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Why Successful Companies are Choosing to Stay Private—and How Investors Can Adapt.

Regulations and market volatility mean that growing companies are staying private longer—or potentially never list on the public markets at all. That shift has real implications for retail investors.

The U.S. economy has shown solid growth over the past 20 years, and most stock indices have performed well. Yet the number of publicly listed companies on U.S. exchange has fallen sharply. Consider that in the late 1990s, there were more than 7,400 listed companies in the U.S. By 2016, that number had been cut in half.1

Some of the decline comes from delistings—i.e., public companies that either go out of business or merge with another firm. But the bigger decline is due to a reduction in initial public offerings (IPOs). Between 1995 and 2000, an average of 458 companies went public on U.S. exchange each year. From 2012 to 2017, that fell to just 125.2 This isn't a global trend—the number of public companies in the rest of the world has continued to increase at a steady rate since the 1980s.3

Number of IPOs

SOURCE: Jay Ritter, "Initial Public Offerings: Updated Statistics," University of Florida, Jan. 17, 2018.

For your clients, it's critical to understand why this trend is taking place, how it might affect their portfolios, and how they can adjust their investing strategy.

Several Factors Behind the Trend

There are several reasons why companies are staying private longer. One is that there are significant costs to publicly list a company. The registration and investment banking fees can eat up 14 percent of the total capital raised through an IPO.4 Once the company is listed on an exchange, the management team needs to meet regulatory requirements like filing financial statements as per the SEC, along with other disclosure requirements. That all takes time and money, and the burden is particularly heavy on early-stage companies.

Being public also exposes companies to market volatility. Companies need to meet quarterly earnings targets and shareholder expectations, and market sentiment can often be driven by emotions and short-term thinking rather than a company's long-term performance. Finally, some companies are able to access capital from other sources, meaning they don't need to sell equity to the public in order to fund their continued growth.

Why It Matters

The decline in public companies may have a real impact on your clients. Why? When companies wait longer to go public, they may already be past some of their highest-growth years. In the late 1990s, when public listings were at their peak, the average age of a listed company was 12 years; as of 2016, it was 20 years.2 Investors who only invest in public companies are potentially missing out. By focusing exclusively on publicly traded stocks, investors may be less diversified, and potentially subject to unwanted market volatility. Meanwhile, investors who have access to private companies may have an advantage—they can invest in a bigger universe of options, including some companies that may still be in their peak growth years. As of last year, there are fewer than 4,000 public companies in the U.S., compared to about 6 million private companies.5

For your clients, the implication is that many investors may need to look wider in order to gain exposure to the overall U.S. economy and remain diversified. Stocks still have a role in investor portfolios, but diversification is key to any investment strategy. As a result, investors are looking for investment alternatives that tap into private markets, such as private capital.

1 Michael Wursthorn and Gregory Zuckerman, "Fewer Listed Companies: Is That Good or Bad for Stock Markets?" Wall Street Journal, January 4, 2018.
2 Jay Ritter, "Initial Public Offerings: Updated Statistics," University of Florida, Jan. 17, 2018.
3 "Eye on the Market Outlook 2018," J.P. Morgan Private Bank, J.P. Morgan, January 1, 2018.
4 Rayhanul Ibrahim, "The Number of Publicly Traded Companies is Down 46% in the Past Two Decades," Yahoo Finance, August 8, 2016.
5 Caroline Rasmussen, "Where Have All the Public Companies Gone?", October 25, 2017.

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