MARKETS EXPAND AS PUBLIC SECURITIES SHRINK
Private capital is the fuel powering much of the innovation in the world. Private transactions are driving growth in the largest publicly traded companies. Most exciting growth opportunities never reach the public domain.
The total number of U.S. listed companies was cut in half from 1996 to 2019, from 7,322 in the beginning of the period to 3,643 remaining last year. Most of this consolidation occurred through direct strategic combinations as smaller companies forewent the IPO process in favor of cash rich industry partnership. The average size of the remaining publicly listed companies is over $10 billion in market capitalization (over 10x 1996 size) and the average age has increased by over 50% to 19 years.
WHERE IS ALL OF THE GROWTH AND VALUE?
A more recent phenomena is the outsized growth of stock market leaders. Facebook, Amazon, Apple, Microsoft, and Google represent 23% of the total S&P 500 market capitalization and have collectively returned 35% YTD through first half of 2020. In contrast, the remaining S&P 500 constituents were down 5% over the same period. The publicly traded winners are companies that operate like private equity firms themselves. Growth for these market leaders has been driven by strategic acquisition and integration.
At the same time, companies that desire to remain independent are sustaining themselves with private capital. They avoid the expense, reporting and scrutiny of the IPO/public markets and find adequate appetite for later venture and growth funding rounds. Specific illustrations of this trend include some very notable names:
1994 (3 yrs)
1998 (6 yrs)
2004 (8 yrs)
2009 (10 yrs)
IPO Market Cap
Total market statistics mirror these individual examples as the average time to IPO from 1998 – 2019 has risen to 10.8 yrs.
These two trends have created a significant bifurcation in equity market access. Institutional investors have access to total market diversification, new ideas and broader return opportunities. The individual investor is likely limited to an aging, shrinking list of publicly traded options. The discussion of rectifying this disparity of access is a recent event. Regulators, investor advocates and attorneys have been collaborating for the last five years to establish the rules and mechanisms for closing the gap. These discussions are beginning to bear fruit with the approval of fund structures and investor implementation in 2020.
When retail investors participate in our markets, how broad a spectrum of investments do they have?
I think that spectrum has been getting relatively smaller. Because we have fewer public companies, companies are waiting much longer in their life cycle to go public, which by definition means that retail investors have less access to the market as a whole. And I fear, less access to companies that are well-established, but still growing.”
– Jay Clayton, Chairman of the SEC
General investor access to these exciting new ideas in their formative stages is limited. Companies are foregoing the early path of public markets, broad ownership, and equity investment spectators. Choosing instead the route of a limited ownership circle and active strategic investors.
These trends will have significant impact on investment styles, portfolio diversification and investment outcomes. This is not to suggest that long term approaches are obsolete. Those that proclaimed value investing dead in the 1990’s lived to regret the abandonment in the 2000’s. However, those that have recognize new trends, identified imbedded opportunities, and established a thoughtful allocation have been rewarded.
IMPLICATIONS FOR INVESTORS
- Consider a “public company/private acquirer theme”: understand the corporate commitment and historical success of strategic acquisition as a growth stimulant.
- Explore new structures and products that provide access to the growing footprint of the private markets.
This material is provided for informational purposes only and is not intended as and may not be relied on in any manner as legal, tax or investment advice, a recommendation, or as an offer to sell, a solicitation of an offer to purchase or a recommendation of any interest in any fund or security offered by Primark Capital or its affiliates (Primark). Past performance is not indicative of future results. Private market investments are complex, speculative investment vehicles and are not suitable for all investors. An investment in a private market investment entails a high degree of risk and no assurance can be given that any private market investment objectives will be achieved or that investors will receive a return of their capital. The information contained herein is subject to change and is also incomplete. This industry information and its importance is an opinion only and should not be relied upon as the only important information available. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed, and Primark assumes no liability for the information provided.
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