What ‘Private For Longer’ Means for Investors

The case for private market investing often centers around where. With the number of public companies shrinking, the bulk of innovation and dynamism in corporate America is happening at private companies.

But an addendum to the case for private markets should center around when. There is growing evidence that companies are deciding to stay private longer, experiencing more of their growth cycle outside the sphere of public markets.

For investors, the implication is clear: With a steeper part of most companies’ growth curve happening privately, an allocation to private markets is becoming necessary for nearly all investors.

Where and When

The argument about where growth is happening is still relevant. There are only 2,600 public companies with annual revenues greater than $100 million. That’s a small slice of corporate America, where there are 17,000 private businesses of that size, according to Capital IQ.

Further, the size of the public pie is shrinking. At the beginning of 2000, there were 7,810 publicly listed companies. By the end of 2020, it was just 4,814, according to research by Professor Jay R. Ritter of the University of Florida.

Of equal importance, those who do go public appear to be waiting longer to make the jump. Within the technology sector, for example, one study conducted by Professor Ritter found that the average age of a new public company had gone from 4.5 years in 1999 to more than 12 in 2020.

Another indirect way to look at how companies are growing in private markets is through the rise of “unicorns,” those companies reaching private market valuations of $1 billion or more. There have been more than 900 unicorns since 2005, CB Insights states. A study that appeared in the Journal of Applied Corporate Finance found that roughly 60% of unicorns stay private for at least nine years.

In short, that is long enough not just for a business strategy to hatch, but for full-scale disruption of an industry before the company ever experiences its IPO. Uber and Airbnb, two of the largest ever tech IPOs, put the trend of private for longer in context. The two companies waited 10 and 12 years, respectively, before going public. By that time, they had already largely displaced the taxi and vacation industries.

There are a few reasons why companies are staying private:

•  The first is the regulatory headache. The Sarbanes-Oxley Act has increased the regulatory burden on companies. Why face it if private capital remains available to support a business?
•  The second reason ties to the first. Access to private capital has grown considerably. Beyond the growing supply of private funding, a strong secondary market and emerging structures like continuation funds are making it easier to stay private longer.
• The third reason comes down to strategy. “The Street” can hammer a company’s stock if it misses on earnings or looks like it is slipping on the near-term execution of its plan. The longer a business puts off going public, the longer it delays managing quarter-to-quarter expectations so it can focus on the long-term growth strategy.

No One Is Locked Out

If private markets are where more growth occurs, it is essential that more investors are allowed to participate.

New fund structures are opening those markets up. Registered private equity funds, often called evergreen funds, remove some of the traditional private investment hurdles by offering limited liquidity, smaller minimums and eliminating the timing delays associated with funding requirements. There are now more than 150 interval and tender offer funds, and nearly 40 more in registration. The majority of those access private markets in some shape or form.

Traditional risks to private investing still apply. Investors need a long time horizon, and while evergreen funds present some level of liquidity, these funds are still less liquid than a standard mutual fund vehicle. And as more funds are created, performance dispersion among them could increase.

Josh Vail, CAIA, is managing director of Hamilton Lane.