Public To Private Equity In The United States: A Long-Term Look

Some good charts from a new MS research note on the rise of evolution of equity markets plus this really good factoid, “…Virtually none of the $1.3 trillion in value that Amazon built was in the private market. Three percent of the value created by Alphabet, which controls Google, was in the private market, and that percentage was about 17 percent for Facebook. And the implied value of Uber in the private market was more than 100 percent of the total value created, as the company’s market capitalization is below what its IPO price implied….”

Michael Mauboussin and Dan Callahan, “Public To Private Equity In The United States: A Long-Term Look,” Morgan Stanley, August 4, 2020, https://www.morganstanley.com/im/publication/insights/articles/articles_publictoprivateequityintheusalongtermlook_us.pdf

MS:“….the mix of tangible and intangible investments has changed over the last 40 years. In the late 1970s tangible investments were nearly double those of intangible investments. Today, intangible investments are one-and-a-half times larger than tangible investments. A watershed change in the form of investment has occurred over a couple of generations.This shift has a few implications for our discussion. To begin, companies need less capital because they need fewer physical assets. For example, sales per employee for Facebook, Inc. were nearly double those of Ford Motor Company in 2019. From 1956 to 1976 the number of public companies grew fivefold, as many companies needed to finance “their mass production and mass distribution.” Today, companies simply do not require as much capital as they once did. This, along with freer access to private capital, allows private companies to remain private longer.Anotherimplication is that the rate of change, which we can measure by longevity, appears to be speeding up. The idea is that if longevity is decreasing, the rate of change is increasing. About 1,500 companies went public during the 1970s, 3,000 in the 1980s, 3,900 in the 1990s, and 2,100 in the 2000s. Companies that had listed before 1970 had a 92 percent probability of surviving the next five years, and those listed in the 2000s had a probability of only 63 percent. The chance of survival has dropped in each successive decade. The main reason companies delist is that they are acquired. This contributes to the last implication.In corporate America, the strong are getting stronger. This is giving rise to “superstar” firms. For example, the gap in return on invested capital between a U.S. company in the top 10 percent and the median has risen sharply in recent decades. Consolidation explains a large part of this. Measures of concentration, such as the Herfindahl-Hirschman Index, have shown a substantial increase for many industries since the mid-1990s. These include industries that rely on tangible assets.When the proper conditions are in place, certain businesses exhibit increasing returns, which include very high market shares and economic profits. Increasing returns are pronounced in intangible-based businesses, and there has been a growing gap between the intangible spending of the large firms relative to small ones.The shift from tangible to intangible assets has had a meaningful effect on the mix between public and private companies. That many young companies have less capital intensity means they don’t need to go public to raise capital. The mix of the companies that are public has shifted to more reliance on intangible investment, which in turn has led to a reduction in longevity. And the economics of information goods, combined with the concentration of traditional industries and the outsourcing of low-value-added activities, means that a handful of leading companies earn much higher economic rents than their competitors and businesses of the past….”