Adam Smith is universally accepted as a the founder of the free market paradigm, and everyone since has presupposed his free market ideals in their arguments. However, in his magnum opus, Smith strongly stipulated that capital must be reinvested in productive jobs, or else it is “perverted from its proper destination”.
As Smith put this in fuller context: “… No part of private capital can ever afterwards be employed to maintain any but productive hands. By diminishing the funds destined for the employment of productive labor, such an investor necessarily diminishes the value of annual produce of the land, tending not only to beggar himself but to impoverish the country…”.
It is in this context that we have to scrutinize the recent phenomena of taking companies private. On the one hand, these moves are the strongest signal yet that the underlying assets are undervalued, suggesting an arbitrage move to capture the upside inherent, especially as monies are deployed in real estate markets.
It suggests that small investors should rejoice and re-allocate capital to these markets in the expectation that asset values will inevitably rise after years of sluggish activity. On the other hand, it was these investors who had made that decision years ago, and who, at the precise moment of valuation capture, are left with little choice but to accept the stock price being offered, without any recourse to shareholder activism available in Western capital markets.
Get in checks and balances
One could conclude that in the contemporary reality of global economics, Smith’s foundational principle has been turned into its exact opposite. To mutate this into a fairer system - one that encourages continual participation in capital market activity - there needs to be put in place checks and balances where the interests of the small investor are protected.
Much like the bankruptcy administration process, where a central administrator oversees the restructuring process in the hopes of finding a holistic solution. So too must re-privatization tender offers be subject to regulatory oversight, such that the true principles of democratic shareholder profit maximization can be achieved.
If the underlying objective is the freedom of movement of private money demand (another of Smith’s principles), then such movement has to be a two-way street. The interests of the small investor are protected and an equal platform provided for such investors to take advantage of the undervaluation of assets that exist in real estate - or in any capital market domain.
For such freedoms to exist, shareholder activism laws then move to the fore, from institutional investors acting in the interests of such investors, to regulation itself that provides for scrutiny of bids when they are made by management and/or the dominant shareholders.
Create multiple winners and not just one
The idea is not for excessive regulation to stifle enterprise, but rather to remove the inherent contradiction of “winner take all” enterprise, for such paradigms serve to reduce rather than enhance confidence and go against the spirit of the law.
Freedom cannot exist for those who have no means to act freely. Capital markets need to thrive in a growing economy; indeed they serve as the epicenter of capital allocation. In the West, they have become an integral part of the culture of a city’s development, and have spawned the tech revolution.
For the same to be achieved in Dubai, investors have to feel free to act in interests that are for the benefit of all stakeholders. Adam Smith emphasized investment that is productive with “the sole use of money to circulate goods, provisions, materials, where freedom of both the buyer and seller is held absolute”.
Dubai has made giant strides in transparency of all markets, from data dissemination to price gouging, and in all cases has kept the small investor at the heart of its decision making thought process. Recent initiatives to revive stalled projects in the real estate space also speak of the intent to protect the interests of all stakeholders, and it would be welcoming if such initiatives were extended to the domain of capital markets.