Where Have All the Public Companies Gone?


Some businesses are staying private. Others are getting bigger. That’s not necessarily a problem.

Not right for every company. Photographer: Spencer Platt/Getty Images

The people who supervise the U.S. stock market are grappling with what they see as a troubling trend: One of the great innovations of Western capitalism — the public company — appears to be losing ground.

Before deciding what to do, they should first ask whether this is a problem at all.

Since the creation of the Dutch East India Company in 1602, the public company has been a central fixture of the global economy. It enables enterprises to raise money from the broadest possible group of investors. It allows just about anyone — from hedge-fund magnates to regular folk — to take a stake in what could be the next Apple Inc., or gain a say in how some of the world’s biggest businesses are run. As such, it has brought a measure of democracy to the corporate world.

Lately, though, the universe of such companies has been shrinking in the U.S. New businesses have been offering shares to the public at less than half the rate of the 1980s and 1990s. Mergers and acquisitions have eliminated hundreds more. About 3,600 firms were listed on U.S. stock exchanges at the end of 2017, down more than half from 1997.

Where Have the Public Companies Gone?
Sources: Jay R. Ritter, Warrington College of Business Administration, University of Florida; University of Chicago Center for Research in Security Prices

Why has this happened? Some blame regulation — notably, the 2002 Sarbanes-Oxley legislation, designed to counteract the accounting frauds of the 1990s, which added to the reporting and liability burdens imposed on public-company managers. (The U.S. Chamber of Commerce, an industry lobbying group, has made rolling back regulation a priority for this year.) Yet that can’t be the whole story: The decline began in the late 1990s, well before Sarbanes-Oxley. Much of the earlier shift was probably payback for the abundance of poorly conceived companies that came to market in that exuberant decade. (Remember Pets.com?)

So fewer public companies isn’t necessarily bad. (Bloomberg LP, for the record, is private.) Measured another way, moreover, the public company is far from dead: Though they’ve decreased in number, such firms have grown in size. Their total market value, as a percent of gross domestic product, is close to the peak reached in 1999:

Fewer But Bigger
Source: World Bank

Granted, size might be an issue in itself. Fewer, bigger companies could reflect an unhealthy degree of industry concentration. Again, though, it’s dangerous to generalize: In many cases, concentration could be benign — a natural outcome of technological innovation and globalization, which have allowed the most productive and profitable companies to dominate. Where lack of competition is a problem, it’s best addressed case by case through antitrust policy, as the Justice Department is seeking to do in the media sector.

Whatever the cause — ill-judged regulation, the drive to accrue market power, other factors altogether — the shifting pattern of corporate form raises big questions. Are the traditional purposes of public ownership under threat? Are businesses being deprived of capital? Are people being excluded from attractive investment opportunities? Do shareholders still have a say in how companies are run? Consider each in turn.

First, access to capital. Once upon a time, selling shares to the public was an important way for companies to raise money — and for early investors to cash out. That’s no longer the case. Companies such as Uber and Airbnb can attract tens of billions of dollars while remaining private. And venture-capital firms increasingly sell their holdings directly to existing public companies, which have the global reach needed to expand young businesses quickly (think Facebook buying WhatsApp). As of 2017, just 15 percent of venture-capital exits involved initial public offerings:

Who Needs IPOs?
Sources: Jay R. Ritter, Warrington College of Business Administration, University of Florida; National Venture Capital Association. Data for 2016 and 2017 are adjusted to match previous years, which exclude unsuccessful deals.

Does this mean regular investors are missing out? Not really. For one, they can invest through mutual funds or the shares of the companies doing the acquisitions — an approach with a better risk-reward profile than making a bet on a single unproven business. Beyond that, an average Joe in an index fund can get returns pretty similar to what investors in private companies do. Adjusted for risk, private-equity investments of recent vintage have actually lagged public markets:

Private Doesn’t Beat Public
Source: “A Bottom-Up Approach to the Risk-Adjusted Performance of the Buyout Fund Market,” by Jean-François L’Her, Rossitsa Stoyanova, Kathryn Shaw, William Scott and Charissa Lai
*Adjusted for size, sector and leverage.

What about governance? Control of private companies falls into fewer hands, but that’s also true of some public companies with dual-class share arrangements. In both public and private markets, the biggest shareholders include institutions — such as mutual and pension funds — that represent broad swathes of the investing public. The most important difference is disclosure: Public companies provide a lot more financial information, valuable in assessing both their performance and that of the broader economy.

So what should regulators and Congress do? There are ways to reduce the burden of being public without impairing the benefits. Discouraging companies from using boilerplate legalese in regulatory filings, for example, would cut busy work and help investors. Elsewhere, “do no harm” is good advice. A case in point: Last year’s hastily passed tax reform limited the deductibility of executive pay at public companies to $1 million –- a needless tax on going public that legislators ought to reconsider.

Lightening disclosure requirements to encourage more public offerings would be counterproductive. Transparency is good for investors, makes U.S. markets more attractive, and lowers the cost of capital for companies. The experience of Regulation A+, an effort to ease requirements for early-stage companies under the 2012 JOBS Act, suggests that the existing rules weren’t excessive: The companies it helped to go public have performed dismally.

Jay Clayton, chairman of the Securities and Exchange Commission, has called the seeming decline of the public company “a serious issue for our markets and the country.” So far, nonetheless, he has trodden lightly — and that’s wise. Tweaks such as allowing pre-IPO companies to file draft documents confidentially, and possibly “test the waters” by holding private talks with investors, pose little risk. But it would be a mistake to go further. The public company is not as imperiled as the numbers suggest, and the market for capital isn’t broken.

The U.S. has long been the world leader in defining what a public company should be. Reviving that model by undermining what makes it so valuable would serve no purpose.

Source: David Shipley / Bloomberg

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