News headlines have focused on the magnificent seven leadership of the public equity markets and the concentration of the equity indices for the past couple of years. But if you look under the hood, you’ll find a different market landscape with a smaller universe of publicly listed companies.
The Wilshire 5000, originally designed to capture the vast scope of the U.S. market, has seen a dramatic shift since its creation in 1974. Once boasting over 7,500 companies, the index now includes around 3,400 as of December 2023. That’s over a 50% drop in the number of companies since its high and a 30% drop since its formation. And this isn’t just a U.S. phenomenon; it’s happening around the globe as the number of listed public companies has fallen as shown below.
Mergers and acquisitions have been responsible for some of the reduction in the number of companies. Larger companies are buying their smaller competitors or adding additional capabilities to their stable.
However, the largest driver of fewer public companies is that many firms are choosing to stay private for longer or go private due to the availability of capital. Just looking at the data on the number of Initial Public Offerings (IPOs), we see a large fall over the past 20 years and companies taking longer to complete an IPO. Since 2000, on average, 129 companies have gone through IPO with an average age of 11 years. Compare that to over 300 with an average age of 8 years between 1980 and 1999.
As the number of companies listed on stock exchanges reduced, the number of private companies expanded. The chart below shows that public companies accounted for less than 15% of the largest firms in the U.S. in 2020.
One reason for the change is that capital is now more accessible with the growth of the private equity industry. The private equity industry has grown substantially from around $500-600 billion in the early 2000s to $7.5 trillion by 2022. Add to that the significant costs associated with required regulatory and reporting for public companies, and management teams no longer feel compelled to be listed on a stock exchange.
The returns of private equity can be attractive, but they have typically only been available for institutional investors, and they do come with some costs. Private markets are less liquid, less regulated, lack transparency, and can include high levels of leverage. The manager of the private equity fund is critical, not only for picking the right companies but also for having access to deal flow and information.
In comparison, public markets provide liquidity, transparency, and allow a broad base of investors to benefit from company ownership. Even with a smaller universe of listed companies, there are still plenty of investment opportunities, and investors have the ability to own the broad stock market through passive funds or be more selective through the use of active managers.
There is no doubt the private market has become a significant part of the financial ecosystem, but public markets still play a critical role. Investors need to consider whether they are comfortable with the conditions that come with the higher premiums found in private markets or whether they prefer the transparency and easy access found in public markets.
As we explore the current landscape of public and private equity, it’s clear that the shift is creating new opportunities and challenges for investors. Here are the key takeaways from this evolving market:
The decline in publicly listed companies and the rise of private equity mark a major shift in the financial landscape. While private equity offers higher potential returns, it comes with greater risks and less liquidity than public markets. Investors should carefully weigh both options to determine which aligns best with their goals and risk tolerance.
Curious how the shift in public and private equity impacts your investments? Contact us today to explore the best opportunities for your financial goals.
Johnathon Opet, CFP® is a financial advisor located at EmVision Capital Advisors, 251 W. Garfield Rd. Suite 155 Aurora, OH 44202. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at (330) 954-3770 or at info@emvisioncapital.com.
Important Information
This is for informational purposes only, is not a solicitation, and should not be considered investment, legal or tax advice. The information in this report has been drawn from sources believed to be reliable, but its accuracy is not guaranteed, and is subject to change. Investors seeking more information should contact their financial advisor. Financial advisors may seek more information by contacting AssetMark at 800-664-5345.
Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss. Actual client results will vary based on investment selection, timing, market conditions, and tax situation. It is not possible to invest directly in an index. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Index performance assumes the reinvestment of dividends.
Investments in equities, bonds, options, and other securities, whether held individually or through mutual funds and exchange traded funds, can decline significantly in response to adverse market conditions, company-specific events, changes in exchange rates, and domestic, international, economic, and political developments.
Bloomberg® and the referenced Bloomberg Index are service marks of Bloomberg Finance L.P. and its affiliates, (collectively, “Bloomberg”) and are used under license. Bloomberg does not approve or endorse this material, nor guarantees the accuracy or completeness of any information herein. Bloomberg and AssetMark, Inc. are separate and unaffiliated companies.
AssetMark, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission.
©2024 AssetMark, Inc. All rights reserved. 6615928.1 | 05/2024 | EXP 05/2026