Distinctions between public and private markets have been gradually diminishing. Historically, public markets acted as a significant source of capital and liquidity for growing companies and their shareholders; in recent years, however, liquidity has been shifting towards private capital.
Research estimates that private capital markets (comprising both private equity and private credit) are growing at twice the rate of their public counterparts. As they currently account for only an estimated 6% of the value of corporate equity and credit issuance, there is significant room for further expansion. Meanwhile, the number of public companies in the US, for example, has declined by approximately 40% over the past 20 years, and there is a clear trend globally of companies staying private for longer.
This development has manifested itself across all industries, but has been most visible across technology and the wider digital economy. As new technologies continue to disrupt all industries, investors now hold on to growth-stage tech companies for longer before exiting through listing, resulting in sizeable private companies with multibillion-dollar valuations.
There are numerous drivers attracting both companies and institutional investors to private markets. For the former, these include the prospect of greater control, less scrutiny and fewer regulatory burdens, as well as the emergence of transaction solutions and the naissance of exchanges dedicated to private capital market liquidity that allow shareholders to cash out pre-IPO. For the latter, these include private markets’ recent outperformance of public markets and the prospect of generating higher returns by gaining exposure to the high-growth phase of companies’ development.
Moreover, there is the symbiotic, self-reinforcing relationship of greater volumes of capital becoming accessible to companies prior to going public or being acquired, which serves to draw more companies to private financing solutions at lower costs of capital, in turn attracting an even wider pool of investors interested in backing private companies.
The wider pool from which private capital is drawn is reflected in the increasingly diverse profile of investors that are pursuing these transactions. Investors in any given minority private equity transaction for a growing company, be it primary or secondary, might now comprise a broad variety of alternative asset managers, mutual funds, hedge funds, wealth-management clients, corporates, sovereign wealth funds, venture & growth funds and other forms of non-traditional institutional capital. I’ve previously written on how this latter group have emerged as leading direct investors into buyout-style private-equity transactions; the same can be said of their participation in minority private capital transactions.
Source: Paul-Noël Guély | Forbes
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