As long-term investors search for their next big growth opportunities, one thing seems certain: They will have to look beyond public equities to find them. Increasingly, companies are delaying going public, with much of their growth — and returns — occurring in private markets.
The upshot? Private markets increasingly are becoming accessible to advisors and their clients.
There is good reason for advisors to consider them. Over the last three years, private equity generated a 33% premium over public equities as of Sept. 30, 2020, according to Hamilton Lane. Looking farther back, private equity and private credit have each outperformed global public equity and credit markets respectively 19 of the last 20 vintage years.
Those return trends could continue, as a confluence of factors encourage firms to stay private longer, experiencing much of their nascent, explosive growth before an IPO. The first factor is control. Staying private always has given executives more direction over their business and strategy. It also shields the company from the volatility that is a natural byproduct of being publicly traded.
The regulatory environment offers another cautionary flag for going public. Regulations are becoming increasingly burdensome and costly and companies might want to consider delaying those headaches as long as possible.
And plenty of capital has given companies time to wait. As of late 2019, private equity companies managed $3.4 trillion in investor commitments, up more than six-fold from 2000, according to a 2019 Kenan Institute report.
Each of these factors plays a role in keeping companies private longer. We see this in the technology space, where the age, on average, of a new public company has gone from 4.5 years in 1999 to more than 12 years old, according to a Skadden 2020 study.
As more tangible examples, Uber and Airbnb, two of the 10 largest-ever tech IPOs, waited 10 and 12 years, respectively, before going public, long after they had disrupted the industries in which they operate.
Growing Opportunity Set
Considering the size and scope of private markets, it's striking how much public equity investors may have been missing. There are roughly 20,000 private companies with annual revenues of more than $100 million, compared to just 3,000 public companies, according to Capital IQ.
For almost two decades, the number of publicly listed companies has been in steady decline. While IPOs increased in 2020 as some companies sought to take advantage of buoyant investor sentiment, the number of companies listed on major U.S. exchanges has still shrunk from more than 7,500 at the beginning of 2000, to less than 5,000 at the end of 2020, according to a University of Florida study.
