Will the public stock market fade into oblivion? No. But, the reality is that the number of public companies have reached a 50-year low as an increasing number of large private companies choose to stay private for the foreseeable future. According to The Economist, equity issuance net of stock buy-backs is currently at its lowest level since 1999. A convergence of factors has led to this decline, reshaping how companies choose to access capital while also limiting access for public market investors.
Prolonged Private Stays
Companies are increasingly opting to stay private for longer, a strategic decision that is altering the dynamics of the capital markets ecosystem, and limiting who can access high-growth investments. This trend is propelled by various factors, one of the largest being the abundance of capital available in private markets. Private equity funds now manage over $8.2T, double the amount they did in 20181. Because of this, companies seeking capital no longer feel compelled to go public, as private capital offers a viable and often easier alternative. With ample funding opportunities available in the private market, many companies find little incentive to undergo the rigorous processes associated with going public, alongside the ongoing regulatory and reporting requirements.
Macroeconomic factors have exacerbated the pause in IPOs. Market volatility, rising inflation and rates, and geopolitical uncertainty all contributed to a quiet IPO market in 2022 and 20232. Luckily, 2024 has so far painted a different picture with many of these macro headwinds having subsided, leading some to suggest that now is the time to go public. They argue that it’s time for these mature, late stage companies to “grow up” and face the public markets. After all, equity markets are trading near all time highs. Jump in while the water is warm!
Contrary to popular belief though, a buoyant public market and strong macroeconomic environment does not guarantee a hospitable environment for new entrants. Recent history bears witness to numerous instances where companies, buoyed by frothy market conditions, faced a harsh reality upon going public. Especially those that were last valued at an aggressive multiple in the venture market heyday of 2021. Many of these now public companies are paying for it, trading at steep declines from where they IPO’d. For this reason, while market timing is one factor to consider, private companies most importantly need to consider if they have the right combination of financial soundness (ideally including profitability) and growth potential to allure public market investors. In the absence of both, many are choosing to remain on the sidelines, reducing the likelihood of an IPO boom for investors.
Heed the Speed
Public market investors are typically less forgiving than those in the private markets, mainly because of their ability to react to information. The moment there is new information about a public company, investors can trade on it with trades occurring at breakneck speeds. The immediacy with which information is processed and acted upon translates into heightened pressure for public companies to deliver timely and accurate disclosures to investors, while being at the whims of market sentiment.
Meanwhile, private companies have no obligation to regularly share information with investors. Regardless of if and when this information is shared, private market investors are typically expected to hold an investment until an IPO or other exit, even in the case of periods of weak growth or performance. When private investors are able to sell shares pre-IPO via platforms like EquityZen, these sales are typically not seen as a formal valuation mark for the company. This infrequency of marks to market benefits companies by reducing the perceived volatility3 in the value of their stock, another reason why companies choose to stay private. Why weather the ups and downs of public markets when you can sail in smoother waters of the private markets?
For these reasons and others, companies are staying private longer with many growing to be multi-billion dollar businesses while private. This has led to a blurring of the line between public and private. The companies that would have been publicly traded twenty years ago are now decacorns in the private market. The lack of an IPO or exit has created a need for pre-IPO liquidity amongst early shareholders and employees who have held shares of these companies for over a decade in some cases. While there are liquidity avenues for shareholder liquidity in the private markets, like via EquityZen’s marketplace, a public market exit remains the key source of mass-liquidity for shareholders. Ultimately, when this liquidity need becomes urgent, more mature private companies will consider entering the public market.
With a higher cost of capital, the right to tap public market liquidity is not bestowed lightly. The past few years have shown that public market investors no longer have appetite for unprofitable4, growth-at-any-rate companies that are burning cash. For this reason, many IPO contenders have remained private while they focus on steering their businesses towards profitability and growth. Some have even changed their business models completely to meet these expectations. Companies must demonstrate a compelling narrative, backed by tangible growth prospects and profitability metrics to consider an IPO.
The Revival of the IPO?
Despite the dormancy of the IPOs in recent years, recent success stories suggest a resurgence in public market activity. Companies are starting to test the waters, buoyed by renewed investor appetite and favorable market conditions. This resurgence hints at a potential shift in sentiment, albeit against the backdrop of investor caution. Given the warm welcome recent IPOs like Reddit and Ibotta have seen, other IPO-ready companies may be in a good position to make their debut if they choose.
So does the recent uptick in activity suggest a full revival of the public market? Not quite. The diminishing public stock market was not a swift vanishing act, but instead a gradual shift shaped by a number of factors. From the allure of private markets for companies to the sometimes unforgiving nature of public investors, many elements have contributed to a shifting landscape. For many investors, this means tapping the private markets to invest in the innovative, fast growing companies that are shaping the industries they operate in. Otherwise, they may be waiting indefinitely.
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Disclaimer: Not all pre-IPO companies will go public or be acquired, and not all IPOs or acquisitions are or will become successful investments. There are inherent risks in pre-IPO investments, including the risk of loss of the entire investment, illiquidity, and fluctuations in value and returns. Investors must be able to afford the loss of their entire investment.
