The Only Constant in Markets is Change
Ask a CIO #29
Happy New Year! I hope you had a wonderful holiday season with an opportunity to relax and recharge. We here at Ivy Invest are excited to start the year with a key product update.
Our mission has been to give individuals access to the investments, strategies, and opportunities typically held by institutions. Our endowment-style portfolio, which is invested across public and private markets, is now available to investors starting at a $1,000 investment minimum, with no wealth or accreditation requirements. When we said access, we meant it.
Whatever your resolutions and goals for 2025 may be, I’m rooting for you too. Cheers to a promising new year ahead.
This week’s question follows up on an earlier newsletter on the rise of private credit displacing public credit.
If debt markets are going private and fewer privately held companies are going public than in prior years, what does that mean for public and capital markets going forward?
This is a great question. It’s also a tough question. I don’t have any definitive answers here, but I do have a number of observations to offer.
If I could be overly simplistic for a moment, capital markets serve to connect those that have capital (investors) to those that need capital (companies). If we say that any given funding could be completed in the public or private market, then I think there are really only two variables determining the decision.1 The first is the amount of private capital available to the company. And the second is whether the company chooses private capital or public capital.2
What we’re seeing in the rising availability of private capital is that the first variable is becoming less of a determining factor. There is evidence of ample private capital to meet even very large funding needs.3 Which leaves the second variable. I won’t predict how companies will evaluate the tradeoff between private and public capital in the coming years, but I’ll share a few datapoints below, some of which you probably already know.
In 1996, there were 7,300 public companies in the U.S. Today, there are 4,300. Over the same period, U.S. private equity owned companies have grown from 1,900 to over 11,200.4
There are over 19,000 private businesses in the U.S. with annual revenues of more than $100 million. There are fewer than 3,000 public companies of that size.5
Take-private volume has outpaced IPO volume by 3.5x since 2022.6
In other words, within equity markets, companies have been choosing between public or private capital for some time. I expect that capital markets, along with implications for investors, will continue to be shaped by these discrete company decisions and the incentives behind them.
Since the earlier newsletter focused on private capital displacing public capital in credit markets, I’ll stay for a moment on equity markets here. As compared to private equity, public equity markets offer greater investor protections, regulatory oversight, access, and of course, liquidity. The more companies are funded through public capital markets, the more overall corporate transparency and economic data available to all investors.
Is greater corporate transparency better for the economy and society more broadly? Almost certainly. Are companies going to voluntarily subject themselves to stringent regulatory requirements, quarterly reporting, and (potentially worse) shareholder activism? Almost certainly not. Jamie Dimon acutely highlights this tension in his April 2024 JPMorgan annual shareholder letter.7
As the total availability of private capital increases, you could imagine more scenarios where, depending on the size of the company and equity value, the company stays private indefinitely (possibly moving from sponsor to sponsor) until an ultimate sale to a strategic acquirer. In these circumstances, all the value would accrue exclusively to private market investors.
For companies past a certain size, however, public equity markets are likely to remain the only viable source of liquidity for private shareholders to monetize their ownership positions. But even here, the growth of private capital raises questions around potential shifts in value capture. As companies have the option to stay private for longer, it’s unclear how much more of any company’s total value creation will be harvested by private capital investors before public market investors have a chance to participate.
On the topic of implications for investors – in my previous discussion on the expansion of private credit, I noted that investors will have to adapt to the changes in the capital markets. I stand by that sentiment. At the time, I also said that investors can choose what they invest in, but not what the investment universe looks like.
If I’m being fully circumspective, that statement is not wholly accurate. The ongoing privatization of capital markets exists in no small part due to institutional investors who have pushed their dollars toward private markets. And in doing so, those dollars have incentivized the growth of private market solutions for companies. In this way, institutional investors collectively, if unintentionally, have shaped and continue to shape the universe of investment options.
Of course, institutional investors are not a monolith. These large pools of capital all operate independently of one another, usually with the singular mission of achieving the highest returns within the investment frameworks set by their institutions. And when each looks out at the available universe of investments across public and private markets, the answer continues to be – private market investments are compelling.
Through a simple game theory lens, investors, both retail and institutional, would probably be better off in aggregate if all investors prioritized public market investing and minimized private market investing. Any one institutional investor, however, would probably be better off capitalizing on the opportunities available in the private markets. The Yale Investments Office captured that advantage as an early mover into private markets. And institutional investors of all shapes and sizes now make the same choice that Yale started making decades ago, which of course has fed into the current state of capital markets.
If investment surveys are any indication, private market allocations are poised to continue growing.8 Which means private market capital will increasingly compete with public market capital across credit, equities, and everything in between. If public markets potentially become less attractive from an investment standpoint, the impact could be greatest on those that are limited to investing in public markets. Investors with other options will likely adjust by moving capital to those other options. And that is in fact what many institutional investors are already doing.
To wrap up this longer than usual newsletter (thanks for bearing with me), I don’t think there is going to be some sudden dramatic change in capital markets. I do think the trends already underway will continue. Private markets will continue to grow, but public markets will continue to be important providers of capital, at least for the largest companies. That said, as more companies choose from funding options across the liquidity spectrum, investors able to evaluate opportunities and invest flexibly across that liquidity spectrum will be better positioned.
Thanks to everyone who has shared great and thought-provoking questions with me so far! Please keep reaching out in 2025: askacio@ivyinvest.co.
Until next week,
Wendy
Let’s put aside companies that the public market isn’t willing to fund and focus on companies that can choose between private capital or public capital. It would stand to reason that these are going to be higher quality companies where investors are willing to compete to some extent to fund these companies.
Broad strokes, private market capital is typically more costly than public market capital, but it also often has the benefit of more flexible terms.
SpaceX is perhaps the most notable example and will provide an interesting case study regardless of when it goes public (given the size, I have to think that it’s when, not if).