(Bloomberg) -- Initial public offerings haven’t been doing so well lately. Goldman Sachs (NYSE:GS) says many of them might suffer longer-term headwinds as well.
Many new entrants have been employing multi-class voting share structures -- including seven of the 10 largest IPOs so far this year, strategists led by David Kostin wrote in a note Sept. 27. That could prevent them from being added to indexes managed by the likes of S&P Dow Jones and FTSE Russell. That would mean missing out on flows from passive investment managers tracking those benchmarks.
“Using multi-class voting to insulate management from its own shareholders comes at a significant long-term cost,” the strategists wrote. “Firms restricted from joining major indices will not fully benefit as capital flows into passive funds that now represent more than 50% of total U.S. mutual fund and ETF assets.”
A potentially banner year for U.S. IPOs is showing signs of cooling. Firms like Uber Technologies (NYSE:UBER) and Lyft (NASDAQ:LYFT) have struggled after their debuts, while SmileDirectClub (NASDAQ:SDC) had the worst opening trade for a big IPO in more than a decade.
The disappointing run in addition to an uncertain economic environment could put a freeze on offerings over the rest of this year and possibly into next year, as well. That’s even before layering on the “secular headwinds,” as Goldman calls the index-inclusion issue.
Goldman acknowledges the pro multi-class structure argument that the set up allows management to focus more on strategy and value creation without being distracted by activist investors seeking short-term gains.
“A sunset provision on dual-class stock is one potential solution to the corporate governance dilemma,” the strategists wrote. “Phasing out high-voting stock after 5-10 years would allow firms the opportunity to eventually be included in the major indices while providing some shareholders more control in the near term.”