Arial view of Paternoster Square in London

13 Jun 2023

Public or Private

As IPO activity slows on both sides of the Atlantic, what does this mean for investors in public and private assets?

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Having “enjoyed” a morning with the Sunday papers reading various accounts of the relative performance of the UK economy, one undisputable concern is around the London Stock Exchange’s ability to attract UK companies to list in their home country rather than in New York. This debate can be obscured by two further trends, one – probably – short term, the other now seemingly structural. The latter is an important consideration for investors.

To list or not to list?

IPO activity in 2022 was vastly down on 2021 in both London and New York. It is unsurprising that in an uncertain economic environment that translated into volatile equity markets, business owners looking to float their companies may press the pause button. A return to calmer conditions will likely at some point see the resumption of IPO activity.

However, this drop off in activity and its expected resumption must be seen in the context of a longer-term decline in the number of companies that are publicly owned and thus listed and traded on stock exchanges. In 1997 there were over 8,000 listed companies in the US. The latest data (for the end of 2022) has the number at just 3,640. Equivalent declines have been seen in the UK. Since 2000, the average listed company has become older (12 years now vs 4.5 years) as private companies take longer to IPO. Data also suggests that IPOs have become more speculative. In 1990, 85% of businesses had positive earnings at IPO, with the public market thus performing a key role in the financing of the real economy. By 2022, just 21% of companies that IPO’d had positive earnings.

In 1990, 85% of businesses had positive earnings at IPO, with the public market thus performing a key role in the financing of the real economy. By 2022, just 21% of companies that IPO’d had positive earnings.

The corollary of this is that an astonishing 87% of US companies with annual revenues of more than $100m are privately owned (17,000 in total), leaving just 13% (2,600) listed. Capital raising by private companies has been far greater than by public companies every year for the past ten years and private equity giant Blackstone is now the fourth largest employer in the US when you look at all the private companies it owns. Blackstone also happens to be the largest landlord in history, demonstrating that privately held investable assets are not restricted to equities. Indeed, in the case of corporate debt, private providers of corporate loans now have a much larger market share than banks.

What does this mean for investors?

Why is this the case and why does it matter to the investor? The failure of the vast majority of even sizeable companies to ever ‘go public’ reflects the preferences of these companies’ owners, who see the benefit of retaining control and avoiding expensive regulation and unnecessary disclosure that comes with being publicly traded. Increasingly, it would seem, more business owners are coming to the same conclusion. For business owners who are looking to borrow money, they see the advantage of selecting one private lender with whom they can enter into a bespoke lending arrangement rather than using a bank who will put together a syndication of lenders or going to the trouble of issuing corporate bonds to the market.

This matters to the investor because most are limited by regulation and practicalities to investing in securities that are publicly traded yet comprise a small portion of overall economic activity that generates investment opportunities. Publicly traded securities are accessed either directly through a stock broker, platform or wealth manager such as Investec or indirectly via open ended collective investment vehicles, which themselves are typically restricted to holding only publicly traded securities. The reason for this limitation (with a notable exception, which I will come on to) is that the regulator sees huge benefits to retail investors in largely being restricted to publicly traded securities that are liquid and benefit from live price discovery so they can readily access their investments. This holds true for investments in open ended collective investment vehicles which, when offering daily dealing, necessarily need to invest predominantly in liquid (ie publicly traded) securities. In addition, publicly traded equities benefit from the myriad of regulation and disclosure required for companies that trade on a stock exchange. It is similar for publicly traded bonds that require the publication of a prospectus.

Investing in private assets

The notable exception is the investment company vehicle. These closed-ended vehicles can be traded daily on the stock exchange but as they aren’t open-ended, the fund manager doesn’t need to hold a portfolio of only liquid (ie publicly traded) securities. This enables them to hold privately owned assets such as real estate, infrastructure, private debt and private equity. Given the additional investment opportunities such vehicles provide, Investec makes good use of them for many of our clients. Typically our use is greater in the real estate and infrastructure space, where there are many high quality investment companies for us to choose from. Indeed, for most portfolios most of our exposure to these two important asset classes comes from investment companies. For private equity and private debt the choice is far smaller. For example, the size of the private equity investment company universe is a fraction of 1% of the total global private equity market. Whilst we have some good options here, the limitations are clear.

Our approach

Despite the obvious investment potential represented by private assets – equity, debt, infrastructure and property – we should not and cannot dismiss the central lion’s share role public markets will continue to play in investors’ portfolios. In the case of the US stock market, it represents c$40 trillion of assets (and over 3,500 companies to choose from) and the global stock market c$100 trillion. Whilst Aldi and Huawei might be non-publicly traded companies, Apple, Microsoft, Alphabet and Tesla are publicly traded. Virtually all of the largest and best known companies in the world today are publicly traded. Anheuser-Busch, Boeing, JPMorgan, Panasonic and Sanofi to name but a few are big issuers of publicly traded debt.

At Investec, most of our clients’ underlying investments are in publicly traded instruments, benefitting from the liquidity, regulation, transparency and vast opportunity set they represent, overseen by our dedicated Investment and Research Office analysts. This will continue to be the case for the foreseeable future. However, where possible, we do look to private assets to augment our clients’ investment returns. The highly convincing investment case for carefully curated private markets ideas is strong, and likely getting stronger. This will pressure advisers such as ourselves to continue to see how our clients can accrue the benefit from such investments.

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