Capital Formation, Economic Growth and Public Equity Markets Brussels Exchange Forum 25 April 2014 Mats Isaksson Head of Corporate Affairs, OECD

How growth happens ! Capital Formation 56% Labour Growth 20% Productivity 24% (Jorgensen, 2006 for G7 countries )

Capital for what? Starting Market expansion Research & development Remuneration Machinery IT equipment Acquisitions etc.

Not all capital is equal Credit card Overdrafts Trade credits Bank loans Bonds Equity

What makes equity unique? It is the only standardized financial instrument that can handle entrepreneurial uncertainty. Taking on uncertainty is the only genuine source of economic progress. (As opposed to managing risk.)

Sources of equity Personal wealth Private pools of capital Retained earnings Public equity

The transferability of shares Separation between investment horizons

What we should expect from stock markets Serve as venue where growth companies effectively can access equity capital. Produce information from many independent sources so that capital is allocated effectively among competing ends. Engage shareholders in the monitoring of corporate performance.

But how is the performance of these functions affected by recent changes in the corporate and financial landscape?

Changes in corporate characteristics - 1 New trends in capital formation: Human capital and intangible assets Alternative corporate structures (PTPs, MSPs) Acquisitions by large established companies.

More difficult for companies to grow and develop as independent companies. On average, Google has acquired more than one company every week since 2010 (Business Insider). Source: U.S. Department of Commerce Changes in corporate characteristics - 2 Share of young companies

Changes in the stock market business model - 1 Trade volume increased three times than the primary market volume between 2004 and Source: OECD calculations based on data from Thomson Reuters New Issues Database, DataStream, stock exchanges’ and companies’ websites. Trade volume data are from World Federation of Exchanges. Trade vs. supply

Changes in the stock market business model - 2 Demutualisation and self-listing trend Market fragmentation; multi-lateral trading facilities, dark pools etc. Low visibility for smaller companies Higher market concentration

Changes in intermediation - 1 Institutional Investors have more than doubled their assets under management in the last decade. 85 trillion in AUM 32 trillion in public equity

Changes in intermediation - 2 Source: OECD Institutional Investors Database, SWF Institute, IMF, Preqin, BlackRock, McKinsey Global Institute Total assets under management and allocation to public equity by different types of institutional investors. Concerns about the accuracy of estimations in the data. The combined holdings of all institutional investors; USD 84.8 trillion in Traditional institutional investors; USD 73.4 trillion (USD 28 trillion in public equity). Alternative institutional investors; USD 11.4 trillion (USD 4.6 trillion in public equity). Their Equity Holdings

Changes in intermediation – 3 Source: CalPERS Comprehensive Annual Financial Report, Financial Year Ended June 30, 2012 and CalPERs Annual Investment Report, Financial Year Ended June 30, 2012, Complexity – The CalPERS Case

Changes in trading techniques and financial products Increase in indexing (play safe – collect fees) Exchange traded funds (increased in volume by % in last decade) High Frequency Trading (where the fast beat the smart) Co-location (jump the queue)

OECD countries: IPO numbers and volume Downward since 1990’s. Both in numbers and volume. “Recovery” before the financial crisis. Average Volume : USD bn Average Volume : USD 69.8 bn Source: OECD calculations, based on data from Thomson Reuters New Issues Database, Datastream, stock exchanges’ and companies’ websites.

Number of listed companies Source: World Bank World Development Indicators Some of the largest OECD stock markets have lost half of their publicly listed companies in the last 10 years.

Thank you for your attention!