U.S. financial markets aren't what they used to be

OpinionJournal - Hot Topic :: Capital Flight : "For example, the vast majority of those global IPOs--over 90%--that bypass the U.S. public markets still elect to sell their shares to so-called "qualified" U.S. investors. Qualified investors are institutions and individuals rich enough to buy stakes in these companies outside of the publicly traded equity markets. Like a hedge fund, a company that markets only to the very rich is not subject to most securities laws or Sarbox. So in other words, non-U.S. companies are still raising billions in the U.S. through IPOs. They're just doing it in a way that skirts most of our capital-market regulation.

Another warning sign is venture capital, long an engine of American economic growth. Traditionally, VC firms have used the U.S. IPO market as their exit strategy; in the 1990s, IPOs accounted for 90% of VC investment "exits." Today, however, nearly 90% of those venture-capital-backed startups are sold to strategic buyers in private transactions.

This has serious repercussions for the venture capitalist business model. For one thing, valuations are lower in private transactions and liquidity is poorer. Finding a strategic buyer can also prove more difficult than taking a company public, which is why private-equity firms have been increasingly scooping up startups incubated by VCs. "From 2001 to 2005," the report observes, "VC-backed private equity exits reaped a total of $94.85 billion, while VC-backed IPO exits raised only $12.06 billion." This is not a purely profit-driven trend, because valuations are generally lower in the less-liquid private markets. Rather, it is a reflection of where the money increasingly can be found."