Over the past 20 years, the number of public companies in the United States has declined by nearly 50%.
At the same time, US GDP has nearly doubled. What’s going on? It’s a migration from public to private companies.
This has powerful implications for investors. Take, for example, Amazon. An investor in the 1997 IPO would have seen their investment increase in value by 900 times. Investors in Google’s 2004 IPO would have enjoyed an increase of 20x, while investors in the 2012 Facebook IPO would have seen the value of their stock quintuple.
Today, it is estimated that there are around 260 “unicorn” startups valued at $1 billion or more. Venture capitalists are trying to extract more value from these companies before taking them public, which is a sharp change from the previous generation of VC investors.
A disturbing trend is exhibited in R&D – since 2000 research as a percentage of revenue for the 100 largest non-financial companies listed on Nasdaq has dropped from 34.4% to 7%. This reflects a trend by the largest public companies to maximize profit margins at the detriment of growth and innovation. CEOs now favor stock buybacks and higher dividends over investments that will cause a big hit up front. Today, it’s all about earnings at the expense of the future.
Boards of directors have also been falling down on the job. According to McKinsey, many directors enjoy their positions as rewards for past service. Oversight can be lax, and groupthink often prevails. Studies have also suggested that corporate directors do not have a strong understanding of what creates long-term value for shareholders.
At the same time, private equity investors are increasing their holding periods. The very structure of their industry precludes precipitous decisions, and instead of selling when the going gets tough, private equity managers must think strategically. Increasingly, institutional investors are expecting private equity investments to outperform public market investments.
For more on the potential of private equity to outperform public market investments and the challenges of short-termism by public companies, please visit;
Private Companies: A Cure For Short-Termism? | Financial Advisor