Stockmarkets are shrinking and ageing. Since peaking in 1996, the number of publicly listed companies in the US has halved while the number owned privately has multiplied nearly fivefold, according to a study by private equity managers Pantheon Ventures. It reveals similar findings in other countries. “The remaining companies are older, larger and slower growing” while “the median age at which companies went public has increased from seven years in 1980-1996, when 285 companies were listing a year, to 11 in 1996-2016, when 136 were listing”.
Amazon, for instance, listed in 1997 when it was three years old, Google in 2004 when it was six and Facebook in 2012 at the age of eight. Since flotation, their share prices have multiplied 674 times, 24 times and four times respectively. This has convinced some investors, notably Baillie Gifford, that they need to get in before flotation in order to benefit fully from the uplift in valuation of successful companies. As a result, having added private equity investment to their mainstream investment trusts, Baillie Gifford is now raising up to $600m from institutional investors, mostly in the US, for Schiehallion, a new investment trust investing solely in private equity.
The shift from public to private investment
So what exactly will this involve? Private equity investment is directed at any company not listed on a stockmarket. This may – as in Baillie Gifford’s case – mean taking a minority stake, but it usually entails taking control so as to influence management, business operations and strategy.
Some investors, such as 3i, are large enough to execute deals by themselves. But most private equity firms raise fixed-term funds financed by institutional investors such as pension funds to acquire businesses, sometimes sharing ownership with other funds. Businesses acquired may be early-stage companies needing capital and expertise to expand, or established firms that the owners are looking to sell?
The Pantheon study found that the number of companies eligible to list in the US had continued to grow by 7.5% a year but the propensity of companies to list had diminished. Listing used to bring exclusive advantages such as access to capital to finance growth, along with the ability to use shares for acquisitions, but private equity can now also fulfil those needs.
The ability of listed companies to reward employees with tradable shares, the provision of an exit for early investors, and the publicity triggered by flotations and subsequent scrutiny remain benefits. However, public companies these days also face significant costs in listing, greater regulation, share-price volatility and the need to report quarterly. What’s more, the stronger link between business owners and management that comes with private equity ownership is an important advantage. A publicly listed firm will tend to have a wide variety of investors with very different agendas: some will demand higher dividends, for instance, while others will keep banging on about debt levels or the volatility of profits. What’s more, under private ownership detailed information on performance and plans need not be made public, so it can be kept away from competitors.
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