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I see a fair amount about how index funds will ruin the stock market. According to this Wall Street Journal article there is a different and more immediate issue. Seems that there is a drop off in companies raising capital on the open market, instead restricting IPOs or their equivalent to a hand-selected group of insiders. Is this a case for some kind of regulation? Hard to see what kind.
Most of my clientele for the past 30 years has been small private startups working towards an exit strategy of either an IPO or a acquisition by a bigger fish, although a few were determined to grow organically and remain private.
Today my clients are all medical device companies that are generally unwilling to roll the dice on IPOs or even the uncertainty of which big fish will swallow them. They are increasingly accepting big development investments from one big company in exchange for the assurance that they will be acquired by that same big company when the development/FDA approval cycle is completed. The assurance of a predetermined landing site assuages the concerns of founders whom I believe to be considerably more risk averse than they were years ago.
That’s just a gut feeling unsupported by data, and it applies only to the market sector in which I live, but I doubt this is an atypical phenomenon.
So, investors are clamoring to get on the private investment game with no guardrails or regulation to protect them. What could go wrong?!
I’ve been involved on the finance side of private equity and public firms for most of my career. Where did the public companies go:
1)Mergers
2)Take private transactions via Private Equity funding
3)Stay private because of private equity funding…OpenAI
Below is a link to good article on public companies.
Where Did All the Public Companies Go? | Tuck School of Business
As a finance leader, I’ve seen there is a very high cost in maintaining compliance in a public company. $3M-$10M per year minimum. With audits, advisors, outside director’s fees and higher finance and compliance staffing needed to support government and market requirements. Quarterly earnings reporting distracts from running the business. That goes away with a
take private transaction. A reduction in regulation might lower the cost savings. More government focus on merger activity might lessen the deals that take public companies out of circulation.
Harold, I think your assessment is spot on regarding the reduced number of public companies. It seems the availability of private equity (PE) funding is a significant driver.
Private equity has traditionally been deemed appropriate only for sophisticated, high earning/high net worth investors. Recently and somewhat magically, it is now appropriate for 401(k) savers, most of whom are unable to perform the necessary due diligence to invest in opaque, illiquid investments.
Now my question. Wouldn’t it make more sense to push companies to go public if they want access to public funds rather than allowing PE and private credit (PC) to be offered in retirement savings plans? And if so, what can be done to prevent this from happening?
The reporting and disclosure requirements for public companies DO provide value even if they are cumbersome. Prior to the existence of the SEC, main street investors were routinely fleeced. I worry that if PE/PC are allowed into retirement plans, we will see the average retirement saver/investor getting suckered into mediocre returns, or worse.