Goldman Gives New Reason IPOs May Suffer: Multi-Class Shares

(Bloomberg) — Initial public offerings haven’t been doing so well lately. Goldman Sachs (NYSE:) says many of them might suffer longer-term headwinds as well.

Many new entrants have been employing multi-class voting share structures — including seven of the 10 largest IPOs so far this year, strategists led by David Kostin wrote in a note Sept. 27. That could prevent them from being added to indexes managed by the likes of S&P Jones and Russell. That would mean missing out on flows from passive investment managers tracking those benchmarks.

“Using multi-class voting to insulate management from its own shareholders comes at a significant long-term cost,” the strategists wrote. “Firms restricted from joining major indices will not fully benefit as capital flows into passive funds that now represent more than 50% of total U.S. mutual fund and ETF assets.”

A potentially banner year for U.S. IPOs is showing signs of cooling. Firms like Uber Technologies (NYSE:) and Lyft (NASDAQ:) have struggled after their debuts, while SmileDirectClub (NASDAQ:) had the worst opening trade for a big IPO in more than a decade.

The disappointing run in addition to an uncertain economic environment could put a freeze on offerings over the rest of this year and possibly into next year, as well. That’s even before layering on the “secular headwinds,” as Goldman calls the index-inclusion issue.

Goldman acknowledges the pro multi-class structure argument that the set up allows management to focus more on strategy and value creation without being distracted by activist investors seeking short-term gains.

“A sunset provision on dual-class stock is one potential solution to the corporate governance dilemma,” the strategists wrote. “Phasing out high-voting stock after 5-10 years would allow firms the opportunity to eventually be included in the major indices while providing some shareholders more control in the near term.”

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