Get 40% Off
⚠ Earnings Alert! Which stocks are poised to surge?
See the stocks on our ProPicks radar. These strategies gained 19.7% year-to-date.
Unlock full list

Goldman Gives New Reason IPOs May Suffer: Multi-Class Shares

Published 09/30/2019, 08:51 AM
Updated 09/30/2019, 09:19 AM
Goldman Gives New Reason IPOs May Suffer: Multi-Class Shares

(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.”

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.