Public’s Demise, Private’s Rise

October 12, 2017

The definition of “making it” as an entrepreneur used to be going public.  However, this goal of yesteryear seems no longer valid.  In fact, in an earlier article this year, the Economist talks about the co-founder of Airbnb, Brian Chesky.  When asked if he would list Airbnb on the NYSE, he said “there was no pressing need.”

Those words would have been downright ridiculous a few years ago.  Why pass up on attaining the very thing every entrepreneur sought out to do?  After all, around the same time, a funding round put the value of Airbnb at approximately $31 billion.  That seems like enough to go ahead and cash in on!

But the story of Airbnb is a story that ties to a broader thematic shift.  Indeed, looking backwards, you can see this shift prevalent with a few very familiar names:

Source: Forbes,


This trend extends well beyond the tech giants to everyday companies as well.  Both the overall age of a company and size of a company upon IPO has been increasing:

Source: 2017 IPO Report

What does this mean?

Intuition would tell you that the future is in private equity.  Get growth before the company hits the public market because it no longer pays to wait.  Wouldn’t you rather catch Facebook when the company was worth $10 million instead of waiting until it grew to $104 billion at IPO?  Of course!

It also seems like the number of companies listed in the US is diminishing, and that is in fact true.  According to Yahoo Finance, there were over 8,000 publicly traded companies in the U.S. at the end of 1996.  Today that number is almost halved!  So, by going private, not only can you get more growth, but you can get more diversification by expanding the number of companies.  A no brainer!

Not so fast.  These markets are still incredibly costly to access, carrying with the investment high annual management fees and performance fees on top.  It’s not uncommon to see these management fees alone stack up to be several percentage points a year.

The second downfall is in access to your money.  If you buy private equity, the idea is to purchase private companies and hold them for 7-10 years or so.  You hope that one or two companies in the portfolio knock it out of the park to make the overall portfolio have a decent return.  Once the underlying companies are sold, then you can have access to your money.  This is a long time on its own, however, oftentimes these targeted time frames are not hit.  We’ve seen deals that were made over 15 years ago and money is still locked up!

Some things are also a matter of perspective, as it is with the “shrinking public market.”  In fact, the size of the public markets has been growing – if you look at how big the market is (market capitalization) versus how big the economy is (GDP).  In 1996 when we hit the peak number of listed companies, the market was about 80% the size of our economy (according to the St. Louis Fed).  Today it is about 145%.  That is massive growth, not shrinkage!

While it’s tempting to be lured to private markets, issues still remain with high costs, limited access, and a strike out/home run mentality.  Yes, things are changing, and we will continue to evaluate as they do, however, the public markets are not dead, instead they’re very much alive, providing both ample opportunity to build diversified portfolios and attain returns over time.

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