Question

5. The number of publicly listed firms has decreased by about half over the last 20 years even though the market capitalization of these firms is up more than 20x. Additionally, the 30 largest firms now account for about half of all public company earnings; in other words, firms are getting much bigger. Why has the number of public companies decreased so much? Are firms just getting bigger or are more companies staying private? Why might a firm wish to stay private? What is the role of private equity and particularly venture capital in fewer public companies? What is the impact on the investors and society of having fewer publicly listed firms? What is the impact of having fewer companies making a greater percentage of all income?

Answer 1

Why has the number of public companies decreased so much?

The year 2016 was a turning point for the publicly traded companies. While the number of companies going public had increased considerably post 2008 financial crisis. From the year 2016 onwards, there seemed to be a fall in the number of companies filing for IPO. Market analysts indicated that this was primarily due to the non-conducive IPO environment. The year 2016 saw significant market correction across the globe there was increased volatility, primarily due to inflated market valuations. There were other uncertainities arising due to the political environment (US elections), the macro economic factors also remained unfavorable. Interest rates remained at all time lows, the business confidence index in US and Europe remained shaky. Further, the ability to raise capital privately became easier with the concept of crowd funding being introduced. Also, there are many more private equity investors in the market as compared to earlier when there were not many players.

Are firms just getting bigger or are more companies staying private?

Both these hypothesis are true.

While the existing firms are leveraging technology and achieving better operational efficiency. They are also in a position to reach out beyond geographical boundaries. This has enabled the firms to grow to mammoth propositions. Many such multi-national companies have been able to raise funds locally by listing their stocks in exchanges across different countries using the American depository reciepts / Global depository reciepts.

The new firms are staying private given their abilty to raise required funds privately. Technology has been a key enabler by providing options of raising funds from various parts of the world. Also, there are definitely more investors in the arena. This mode of fund raising enables the company to retain required control and expand meaningfully.

Why might a firm wish to stay private?

Some of the benefits derived by firms while staing private are -

1) Staying private provides the firm the required control

2) Ability to raise only required amount of funds in the manner as required (without dilution of stake)

3) Phased out fund raising to keep the Balance Sheet healthy (no excessive leverage)

What is the role fo private equity and particularly venture capital in fewer public companies?

Venture capitalist typically invest in the company at an earlier stage, when the buisness (or idea) is still in nascent stage. Private Equity typically comes in when the company has a well established growth pattern. The company may be raising funds as a last leg before going public over the next few years. The VC and PE typically invest in companies which are yet to go public. They will be able to gain significant upside when the company goes public and the valuations spike significantly. Hence, their role in public companies is limited to that of other shareholders with the same set of rights / liabilities.

What is the impact on the investors and society of having fewer publicly listed firms?

Investors and society have limited opportunity for investment. However, investors and society opt for other investment avenues. This may also lead to greater spending on discretionary items. This could prove beneficial over the long term.

What is the impact of having fewer companies making a greater % of all income?

This could prove to be detrimental to the economy. From a perfect competition, the economy could move towards an oligopolist economy. This could eliminate the required competition, which is the basic requirement for innovation and free trade economy to flourish.