Quick note about secondary financings. Not targeted at you per-se as much as the large quantity of HN comments that seem to not understand the nuance.

You can't include primary and secondary financings in the same total, because you would be double-counting. That would be like measuring a public stock on its total volume traded, not its market cap.

For example:

- Investor A invests £100M into Uber for 1M shares

- Investor B buys those 1M shares from Investor A for $400M

- Investor C buys those 1M shares from Investor B for $500M

There has been "$1B in fundraising" but: (a) only $100M went to Uber and; (b) the market cap of those shares is $500M

I don’t think anyone would say that there was 1B in fundraising. They’d say there was 100MM in fundraising. The market cap of those shares is indeed price * shares outstanding. But that’s not enterprise value either.

But aren’t most subsequent rounds, Series A, B etc putting money into the company, and not transacting with existing shareholders for an exit?

Yes, the article gives IMO a worse explanation for the delays here.

> Without deep knowledge of a company’s critical research — which businesses may be reluctant to share, for competitive reasons — it’s difficult for outsiders to evaluate a start-up’s worth.

In the presence of ZIRP --> greater fund availability, existing reasons for not going public dominate: not dealing with Sarbanes-Oxley, activist short investors, and other operational headaches of a public company. The other good reason for going public -- getting officers and employees regular liquidity -- is being undercut by increased availability of secondary offering platforms.

It is such an expensive pain to run a public company, the only reasons to do it are access to capital and ongoing liquidity for your shareholders. If you can get that another way, why bother?

I believe zirp results in higher secondary (and as you pointed out primary) markets. The stock market in the US is shrinking because of the shift in focus toward foreign markets. Namely those with higher returns (and risks) which again is partly due to low interest rates. From investor’s perspective, however, the secondary market really doesn’t give you much now. Shareholder rights/influence have diminished over the years especially among technology companies. Facebook is a primary example of this.

I agree. This is probably also the reason for the record amount of share buybacks. Credit has become cheaper relative to equity.

Yes, debt is a cheap way to drive up stock prices under ZIRP. If you are a qualified borrower (e.g. a large corporation) then you can borrow cheap and use the money to buy your own shares. If you are lucky, your reduction in dividend expense is greater than the cost of the debt.

But, share buybacks are basically “return capital to shareholders”. Put another way, it is an admission by management that they expect shareholders (at a given stock price) to be able to achieve higher return on equity/capital elsewhere. When a company buys its stock back, they are also saying something about how their long term prospects look.

I read this differently.

Disciplined companies return capital. Bad ones squander it on bad projects.

All things equal, I would prefer a company invest my capital in new, good projects. But barring that, I would much prefer it's returned as a dividend/buyback than blown in silly, wasteful spending that doesn't do anything for the firm or its investors.

It takes a lot of courage and intellectual honesty to return capital. It's far easier to spend it on bad things.

What about companies that loan a boatload of money to do buybacks ?

Because loaned money effectively creates a preferred share class with buyout option (meaning if the debt can't be paid, company gets owned literally by the lender and shareholders lose everything, but shareholders can buy out the lender if they choose for a fixed amount)

I mean, you only answered the very easy questions, so I figured I'd throw a harder one out there.

By loaned, I assume you mean borrowed? Usually, a bank does the loaning, a company does the borrowing (I.e. is the recipient of the loan.

In effect, you could be right, but, not all loans are secured the same way, and not all loans use equity as collateral. But, in the case of the above, you as a shareholder could be one of those that sells your share instead of keeping it. Corporations that use loans to buy their own stock are changing the picture of how their company is expected to perform. If you do not like this new picture, you are not obligated to own their stock.

If the company goes bankrupt, it is frequently true that the equity holders get hurt the most, but, that is reflective of the underlying math of equity ownership in the first place. A stock is worth some discounted value of the company’s future earnings. It is not a guarantee of some payment. A bond/loan is a guarantee of payment, but not reflective of future earning (though its market value may reflect the likelihood that it will be paid back).

Put another way, if the loan is a bad idea, and the company is not going to be able to pay it back, then that will probably be reflected in the stock price. For companies that take loans to do share buybacks, the risk of non payment of the loan is also priced in to the stock price by the market. If you don’t agree with this, and feel that the market has mispriced the stock, then there are abundant financial products (options, derivatives, etc) to allow you to express that opinion financially.

If a company borrows money to issue a dividend then fails the owners have already gotten money. Buybacks are slightly more complicated in a subset of owners get that money but it's still often a net win for shareholders on average.

Further, low capital costs increase the amount of money that can be extracted and thus make this ever more enticing.

I think we agree. It does take bravery for management to admit that shareholder will achieve better return elsewhere.

Doesn’t this mean, fewer shareholders get to keep bigger profits?

Like public companies sliding the scale towards private companies to give fewer people more power and returns.

Not necessarily fewer shareholders. Fewer shares is the only certainty there. If the company is returning eg $6b per year in profit, in the form of a dividend, then that distribution is going to fewer shares as they're repurchased.

Microsoft for example has had an enormous repurchase program over two decades. They've bought back something like $150 billion of stock. Yet they can have more shareholders today than when they began the first repurchase program. That's because new public investors can continue to come in. Also, formerly large ownership positions can be sold out of, de-concentrating it (eg Gates donating shares to his foundation, which then sells the shares, plausibly to a lot of new owners over time).

Consider Johnson & Johnson. They could buy back their shares for 50 years and still end up with more total shareholders, as people are very attracted to their persistently rising dividend.

Don't (nearly) complete buybacks also mean that company doesn't want to be ruled by the vote of (minority) shareholders?

I think e.g. Dell buyback was of this type.

Well, Dell didn’t do a buyback, the went private with funding from a consortium of investors including Silver Lake Capital and Microsoft. Similar idea (buying your own equity) but different in objective/degree. As a private company, you are shielded from the pressures and requirements of the public markets which can make certain corporate changes more efficient/effective/palatable.

This very thought crossed my mind, and with interest rates rising we are about to put this hypothesis to the test. Assuming this is the correct explanation, we should see an increase in IPOs over the next few years as the cost of borrowing grows.

Even an artificially low interest rate will do this, albeit as a slower burn