From an investor perspective, investing in public companies has traditionally been seen as safer than investing in private firms. On the face of it, this still makes sense. A company must achieve a certain amount of success to be eligible for an IPO, and once public, it is subject to a greater degree of transparency than private firms, meaning that investors can monitor performance more easily.
Investing in public companies has also been highly profitable. The S&P 500, for instance, is currently enjoying a near decade-and-a-half bull run. Looking back further, the US stock market has delivered superb long-term returns to investors who have stayed the course in the past 50 years.[1]
And yet, all this may be changing. Why?
The shifting balance of private vs. public
One major change in the landscape is the number of companies deciding to either remain private for longer, or even ‘de-list’ (go from public to private). The result has been a steady decline in the number of public companies overall.
The total number of public companies traded on US exchanges, for instance, peaked in 1996 (8,000+) and has since more than halved to 3,618.[2] Globally, 75% of the world’s highest-earning companies ($1bn+ in revenues) are now private.[3]
Why this shift? As we have covered elsewhere, going private has a number of advantages for companies themselves, as well as for their investors. These benefits include greater control, less exposure to market volatility and short-term expectations, and a lower regulatory burden.
The main benefit, however, is that keeping a company private for longer means that it is possible to capture more of the returns that come from its growth during the period.
The relatively new phenomenon of ‘unicorns’ (private companies worth over $1bn) is an illustration of this, with most such companies - including Uber and Airbnb - waiting around a decade before going public, if at all.[4]
Reassessing the field
The rapid rise of so-called ‘private markets’ as a counterpart to the public markets is a growing phenomenon.[5] The growth of funds that gather capital and deploy it to private companies in the form of debt or equity has meant that such firms have a robust - and expanding - list of options for financing.
Investors with an eye on the uncertain future of public market returns in an age of higher inflation and higher interest rates (see our Shifting Balance white paper) can also expect higher returns for a comparable level of risk. As Apollo Global Management CEO Marc Rowan pointed out in a recent talk, private companies are not necessarily riskier investments than public companies - the difference ultimately is about liquidity.[6]
Investors in public markets essentially pay a ‘liquidity premium’ for the fact that they can buy and sell investments easily. Private market deals are typically illiquid, with time horizons of 7-10 years. But as Rowan points out, for a long-term investor, such as a person saving for retirement, illiquidity is not a problem, and liquidity is therefore not worth paying for.
Studies have shown that private debt instruments of similar risk can yield 60-90 bps more than public equivalents, simply owing to the difference in liquidity.[7] This spread can of course be far higher for individual deals. When it comes to private equity, the liquidity spread can be higher still, with Barclays estimating a premium of between 2% - 5%.[8]
Conclusion
Many have observed that public markets are increasingly dependent on a small number of technology stocks - such as Apple, Nvidia, and Microsoft - to deliver continued growth.[9] The current level of concentration - with 35% of the market concentrated in the top ten stocks - is at a historic high, it's important to recognize that this trend is specific to certain markets.
Given the above, it is worth reconsidering whether the perception of public markets as ‘safe’ and private markets as ‘risky’ has stood the test of time. If the ground has shifted in the past two decades, investors would be well advised to adjust their strategies, accordingly, considering a more holistic view of global market opportunities.