Between 2000 and 2018 the number of private equity-backed companies in the US rose from around 2,000 to more like 8,000. At the same time the number of publicly listed companies fell from 7,000 to more like 4,000. The listed firms are still worth more than ten times the private-equity backed ones (being rather bigger).
But you get the idea. These days, if you want to be in the growth game you need to be invested in private markets. That’s why every pension-fund manager you talk to is muttering about getting into private infrastructure, property and bit more private equity. It’s why more and more retail funds are looking to add some unlisted companies to their portfolios (if you want to do this alone and in a small way, incidentally, see our EIS feature in this week’s magazine).
It is one of the main reasons Neil Woodford has come a cropper (read more about Woodford in this week’s cover story). He noted the trend (like everyone else), but rather than dipping his toe into the pool of opacity, manipulation and impossible valuation that is the private market, he dived in very deep. And not just with the cash in his Woodford Patient Capital Trust (majority-invested in unquoted stocks,) but with his income fund too (there is roughly a 70%-80% holding crossover between the two funds. It has not gone well (so far – it could come good of course).
But it is also why policymakers need to start paying attention to the trend. I’ve written about this several times here, but Gillian Tett picks it up in the Financial Times this week too. We are both worried because we both believe that public markets are the “best way to create participatory and democratic capitalism” and the policymakers should therefore support them as much as possible.
How? Tricky one. Companies don’t list as much, or as soon, as they used to – partly because there is plenty of cash sloshing about off-market (so they don’t need to) and partly because sticking to the regulatory requirements of listing is boring and expensive (so they don’t need to).
Neither of those things can be easily reversed. We might, however, chuck in an incentive to list. I’d go for lower corporation tax for public companies over private ones over a certain size. All other ideas on this are very, very welcome – email address here – but financial incentives do have a long and happy history of working very well.
That said, this week Matthew Lynn offers up an exception: fund managers’ performance fees. Turns out they hardly ever work (another black mark against the poor Woodford Patient Capital Trust, which only charges an administration fee and a performance fee).
Why? Because whatever anyone pays you to do it, beating the market on a regular basis is extremely difficult. With that in mind, we also look at the best dividend-paying investment trusts.
They might not always bring you the greatest of capital gains, but their structures make them default long-term investors; they are unable to limit your access to your own money Woodford Income Fund-style; and they have solid records of raising their dividends year after year after year. Which is nice.