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Here’s the rub. Most individual investors predominantly invest in listed assets. Yet much of the growth, innovation and value creation taking place today is in the private markets arena.

Institutional investors have long recognised this.

The latest Preqin Investor Outlook reported that 80% of the investors surveyed now have allocations to at least one private asset class, while 39% have allocations to three or more1. CalPERS, the biggest public pension scheme in the US, recently reaffirmed its commitment to the sector with plans for a multibillion-dollar push into international venture capital in their hunt for higher returns and diversification.

Private equity remains the most popular private sector segment, according to the Preqin report, with over a third of respondents planning to allocate more capital to PE in the coming year. Meanwhile, private debt has emerged as the standout performer, with 90% of those surveyed saying it had met or exceeded their expectations over the past year. And 53% predict private debt will perform even better over the next 12 months.

De-equitisation is shrinking the public market universe

Why this allocation to private markets? In essence, opportunity and shrinking alternatives.

Major public markets are “de-equitising”. As Robert Buckland, the former Citigroup chief global equity strategist who coined the term de-equitisation, observed: “It makes little sense for listed companies to issue more equity or unlisted companies to float.”2

Just 34 companies publicly listed in Europe in the first half of this year, the lowest number since the global financial crisis. Association for Financial Markets in Europe figures show companies raised €2.4 billion through IPOs in the first half, a 42% fall on H1 2022 and the lowest total since 20093. In EMEIA, there are now 40% fewer publicly-listed companies than in 2002.

Part of the reason is many UK and European businesses are opting to float in the US, drawn by its larger capital pool and higher valuations.

Even here though, de-equitisation has taken hold. The US saw 75 companies float in H1 2023, raising $11.5 billion, the lowest volume and value since 2015. Delistings have shown a steady upward trend globally since 2012, with a particularly steep rise in the Americas and APAC. Buckland noted that available stock in the US public market has shrunk by about 1% a year since 2000.

A 2022 study found the total number of publicly-traded firms in the US has halved since the late 1990s4. As a result, the market is roughly the same size as it was in 1991, despite a tripling of the overall economy over that period. This long-term stock market shrinkage “is associated with higher levels of cash dividend payouts by firms, slower rates of profit and revenue growth, and less firm-level risk, all of which point to an average firm that is later in its lifecycle.”

Private for longer

Companies are choosing instead to stay private for longer. A 2022 Hamilton Lane article noted that the average age of a new public company within the technology sector had increased from 4.5 years in 1999 to more than 12 years in 20205. Roughly 60% of unicorn companies (those reaching private market valuations of $1 billion or more) stay private for at least nine years.

Multiple reasons are at play. Going public involves sizable initial listing expenses, onerous ongoing regulatory compliance and complex accounting obligations. Private companies are accountable to a smaller group of shareholders. They can retain more control over the strategic direction of the business and day-to-day operations, with less short-term scrutiny of performance, transactions and expenses.

Limited public returns

With private investors capturing a greater share of returns prior to going public, noted former banker Satyajit Das, public investors may suffer in the long run, “as evidenced by the poor post-IPO performance of many private investor-owned companies after adjustment for market movements.”6

FT analysis of Dealogic data shows that of the more than 400 listings where companies raised at least $100 million between 2019 and 2021, more than three-quarters are below their IPO price, with a median post-IPO return of minus 44%7.

And as many businesses opt to stay private for longer, “public markets risk becoming narrower, limiting diversification opportunities,” Das added.

With companies experiencing more of their growth trajectory outside the public market domain, allocations to private markets have become essential. Individual investors increasingly appreciate this. But without the investment allocation sizes of institutions, they have hitherto been unable to tap into those private market opportunities.

Fortunately, that is now changing.

This content is for information purposes only. Treble Peak does not provide investment or tax advice, and information on this website should not be construed as such. Potential investors should seek specialist independent tax and financial advice before investing in any alternative investment.  Past performance is not a reliable guide to future returns. Your capital is at risk.

  1. Preqin, “Investor Outlook: Alternative Assets, H2 2023“, 22 August 2023
    https://www.preqin.com/insights/research/investor-outlooks/preqin-investor-outlook-alternative-assets-h2-2023 ↩︎
  2. Robert Buckland, “The logic of the de-equitisation trade“, The Financial Times, 10 August 2023
    https://www.ft.com/content/d18984e6-e6c7-4ca1-8e29-fba2c7696b5e. ↩︎
  3. Julio Suarez, “AFME Q2 2023 Equity Primary Markets and Trading Report“, AFME, 2 August 2023
    https://www.afme.eu/publications/data-research/details/afme-q2-2023-equity-primary-markets-and-trading-report ↩︎
  4. Michael B. McDonald, “The shrinking stock market“, Science Direct, Journal of Financial Markets
    Volume 58, March 2022, 100664
    https://www.sciencedirect.com/science/article/abs/pii/S1386418121000458 ↩︎
  5. Hamilton Lane, “Private Market Investing: Staying Private Longer Leads to Opportunity“, 14 April 2022
    https://www.hamiltonlane.com/en-us/insight/staying-private-longer ↩︎
  6. Satyajit Das, “Expanding private markets are redefining their public counterparts“, The Financial Times, 21 July 2023
    https://www.ft.com/content/89308f78-f8e8-403e-ab4b-a7df17accb56 ↩︎
  7. Sujeet Indap, “Private equity circles fallen stars of pandemic IPO boom“, The Financial Times, 18 October 2022
    https://www.ft.com/content/3f3642f4-598d-4f9a-92a7-4980891c766e ↩︎