Columbia’s Millstein Center for Global Markets and Corporate Governance recently pulled together the numbers.
Although the market value of public companies has held steady as a percentage of gross domestic product, the number of exchange-traded companies is now half of what it was in the late 1990s.
Over the same period, meanwhile, the number and size of private equity deals has more than tripled. Deals exceeding $1 billion, once rare, now account for a third of purchases by private equity funds, which are holding on to their portfolio companies longer and often selling them to other private equity firms rather than taking them public.
Venture capital — the other source of private capital — is also expanding rapidly. Since 2009, the number of VC deals has doubled while the amount of money invested has increased five times .
Once unheard of, “unicorns” — private companies with market values in excess of $1 billion — now roam freely across the entrepreneurial landscape.
“While public stock markets no doubt remain important, they are no longer the only game in town,” the Millstein Center report concluded.
Of course, if Wall Street wants to know who is most responsible for this loss of market share, it need only look in the mirror.
The number one reason executives dislike going public is that the Wall Street herd of traders, analysts and “activist” investors will insist that they deliver double digit earnings growth each quarter, or their share prices will be pummeled and they will eventually lose their jobs. In such an environment, it’s not wonder that so many shy away from making risky long term investments and never even consider sharing profits with employees. They will be richly rewarded, however, for loading up the company with debt, selling assets, dodging taxes, outsourcing jobs and buying back shares.
Executives also know that the process of taking company public will require them to pay hefty tax to the investment banks, law firms, brokerages and exchanges who act as gatekeepers to the public markets and earn outsized profits from their cozy price-fixing cartel.
In a recent speech, Robert Jackson, a new Democratic member of the Securities and Exchange Commission, noted that while technology and competition had driven down prices for almost every other good and services in the economy, 96 percent of middle market companies still paid the exact same 7 percent in fees that prevailed when he was an investment banker 15 years earlier.
“The concentration of power in our capital markets — and the SEC’s failure, in the past, to grapple with its implications — has left us with a marketplace in which investors have only the slimmest menu of choices,” said Jackson.
Wall Street, of course, dismisses any suggestion that it is responsible for the shrinking of public markets, preferring to blame it — you guessed it — on excessive government regulation. In this case, that refers to the regular disclosures that public companies are required to make of their quarterly financial results and any material changes to their business.
Companies reflexively gripe about the cost and legal risks associated with these disclosures, and for smaller companies, this may be a valid complaint. That’s why Congress recently provided some relief to them in that regard. But for large private companies — those with revenue of more than $250 million — that complaint rings hollow, inasmuch as virtually all of them are already producing such reports for lenders and equity investors.
The bigger reason executives dislike disclosure of their operations, strategy and financial performance is that they believe it puts them at a competitive disadvantage. Perhaps more to the point, it also subjects executives to unwanted and sometimes unjustified public criticism that private company executives rarely face.
There’s a good argument to be made that public policy should aim to level the regulatory playing field between public and private companies. But the better way to even out those differences is not to allow public companies to disclose less but to make big private companies disclose more.
After all, whether public or private, big companies have significant impact on a wide range of stakeholders beyond investors — customers, employees, pensioners, creditors, suppliers and neighbors. Those stakeholders are entitled to know the basic facts about the companies they do business with, work for, contract with or invite into their communities. More generally, there is a significant public interest in these firms that flows from the fact that they borrow money from government-insured banks, insure their workers’ retirements at the government’s pension guarantee corporation and are entitled to have their debts forgiven or restructured at government-run bankruptcy courts. Such valuable public benefits justify a measure of public disclosure.
In addition to traditional financial reports, large private companies should be required to state their purpose and values, to disclose what products and services they sell and in what markets they sell them, and to state concisely their short and long term strategic goals. They should be required to disclose how many employees they have and where they operate, and to list their top executives and directors and shareholders Their largest creditors, suppliers, customers and competitors should also be included. Disclosure should also be required of any major legal or regulatory actions that they face or are involved in, what taxes they paid and how much spent, directly or indirectly, on lobbying and political contributions. They should be obligated to calculate the range and median of the wages and salaries they pay and state whether and how it shares profits with employees, what fringe benefits they offers and the degree to which its pension fund is funded.
This is hardly a radical idea. In Britain, as part of an effort to rebuild trust in business, the conservative government announced a new “corporate governance code that, beginning this year, will require all companies to make just such public disclosures, whether they are public or private. The business community seems to have taken the new mandate in stride.
Here in the United States, such disclosures would help to accelerate development of new markets in which the wealthy, sophisticated investors who now own stakes in private companies could sell them to other wealthy, sophisticated investors. It would also pave the way for the Securities and Exchange Commission to allow small investors to buy into privately owned companies and the private equity funds and venture capital funds that invest in them — if not directly, then through a new class of professionally managed mutual funds. Such developments would increase the supply and lower the cost of equity capital for private companies, reducing further the incentive to take their companies public.
Despite the dire warnings from the Wall Street cartel, there is simply no reason we should favor having more companies listing their shares on public exchanges. By requiring all companies to make annual disclosures and allowing all investors to buy into private companies, the decision whether to go public or remain private can be left where it rightfully belongs — with the companies and investors interacting in an open and competitive market.
Steven Pearlstein is a Post business and economics columnist. He is also Robinson Professor of Public Affairs at George Mason University. His book, “Can American Capitalism Survive?,” was recently published by St. Martin’s Press.