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Who will the winners in the post-Finreg Capital Markets? June 27, 2010

Posted by Bernard Lunn in capital markets.
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The “first major overhaul of the financial system since the 1930’s” is in the final stretch to becoming law (details here from WSJ). There is lots of talk of who will lose and what Goldman Sachs will do – to be or not to be (a bank) that is the question. And of course lots of critique from all sides – too much regulation, too little regulation, the wrong regulation and so on.

My question is simpler. What companies will win from this? Specifically, what companies will win the trust of individual investors and small companies seeking access to capital. I am choosing those two constituents, because they are the ones that have been sidelined by the last few decades of speculative, shadow market craziness. The firms who have done well – the Fortune 500, the hedge funds, private equity funds – will still do well (their lobbyists earned their pay, inserting small but critical bits in late night haggles).

But in the end, the health of the capital markets and of the economy as a whole is determined by two parties in a simple transaction:

1. A young high growth company needs access to capital (debt or equity or both).

2. An individual investor, either directly or via a fund, invests in that company.

Both parties have been totally alienated and left out of the party. But they are the essential parties to the transaction. So who will gain their trust?

I can think of three actual companies and one type of company.

The three companies are:

1. Vanguard. To the individual retail investor, John Bogle should be the hero. His consistent story over decades – that the cost you pay to fund managers is the biggest factor in your eventual payout – has finally become accepted wisdom.

2. Charles Schwab. With the founder back at the helm, we see a consistent focus on serving the individual investor and their advisers with quality products at low cost.

3. Grant Thornton. Who? The first two are obvious. As per Wikipedia, Grant Thornton is a “Grant Thornton International is a global organisation of accounting and consulting member firms which provide assurance, tax and specialist advisory services (SAS) to privately held businesses, public interest entities, and public sector entities. Grant Thornton International Ltd is a not-for-profit, non-practising, international umbrella membership entity organised as a private company limited by guarantee. Grant Thornton is incorporated in London, United Kingdom, and has no share capital.

Why I rate Grant Thornton is their leadership on this initiative: http://blogs.wsj.com/venturecapital/2010/06/22/grant-thorntons-proposed-alternative-public-market/# Where others in America propose “shadow markets” that lock out individual investors, this Grant Thornton proposal tackles the problem for the small cap company without tossing out the SEC regulatory protection for the individual investor.

The one type of possible winner is a startup with a disruptive online model for connecting the two parties, probably using some mixture of P2P Finance and auction pricing.  I see lots of contenders but these are very early days, way too early to call a winner.

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