Today, the evolution of the investment landscape means financial advisors have a number of choices to provide their clients, more than at any time in history, including rapidly expanding opportunities beyond public markets such as private investments. Not surprisingly, advisors would do well to take greater advantage of various investment possibilities in seeking new and better means to meet the financial needs and wants of those whose money they manage.

After the rapid growth of mutual funds that accelerated in the 1960s and was then further boosted with the introduction of 401(k) plans in the 1980s, a large percentage of Americans now invest in public markets in some way. The more recent rapid decline in trading costs has further encouraged individuals to venture into public markets, which generally include stocks, bonds, futures, options, commodities, currencies as well as packaged versions of these investments such as exchange traded funds and mutual funds. These investments usually trade on exchanges, offering excellent liquidity, immediate price information, and robust regulation.

Previous to the advent and growth of public markets, individuals with investment dollars generally used private investments because of easier access and familiarity. A neighbor might fund a store in exchange for partial ownership, loans to in-laws were common, and exchanging services or goods often offered excellent returns. Over time, as the United States and global economy grew in size and sophistication, individuals moved away from less sophisticated deals more dependent on relationships toward more accessible and increasingly larger public markets.

Yet, in the last decade or so, this flow appears to have reversed. There are fewer public companies in existence today than there were in 1976 despite a more than tripling in the U.S. GDP over the same time period.  Since 1996, the number of public companies trading in the United States has dropped by more than half from more than 7,400 companies to less than 3,700. While the number of public companies peaked in the 1990s with the rise of the Internet, the drop in public companies that started with the dot-com bust in the early 2000s has continued for numerous reasons. 

Public companies face increased regulation, higher listing fees, dramatically higher disclosure requirements, potential risk of activist investors and seemingly countless areas of greater legal liability. In essentially all of these areas, smaller companies suffer a disproportionately higher cost burden relative to their larger competitors.

While costs have increased, the perceived benefits of going public have also declined. Private companies can now access capital at various stages of growth, often more cheaply and easily than through a public listing, resulting in private companies building most, or at least a much greater percentage, of their value before going public.

Feeding the rise in private markets and decline in public companies over the past few decades, larger entities such as college endowments and pension funds have markedly boosted their investments into increasingly sophisticated private investments as they seek to add alpha to their portfolios. A 2018 McKinsey & Company survey noted, “… 90 percent of LPs (pension funds) said recently that private equity (PE), the largest private asset class, will continue to outperform public markets…” (Source: McKinsey & Company, “The Rise and Rise of Private Markets”, McKinsey Global Private Markets Review 2018, p. 3)

The growth in private capital funding in much later phases of company development has made it harder for advisors who focus on standard equities to gain exposure to younger and smaller companies. In 2017, the average age of a publicly listed company was about 18 years old versus only 12 in 1996.

Facebook was a multi-billion-dollar company before it listed, and multi-billion -dollar companies Uber and Airbnb remain private. Compare these companies to Amazon, which listed as a small-cap stock in 1997 at a market value of $438 million. Those who took an early position in Amazon have shared in its growth to a nearly $1 Trillion colossus, while many advisors have been shut out of Uber and Airbnb.

As a result, advisors managing portfolios without private equity holdings may be missing out on considerable gains, and lack diversified exposure to the U.S. economy. In addition, concentration risk appears higher as few public companies operate in certain industries and sectors.

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