Before it listed on the stock market in 2004, Google had raised a mere $25 million privately. Today, there are companies raising more than 500 times that amount. Would Google (now Alphabet) list at such an early stage of its growth today? Not a chance.
The emergence and growth of private markets have played a pivotal role in reshaping how companies finance themselves. Investment strategies had to change too, but also how investors access the market.
Previously, only institutional investors had the keys to this opportunity but access is broadening, with increased participation from high-net-worth individuals and retail investors. Regulatory developments and product innovation have paved the way.
What’s changed?
In the US, over 300 companies a year, on average, joined the stock market between 1980 and 1999. Since, there have been only 127 a year. Alongside a lack of new entrants, M&A-driven de-listings have consistently reduced the stock of existing companies on the public market. The number of US listed companies has dwindled by nearly half since the 1996 peak. And this is the much-vaunted US market. Others are mostly worse.
Figure 1: Far fewer companies are listed on major stock markets than in the past
This is down to a combination of the increased scale of the private equity industry (which can now write bigger cheques) and an increase in the perceived cost and hassle of a stock market listing. Companies are staying private for longer and more of the returns are being captured by private equity investors. Investors who don’t incorporate private assets in their portfolio risk missing out.
In debt markets, there has also been a notable shift to private markets. The private debt industry has grown considerably, while traditional bank-lenders have stepped back from many markets due to post-financial crisis regulatory changes. This has provided an opportunity for private lenders to step in.
It’s important not to conflate private debt with direct lending. Many use these terms inter-changeably but the largest part of the private debt universe is asset-based finance, which is fundamentally different. Direct lending, representing about $1.7 trillion of loans, is private corporate lending. Asset-based finance, representing more than $13 trillion of loans, includes commercial real estate debt, infrastructure debt, consumer debt (auto loans, credit cards, student loans, etc), and receivables or lease finance. A key distinction is that asset-based finance is secured on, and repaid by the cashflows from, specific assets. Direct lending is repaid out of general corporate cashflow so is correlated with the corporate risk present in traditional bond portfolios.
What is the appeal of private assets?
1. Provide higher returns/income.
Private equity buyouts have outperformed US large and small caps by a significant margin (net of fees) over the long run. And private debt offers a yield pickup over corporate bonds. The secured nature of asset-based finance also helps to provide a more stable return profile than corporate bonds.
Figure 2: Private assets typically outperform, net of fees
Figure 3: Private debt offers a yield pick-up over public bonds such as high yield debt
2. Provide access to a broader range of exposures, industries, or outcomes.
