Staying private - fad or trend? Probably some of both. But have no doubt, it will continue because the advantages are just too great.

Companies are staying private both more frequently, and for longer periods of time. This is a real thing. I believe that it is a trend that is here to stay. Has the trend gone too far? Perhaps. To that point, we have seen some of the larger private tech companies go public over the previous few months. However, these recent IPO’s are just a drop in the bucket.

Not everyone in the industry believes that staying private is necessarily a positive development. Staying private creates some challenges for companies and for some of the investors on the cap table. Particularly, the earlier investors that have experienced the company success, yet are unable to monetize any of that success.

For investors, engaging with and investing in private companies comes with elevated levels of risk - particularly for inexperienced investors. First, let’s state the obvious. Yes, there are many 'tourists' currently active in private markets and direct investing. But today's tourists can become tomorrow’s guides. So don’t look too far down your nose at these new entrants.

So why do it at all? Why would a Founder/CEO want to stay private? Why would an investor want to invest in an opportunity that comes with potential elevated risks. Short answer, because both of these groups see an advantage to it. If you are a Founder, CEO or an Investor, it is better to understand what these advantages are.

Many management teams simply do not want to run a public company and the growth capital is there.

First, there is plenty of growth capital available in the private markets for all but a handful of global companies. Lack of growth capital in the private markets used to be an issue twenty years ago. If a company needed a significant amount of capital to grow the business, the only place that company could go was the public markets. Not so anymore.

Second, running a public company is expensive. The cost can be much higher than running a private company. Generally these expenses come in the form of higher regulatory, accounting, audit and reporting costs. However, there are probably more than I am not mentioning here. Many teams believe it is more responsible to avoid those fees by staying private.

Want to run a public company? Have fun being in the public domain…

However, access to capital and higher costs are not the only reasons. Privacy is another huge reason. When you are a public company your information is, by definition, in the public domain. That is not so much fun these days.

Social media has changed the game for public companies. Social media tools, without question, have enabled companies to expand their message to consumers and the investor community. However, that benefit has come with some significant downsides.

Not all companies - namely company CEO's - want to be that far in the public eye. Being a publicly-traded company opens the management team, and their families, to increased personal scrutiny. Much of which is unwarranted and inappropriate. Who wants to put themselves and their family through all of that? Well, it turns out, fewer and fewer CEO’s.

In addition, with social media being as pervasive as it is, any employee of a company can have an adverse effect on the reputation and/or stock price (ie. value of the company) with an ill-advised social media incident. For many companies, the risk of a downside event like this far outweighs the benefits.

Managing expectations for a smaller cap table is often far easier than managing expectations for thousands of public investors.

Many companies would prefer to have a smaller, more manageable cap table consisting of partners that they know are long-term investors. Partners that they can share information with. Partners that they can overcome challenges with. In other words, partners with strong long-term alignment. This is easier to build if a company stays private and 'picks' its capital partners. This is impossible to do, and impossible to expect as a public company.

By definition, public companies are owned by the public. There is just no way that every investor can align with the company in its strategies (or its timeline to reach goals). Some investors will pay lip service to doing the right things to grow the company over the long-term. However, when push comes to shove, the most vocal investors are generally those that are pushing hard for short-term results. Company management that does not want to micro-manage the long-term direction of the company by hitting short-term quarterly earnings estimates will grate at being a public company.

Decades ago, only large M&A shops, Investment Banks, and Private Equity funds could realistically gather the correct information to make informed investment decisions in opaque private markets. Not so anymore. Smart, informed investors of all stripes can now access a great deal of information. Sure, some information is better than others. Yet still, it is viable for investors of all sizes to play professionally in the private markets.

Market volatility will continue to drive these trends.

Volatility in the publicly-traded markets has also fueled the move into private markets. The trend toward staying private has taken place at a time when volatility in the public markets has been rather high. The last twenty years of the stock market have not helped the cause of public markets either. With three major stock market crises in twenty years (dot.com, housing recession, COVID), many savvy investors are looking for ways to diversify their holdings away from a market that seems prone to large pullbacks every decade or so.

That is not to say that private markets are not subject to volatility as well - they are. It is just that the volatility is 'hidden' due to the fact that the companies are not marked to market at the end of every day. Some would say that is an unfair comparison. The volatility is there, you just don't experience it. Others would say - that is the point.

In private markets you don't experience it, because investor don't have the chance to sell shares in the company on a whim, and artificially affect the valuation in a negative way. In the private markets, companies can be owned and operated with the long-term in mind. If public markets fall, and valuations decrease, private markets companies can just continue on and not force a valuation. Reasonable people can disagree on this. They have disagreed. They will continue to do so.

Investor access is a big (and growing) problem.

A big issue that many in the industry do not like to talk about is that most average investors have no access to the private markets. If they do, it is only manifested in their pension funds. This matters. Much of the growth that is taking place today in the investment world is happening in private companies. If the average investor cannot access private markets opportunities, then they are missing out on a large portion of this growth.

Add to that, many of the companies that do go public do so at a later, more mature stage. That sounds great and less risky, except that the later, mature stage often translates to lower expected investment returns. Many wealth managers I know vehemently disagree with this point. They are wrong, and are often disincentivized to invest in private markets. However, that is a post for another day…

At the end of the day, many of these arguments don’t matter much. All of these things have combined in a perfect storm for the public to private markets transition. Private markets IS the game in town. Only time will tell if this is good for the health of the investment world.

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