Here is a good interview with Paul Deninger of Jefferies Broadview on changes to the investment banking business that impact the IPO market. I agree with Paul that the number one reason (I won't call it a problem as he does) IPOs are down has been the changing structure of investment banks. I don't think SOX is as big of an issue as most people (including Paul) make it out to be, and I've been part of an implementation, so I have a pretty good perspective. There were three key events during the last five years that heavily impacted the IPO market:
- Regulation FD (2000) - This reg. is seldom mentioned as a woe afflicting I-banking, but it really did change the way that public companies communicated with research analysts. Pre-FD, analysts got a tremendous amount of intelligence right from the company. This information was worth every dime of commission the buy side paid for it. After FD, companies seldom let research analysts meet with anyone but IR, and they established more formal relationships with analysts.
- Decimalization and Electronic Trading (2001) - Ironically the push for decimalization was led by Rep. Michael Oxley (R-OH) - conspiracy theory? This evolution took most of the margin wind out of the sales & trading business which was a key supporter of research. Reg. NMS which was implemented earlier this year only further degraded the profits of investment banks' sales & trading arms.
- Global Research Settlement (2003) - This event eliminated nearly all the revenue from research departments' budgets. Formally separating investment banking and research admittedly ended a lot a abuses; however, it's too bad because the relationship, when done right, often worked out really well for companies.
I still think lack of demand by institutional investors is the primary reason for the dismal IPO market, but the above factors certainly contributed.