Question

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

The number of public companies decreased so much due to M&A activity and delistings. It is unable to meet the listing standards of their exchange.

The trend has been driven by declining numbers of IPOs and a higher rate of M&A activity relative to the number of remaining public companies. While an increase in the bankruptcies and insolvencies woul seem a likely additional cause for the decline.

Private companies can now raise late stage venture and other private capital to finance their innovation and investment, often on equal or better terms than in the public markets and with less hassle.

Many founders also believe that private markets are better at allowing them a long term prospective. The private capital market has grown aggressively recently, allowing emerging companies to access more capital without going public. Venture capital firms and private equity funds are aggressively financing emerging companies with the healthy supply of private capital potentially delaying the timing for public offerings. In some cases, emerging companies are being acquired by strategic and financial buyers rather than going public. Venture capital and private equity firms as well as soverign wealth funds have larger amounts of capital to invest. Large companies are establishing venture arms, institutional investors funds focussed on private investing and both are actively searching for ways to invest sizable amounts of capital.

The trend towardsprivate investment has been accelerating. Venture capital investment in private companies has exploded in recent years. In addition debt financing has also been an attractive option as companies are able to borrow at or near all time intrest rates.

Many of the developing companies today are pursuing business models that fit better with the private markets. Under private owners, disruptive companies are better able to take risks, sometimes in unregukated markets. While public markets seek predictability, many of today's new companies benefit from the ability to take risks without intense public scrutiny.

The dyanamics of the market for private capital has also completely altered the financial landscape. Todays emerging companies have more options than ever to find private financing for a longer term aand in greater amounts. The amount of private financing has grown immensely and takes many forms, including venture capital, private equity, and debt financing. The availability of these funds as well recently enacted legislation, has made it easier for companies to stay private longer.