The number of companies listed on the US stock exchange has virtually been cut in half over the past few decades. Liberty Street Advisors’ Christian Munafo explores why so many companies are opting to stay private for longer and the potential benefits offered by access to private shares.
13 October 2022
Over the past couple of decades, the number of publicly listed companies in the US has diminished rapidly. In 1996, there were approximately 8000 listed companies in the US, a figure that now sits at around 4000. As the number of companies listed on the US stock exchange has virtually been cut in half, the opportunity to generate alpha in US listed companies has also reduced. This means that access to private shares has become more important to tap into the increasing number of innovative private companies.
Private markets are better suited to fast growing companies operating in growth sectors given greater patience and higher levels of intangible assets. The names most often associated with the venture, technology, innovation, disruption segment of markets in general are companies such as Amazon, Google, Apple, Oracle and Microsoft. These companies historically went public typically within three to four years of their inception. Today, similar businesses in this section of the market are staying private for up to 20 years.
Why is this so?
Firstly, this is due to the regulatory changes which make becoming a public company unattractive to some growth companies. These companies do not want to deal with the administrative burden of being a public company as it can be costly. Secondly, as a high growth business, sometimes growing 50% to 100% plus per year, these firms do not want to be held accountable for near-term quarterly earnings estimates while they are disrupting industries. Thirdly, when trying to disrupt an industry, being held hostage to public market psychological volatility can be restrictive.
The benefit of these companies staying private for longer is that private shares investors can potentially tap into companies that are generating typically a minimum revenue of USD 50 million to USD 100 million with growth rates often in excess of 50% that are increasingly focused on achieving profitability. These are not the early-stage seed ideas coming out of a garage but are rather real businesses that are growing into much larger operating companies in the private market and whether it be through an IPO or a trade sale, there will often be a liquidity event to provide such investors with an exit.
Tsunami of capital
This trend of remaining private for longer has been supported by the tsunami of capital made available to these businesses. Over the past decade or so, roughly USD 1.5 trillion has been made available just looking at US-backed companies.1 This availability of capital has allowed these companies to continue to grow, to innovate, to disrupt and to develop their business models, all while staying private. While we have seen a slowdown in the amount of capital that has been invested year-to-date for obvious reasons, we are still seeing a large amount of volume in terms of numbers of deals that are being funded. At its current pace, 2022 has the potential to be the second most active year for all venture capital-related activity on record.
Even in periods of increased volatility and uncertainty in the public equity markets, we often see an increasing supply of opportunities in the private markets. In other words, uncertainty may improve supply and demand imbalances in favour of buyers and investors as owners of illiquid assets tend to become more risk averse and prefer liquidity. These types of environments can result in more attractive risk adjusted entry points. As a result, vintages involving periods of increased public market activity and macro uncertainty may also generate outperformance. So, while this may appear counterintuitive, environments like the one we are witnessing today could create buying and investing opportunities in the private markets while simultaneously maintaining investment discipline.
Increasingly, we believe private markets are the only way to gain access to some of the most innovative and technology-driven sectors, including fintech, artificial intelligence, cyber-security, cloud, data storage and analytics, online education, supply chain optimisation, e-commerce, digital health, and the space economy. Access to such high growth sectors can offer an important source of diversification. By investing into publicly listed private market investment vehicles, investors can access these sectors without the drawbacks of traditional private equity structures which often require certain accreditation, large minimum investments, multi-year lockups, multiple layers of fees, burdensome tax reporting and capital calls.
1 Source: NVCA Venture Monitor as of June 30, 2022.
Important legal information
GAM Investments has partnered with Liberty Street Advisors, Inc. (“Liberty Street”) since February 2022 to provide clients with access to late-stage privately-owned technology and innovation-driven companies.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is not a reliable indicator of future results or current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented and are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. There is no guarantee that forecasts will be realised.