to Sayers.
One alternative might be crowdfunding. Several firms undertaking crowdfunding in 2019 have pointed to this as a way of involving retail investors.
Sayers said this was an option considering the pool of private capital, but that it was still developing.
“Crowdfunding could be an option, although it is still in relevant infancy at this stage in Australia from an investment funding perspective,” he said.