The Conglomerate Blog points out that smaller firms aren't likely to get the SarOx exemptions that they have been asking for. This, of course, is nice for the likes of Sub Rosa, because it means just that many more incentives for smaller firms to go private. It also brings up a larger issue that I have been turning over in my thoughts for quite some time. I wonder, aloud now, if the public markets have been mispriced for awhile now.
Though it may be a crass way to think of them, the 1990s demonstrated that the public equity markets can be manipulated as the "greater fools" quite easily. SarOx, in part, is an attempt to right this "wrong." Mutual funds (in the last 10 years) and hedge funds (more recently), in part, are a recognition that information disparities still exist and can be capitalized on (with great effect, apparently) by savvy players managing money professionally. Lately, with all the money pouring into hedge funds, it seems almost like those information arbitrage opportunities are getting sanded down.
Back "in the day" you threw together an IPO to dump the remaining risk after development on the party most interested buying the risk (or least able to properly price it). That party was the public markets. That this was "wrong" in some way has to include the arugment that risk and return were out of scale in the market. It would be interesting to look at the equity gains during the period and wonder if this could be said to be so.
Let's assume that the market was "unfair" or mispriced. SarOx looks to me like a regulatory effort to provide more and cleaner information in the hopes that this will keep the public from stabbing themselves again. I believe SarOx an expensive and inefficient method to accomplish either. Given the massive amounts of funds pouring into private equity and hedge funds, I suspect that the market has gotten wise to the information disparities and put their money into professional hands. SarOx will only push it farther in that direction. But the fact that, despite a massive amount of private money, better deals can be had in IPOs than in private equity. Given the much higher risks and transaction costs of being public, why would anyone go IPO who could raise the money privately? I have to assume it is because the public markets still overprice offerings. (I suppose private markets might underprice, but this seems less likely to me).
As for disclosure as a tool to correct what is basically a pricing error, maybe the wrong problem is being solved. In the end who cares if there's a lot of disclosure as long as we have the D. E. Shaws and KKRs of the world ringing in 20%-60%+ returns? Imagining the public will ever be even a marginal player in the information game, piles of disclosure or not, is, I believe, fantasy. But, as I have said before, go ahead and make it expensive to be a public firm. Correct that price disparity by effectively taxing public market offerings. That leaves more for us private equity types to pick up.
