Why is it taking so long for a fresh capex cycle to re-engage in the US?
In the last couple of years a new database on US private companies has become available from Sageworks Inc. It takes in data from all the major US accounting firms (and many of the smaller regional ones) on their private customers with only their names redacted and academics have been having a lot of fun with it. For example, it’s been used to prove convincingly that private companies are significantly and persistently more profitable than public ones.
Last week I sent out an opinion piece on how encouraging trends in the US macro environment were likely to persist and how that would be be good news for all of us. I received justified push back though specifically on the subject of investment. There are only feeble signs to date that US public companies have re-engaged in a fresh capex cycle and I wanted to go a little deeper into why this might be the case?
The paper highlighted this week adds something to this discussion. In it Mr. John Asher and Mr. Alexander Ljungqvist of the Stern School of Business New York University and NBER with collaboration from Ms. Joan Farre-Mensa of the Harvard Business School investigate, with the help of the Sageworks database, the difference between public and private company capital spending patterns.
[ Here’s the link https://www.rotman.utoronto.ca/-/media/Images/Programs-and-Areas/Events/CorporateInvesmentAndStockMarketListingAPuzzle.pdf]
Agency problems that force managers of public companies into sub-optimum long term planning decisions are well understood, in theory. This is the first study of it’s kind though that attempts to put hard numbers on one of these problems; and the numbers are shocking.
In the period studied, 2001~2011, private companies were investing almost twice as much per annum as public companies. Private companies on average were investing 6.8% of their total assets every year to grow their businesses, public companies by comparison were investing only 3.7% of total assets. The gap is especially hard to understand when one of the main reasons for going public is that it reduces funding costs?
The authors go into some of the probable causes of this behavior. One of the most interesting for practitioners being that managers of public companies set too high hurdle rates for investment. That makes their lives easier, but avoiding low hanging fruit sounds like a good idea (how many times have I sat in a meeting and been impressed when a company boasted of being very disciplined about new project hurdle rates?) but is in fact not a good idea for shareholders at all.
This isn’t much help in helping us to predict when a fresh capex cycle will finally re-engage in the US; but it does at least add to our understanding as to why it’s taking so darn long!
Happy Sunday.