In 1996, there were over 7,300 companies listed on U.S. stock exchanges. By 2016, that number had dropped to around 3,600. In twenty years, roughly 50% of investable stock market companies ‘disappeared.’ There are now fewer publicly-traded companies in the U.S. than there were in 1976, even though U.S. GDP is now three times larger. Those companies did not go away - they are now being held privately. Back in 2017, Credit Suisse wrote an article that I think helps to showcase why private markets are so important today. I have included the link to the article below.

I am often asked why I spend so much of my time investing in private markets, because it does take a lot of effort and patience. Well, that stat above is why. It is nice to see that some of the larger tech names are starting to go public. My guess is that many of these companies have a fair amount of early investors that would like to experience some liquidity. I can’t blame them.

However, I do wonder about valuations. Many of the companies that are now going public potentially have already moved through the steepest part of their growth curve. Private markets investors experienced all of those gains. It will be interesting to watch and see if public markets investors can experience similar levels of growth and value appreciation. I tend to be skeptical, but time could easily prove me wrong.

I have been in the markets for more than twenty years, and even I was astounded by this statistic. As an investor of capital for my own family, and an allocator of capital for clients – this data has serious implications.

To name just a few:

Investors relying primarily on the stock and bond markets (S&P 500, ETF’s, etc.) are missing out on the majority of investing opportunities. Most growth opportunities are in private markets – not publicly-traded markets.
Hedge funds, ETF’s, and mutual funds are ‘crowded’ into fewer and fewer available stocks. These offerings have become less ‘diversified’ over time.
ETF’s, high-frequency trading, and algorithmic trading all have changed the very nature of stock market investing within the last decade – and not necessarily in a good way.
More than ever, managing a diversified portfolio in the stock market has become commoditized. The higher value-add in the investing world is access to private market opportunities.
The most important implication: As an investor, if you are not intentionally allocating to investments in the private markets – you are missing the vast majority of investing opportunities today.

As you know, investing in private markets can be difficult – you can overpay for a private company, just like you can overpay for a stock - valuations matter. However, as an investor, the private markets continue to be an extremely important component of portfolio return.

(C) Marc Patterson 2020

The Incredible Shrinking Universe of Public Stocks - Credit Suisse - June 2017

To put it mildly, the last few years have been challenging ones for both the venture capital and private equity funding markets. Companies that raised capital in 2020 and 2021 often did so at a favorable valuation, and with the expectation that they could tap additional rounds of funding a year or so down the line. As we have all discovered, that has not necessarily been the case.

The Incredible Shrinking Universe of Public Stocks

RELATED POSTS: