The decline of the public company

Amazon warehouse worker © Alamy
Amazon came to market early, allowing investors to profit from its growth

When Elon Musk revealed his intention to take Tesla private, he tweeted that it would be “way smoother and less disruptive” if the company were no longer on the stockmarket. Share-price swings can be a distraction for Tesla’s staff, who own shares in the firm. What’s more, being listed puts “enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily… for the long term”. Musk’s decision is bad news for ordinary investors. It highlights the “long, slow decline in the importance of public equity markets”, says Fidelity’s Tom Stevenson in The Daily Telegraph – and the flipside: what the consultancy McKinsey calls “the rise and rise of private markets”.

A long-standing deal collapses

Ever since the Great Depression, the US Securities and Exchange Commission (SEC) has imposed regulatory burdens on listed companies, says Colby Smith on the Financial Times’ Alphaville blog. The deal has always been that to get access to the savings of private investors, companies have to say what they’re earning and how, “quarter after quarter”. This is irritating administration for boards, but helps small investors evaluate what they’re buying, giving them confidence in the business.

But now companies have backed away from this arrangement because they can get the money they need to fund their development from private markets. In the past few years, “the markets for private capital [have] become deep, sophisticated and global”. Private-equity and venture-capital funds have proliferated and banks have become more involved in the early funding of promising new ventures. So companies now “have access to enough private savings of wealthy citizens”.

As a result, smaller investors have less of a chance to benefit from the growth of companies, and therefore have less of a stake in the expansion of the overall economy. This is likely to undermine faith in capitalism. Jay Clayton, chairman of the SEC, has called the decline of the public company “a serious issue for our markets and the country”. The availability of private funding has made going public less appealing. Instead, companies now list on public markets because their early owners want a liquid market for their own shares. “It’s an exit for the big capital that’s already there,” says Smith. Many companies choose not to go public at all, or they wait much longer before taking the plunge.

The bathtub is draining

The stockmarket is like a “bathtub with the plug pulled out”, says Stevenson. Listed companies are pouring out while new listings don’t come in at the same rate. The number of stocks in the US has halved in the past two decades. The remaining companies tend to be larger and slower growers than previously, so pickings for investors are slimmer. Amazon floated three years after its inception, growing sales by 60% in the first year after it listed. Facebook took eight years to come to market, increasing revenue by a mere 36% in its first 12 months. “Guess which has been the better investment?”