Why Public Companies are Disappearing
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Where have all the publicly held companies gone? As companies increasingly choose to remain private, new opportunities emerge for investors.
It’s a significant trend that’s been underway for the past three decades: The number of public companies in the U.S. has fallen by nearly half since the late 1990s. After peaking at more than 8,000 companies in 1996, the number of domestic publicly traded companies trading on the major U.S. stock exchanges has declined to 4,572.1
What’s driving the decline? Mergers and acquisitions between public companies have contributed, as well as a wave of bankruptcies. But more telling are these additional reasons:
Why more companies are choosing to remain private
The challenges (versus the reward) of becoming a public company today have tilted the scales in favor of staying private.
Additional governance requirements and the associated higher costs are one significant reason. The Sarbanes-Oxley regulation, enacted in the wake of a series of corporate scandals in the early 2000s, resulted in increased regulation of public companies. This and other new rules and regulations, including heightened accounting and auditing requirements, pile on greater administrative burdens and increase costs. The average recurring annual costs of operating as a public company now exceed $1 million a year, according to PricewaterhouseCoopers.4
Meanwhile, business owners have increasingly valued the inherent benefits of staying private. They can focus on long-term strategic objectives to pursue company value without being distracted by quarter-to quarter performance results. Remaining private gives executives greater control and flexibility over their decisions and business development as they grow and compete.
And as business executives look to the private markets for financing to expand their businesses rather than undertake IPOs, they find themselves supported by private equity firms that have a vested interest in helping their companies grow and succeed.
A role reversal for public and private companies
Because of this shift, there’s been a reversal in the types of companies going public versus staying private. We believe IPOs, increasingly, are immature businesses – high profile “disruptors” or hyped-up companies perceived as exciting new businesses, but which are less proven, less profitable and more speculative. Unlike when Microsoft and Nike went public in the 1980s, today’s IPOs tend to be unproven businesses without measurable track records of growth, profitability and financial stability.5
Meanwhile, we believe the businesses in today’s private markets tend to be established and profitable, rich in assets, with a solid track record of providing core products and services. They typically reflect the real, broader economy, and in many cases, are the more solid and promising companies in which to invest.
Private investment markets, in turn, have become long-term oriented, focused on financing strong and proven companies. The result is that, on a relative basis, private markets have typically outperformed public markets in recent years.6 Historically, institutional investors have traditionally taken advantage of this dynamic by investing a meaningful allocation to the private market asset classes.
Capitalizing on this trend
Retail investors have historically been unable to access private markets easily. Minimum investments were as high as $5 million to $10 million, and investors had to meet accreditation standards. Additionally, the process to invest in private companies (though private equity funds) is fairly cumbersome and time consuming.
We believe this has changed.
Interval funds provide easy access to private investments with typically low investment minimums. As a “point-and-click” solution, an interval fund has a ticker symbol, 1099 tax reporting, and prices daily. It makes investing in private companies almost as straightforward and simple as investing in public companies.
The biggest differentiator for an interval fund from a traditional mutual fund is its quarterly liquidity feature. These investments are classified as closed-end mutual funds that don’t trade on an exchange and only allow share redemptions at certain intervals, such as quarterly, and are subject to a maximum redemption amount. Redemptions are available only at intervals because these are long-dated, long-term assets, and best suited for the long-term investor.
Interval funds aren’t new, but they have become more popular recently as a tool for individuals to invest in illiquid assets, such as private investments. The number of interval funds has grown from just 16 funds in 2011 to 79 funds at the end of 2022, according to Intervalfundstracker.com.
Don’t overlook the future of investing
The shift to investing in private companies may be less well known, but it represents an exciting new opportunity. An ecosystem of private-market investment opportunities has evolved, covering most sectors, company sizes, company growth stages, and capital structures.
Financial advisors now have the opportunity that large institutional investors have had for years. Private investments can be a viable tool for their clients’ portfolios. As they help clients align their investments to the foundation of the future economy, they should consider the benefits of pursuing these opportunities.
By Michael Bell, Founder and Managing Director, Primark Capital, and President, Forum Investment Group. Michael Bell has spent the last two decades building and directing sizable, growth-focused wealth management and asset management companies.
1 Source: Statista, data as of Q1 2023, NYSE and Nasdaq: listed companies comparison Q1 2023 | Statista
2 Source: Stock Analysis, IPO Statistics and Charts - Stock Analysis
3 Source Dealogic, Private equity deal-making hits 10-year high | Dealogic Insights
4 Source: PricewaterhouseCoopers, Nov. 2017. Considering an IPO to Fuel Your Company’s future? Considering an IPO to fuel your company’s future? (pwc.com)
5 Source: Kiplinger Personal Finance, Tread Carefully in Hot IPO market, Tread Carefully in a Hot IPO Market | Kiplinger
6 Source: McKinsey Global Private Markets Review 2022, McKinsey & Company, mckinseys-private-markets-annual-review-private-markets-rally-to-new-heights-vf.pdf
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