In the last several years, we’ve witnessed an astonishing revolution in technological advances. Most of us find our lives immeasurably enriched by the connectivity offered by smart phones, tablets, social media networks and so many other innovations.
Yet most people rarely stop to think about how another revolutionary innovation — capital markets — served to make those advances possible by providing the financing that many companies need to grow.
Why do capital markets matter? By bringing buyers and sellers together to make voluntary exchanges of value, capital markets have built the world we know today. Consider a few of the leading consumer technology companies. You’ve no doubt heard the now legendary stories of how they were started: a young Steve Jobs launched Apple from the garage of the home where he grew up, and Google and Facebook’s origins were on college campuses (Stanford and Harvard, respectively).
Those humble beginnings were promising, but the companies depended on access to a much deeper and broader source of equity financing through capital markets that empowered the companies to grow and change our lives for the better.
The average American household also benefits from the strength of capital markets. If you have a 401(K) retirement account or an IRA, or are the beneficiary of a public or private pension system, odds are that your retirement savings are invested via capital markets in equities and bonds.
The Benefits of Capital Markets
Capital markets play a fundamental role in growing communities. You don’t need to look far to find concrete examples of that fact. In virtually every American community you’ll find infrastructure projects funded through municipal bonds. Through capital markets, financing flows to public infrastructure projects like road construction, hospitals, schools, airports, sewer and water systems, and other critical projects.
Municipal bonds represent a long-term debt obligation, at a relatively low rate of interest, which can be paid back over years. That long-term debt structure means infrastructure projects can move forward without placing a heavy burden on taxpayers. And municipal bonds are popular with investors due to their steady, reliable return on investment, and the fact that the interest income on most muni bonds are generally tax exempt.
It’s safe to say that without long-term funding supplied through capital markets, U.S. infrastructure construction would slow significantly. A National League of Cities estimate found that tax-exempt bonds underwrite three-quarters of the nation’s infrastructure investment. In 2013, more than $330 billion in municipal debt was issued in the United States; in the first three quarters of 2014, that number was $230 billion.
In Minneapolis, for example, the University of Minnesota recently used municipal bonds to finance $150.5 million of the $160 million needed to build a new ambulatory care medical center which will provide both health care to patients and serve as a top-flight research facility.
Consider how American brands like Land O’ Lakes use tools such as derivatives to protect against sudden price changes for the commodities they use to make products.
Or consider how Tesla Motors raised $2 billion through the sale of convertible bonds, which will build a new $5 billion manufacturing facility in Nevada, creating new American jobs.
The capital markets bring available capital to where it was needed, which helps develop our communities.
Markets and Entrepeneurship Go Hand in Hand
Economist Ross Levine, a scholar at the University of California — Berkeley and a leading expert on how capital markets serve to drive economic growth, notes the link between entrepreneurship and well functioning financial systems. Entrepreneurs depend upon the financial system to gain access to the capital they need to grow their businesses, innovate and create new jobs.
“One of the ways in which a better functioning financial system promotes economic growth is by spurring entrepreneurship,” Levine writes. “Indeed, one way to define a better financial system is that it does a superior job…allocating capital to those with the best projects, ideas and entrepreneurial energy.”
To put it simply: a culture of entrepreneurship and vibrant capital markets go hand in hand — you can’t have one without the other. It’s inconceivable that Apple could have continued building computers in a suburban garage. Apple needed a large-scale investment that capital markets make possible. Entrepreneurs continue to finance their companies’ growth through capital markets. In the first three quarters of this year, companies have accessed over $76 billion in capital through initial public offerings, allowing entrepreneurial dreams to take flight.
SIFMA’S Project Invested
The Securities Industry and Financial Markets Association (SIFMA), which represents nearly 400 broker-dealers, banks and asset managers, share a set of key values: all are dedicated to promoting investor opportunity, access to capital for families and businesses, and an efficient market system that stimulates economic growth and job creation.
Economic success depends upon a vibrant financial system that provides access to capital; it’s up to the financial industry to do a better job of providing that explanation. To that end, we’ve launched a new web-based initiative, “Project Invested” to offer a fuller perspective on the role of capital markets in our nation’s economy.
The goal of Project Invested is to focus on local stories, and to provide a forum to explore and discuss key concepts that underlie the market economy. By doing so, our hope is that this project will spark a conversation about the importance of capital markets in both private and public enterprises. We believe that’s a story worth telling.
Kenneth E. Bentsen, Jr.
President and CEO