Public markets are dying – the future is private

Fewer and fewer companies are listing on public stock exchanges
One of the big trends of the past two decades has been the decline of the listed companies. Since 1996 the number of companies listed on the world’s major stock exchanges has fallen by 41%, dropping by half in the United States and a quarter in the UK.
Meanwhile, private equity – buying companies with the aim of turning them around and selling them for profit – has experienced explosive growth with assets under management increasing from $707bn in 2000 to $4.92trn last year (2017). But there is still plenty of scope for growth. Private equity accounts for just 3.5% of global assets (compared with 38.2% for listed companies and 7% for real estate).
One of the most well established private equity houses is Pantheon, which was founded in 1982. We spoke to Helen Steers, head of Pantheon’s European investment team, as well as Vicki Bradley, head of investor relations for Pantheon International (the investment trust managed by Pantheon).
The advantages of private equity
Private equity has three advantages, says Steers, for both the companies involved and investors, over the traditional model of the publicly owned corporation.
The main benefit is that private ownership means that the managers “don’t have to worry about changes in the day to day stock price, or even quarterly earnings”; important because the stockmarket “isn’t very tolerant of the long term” says Steers. That means private firms are much freer to invest in research and development and other projects that can add value and secure the company’s future against its competitors.

Another benefit is that private equity firms “are much more involved in running the firms that they own”, than either traditional fund managers or even activist funds that take a stake in a company. The funds Pantheon invests in typically advise their companies on everything from supply chain management to potential mergers and acquisitions. Freedom from regulations designed to ensure a level playing field for all investors in a listed company, as well as the myriad of red tape to do with reporting, ensures that private-equity fund managers “receive far more information on what is going on”. It also means that they can quickly deal with any problems that arise.
Finally, there is “a much stronger alignment of interests between owners and the management”. In Steers’ view, one of the big weaknesses of listed companies is that executives usually don’t own many shares in their companies. In contrast, firms owned by private equity companies are much more likely to have the executives as minority shareholders, ensuring that it is in their interest to act in a way that maximises value, rather than remuneration or perks.
Private equity can take a longer term outlook
Typically, a private equity fund will hold onto a company for around five years before selling it on, usually to a larger firm “that is looking for a strategic acquisition”. Sometimes it will act as an intermediary, buying a company, restructuring it, and then selling it after a year or two. In other cases it can hold on to an investment for nearly a decade, if it feels that this would allow the company to reach its full potential. While private equity “is traditionally seen as a form of arbitrage, it almost always involves creating growth, sales and employment” says Steers.
A lot of the firms that private equity invests in are family firms. “In many cases the owner will be in his eighties, and will have children or grandchildren who don’t want to take it over”. While the owner “will have built up the firm from scratch”, their ambitions “may not now match the company’s true potential”. In those cases, it will make the founder chairman, allowing them to keep a connection with their firm, while bringing in a new CEO to manage the day-to-day business. It will also work to strengthen the board of directors, ensuring that it is more independent.
In the past, private equity firms have been accused of loading up companies with huge debt. While this may boost a fund’s returns, it leaves the companies vulnerable if the economic climate suddenly changes, or if the firm has overestimate their performance. For Pantheon “the amount of leverage used varies from deal to deal”. While it “makes sense for firms with more predictable earnings to take on some leverage”, technology companies, or those that are investing now for the future, “tend to use much less leverage”.
How ordinary investors can buy into private equity
Pantheon primarily manages money for institutional investors such as pension funds. But ordinary investors can invest in the company via Pantheon International (LSE: PIN), a diversified private equity investment trust that has been running for over three decades, returning 11.9% a year (since the start of 1992 it has beaten the stockmarket by 6.9% a year). Just over half the holdings are in American companies, with around a quarter in Europe. The companies are across a wide range of industries, but there is a particular focus on healthcare, technology and consumer goods.
Steers thinks that the global healthcare sector should benefit from “an ageing population” as well as “an explosion in demand from the middle class in emerging markets”. She is cagey about making any direct comment on the current US healthcare debate, but says the firms that Pantheon tends to invest in are focused on improving efficiency and reducing waste. This means that they won’t be derailed from any government attempt to bring down prices, and may even end up benefiting if there is a greater demand for their technology.
Overall, Steers expects the decline in the number of firms listed on stock exchanges to continue, with “the newer, exciting companies staying private” and “the stockmarket becoming the preserve of bigger, more mature companies”. Part of this is because of what she sees as the over-regulation of public markets. But she also thinks that private equity is generally a superior model, because “there are lot of mispricings in public markets” and private equity “is better at helping companies grow”.

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