Musk’s private Tesla dream shouldn’t spook public markets
The number of listed companies may be falling, but public equity isn’t dying
Question: How many companies are in the Wilshire 5000 index of all U.S. stocks?
This is a trick, of course. There are only 3,500, down from a peak of nearly 7,500 in 1997 and roughly 5,000 when the benchmark launched in 1974. There are many reasons to worry about a decline of public companies, but fears about the death of public equity — revived this week by Elon Musk’s potential bid to take his electric car maker Tesla private — are certainly overdone. Why worry? Fewer public companies would mean ordinary investors could miss out on good returns from investing in equities. Also, if more firms are in private hands, it is harder for politicians and the public to monitor and influence corporate behavior. That has real potential consequences for employment, the economy and the environment.
Corporate complaints about being public are well rehearsed. Shareholders focused on quarterly results stymie corporate development and long-term growth. The costs and governance demands are too onerous. One of Europe’s biggest private-equity firms, Partners Group, says public markets suffer excessive “governance correctness,” which restrains entrepreneurial spirit and forces companies to employ independent directors who lack insight. (Ironically, Partners is itself publicly listed.)
The signs of decline are equally well known. Public companies get picked off by deal-hungry private equity, or they use debt to buy back their own stock. There has been a dearth of initial public offerings, especially by $1 billion-plus tech “unicorns,” which remain in the hands of founders and venture capital funds. In the U.S., 2014 was the best year for more than a decade for IPOs, but volumes have been weaker before and since, according to Dealogic.
But is this really a problem with going public? Many entrepreneurs want to keep control of their creations for as long as possible. On top of this, mod- ern businesses simply need less investment to get going, argues Brian Cheffins, a corporate law professor at Cambridge University in a new paper.
Modern company assets are mostly intangible rather than physical: intellectual property, branding and patents rather than machines and buildings. Apple doesn’t manufacture phones and its physical assets are worth $38 billion, a tiny fraction of its $1 trillion market valuation.
Startups today, as in the dotcom boom, still burn large amounts of cash, but Prof. Cheffins says this is to fund growth, not to build the physical capital needed to launch production. And this funding is now available in many forms: not just private capital but also debt, which is made more attractive by tax advantages and an ageing society’s desire to take less risk.
But for all the growth in private assets and corporate debt, public stock markets are still bigger. The market value of all U.S. stocks is higher than ever at more than $30 trillion. That sits against more than $6 trillion of high-grade U.S. corporate bonds at face value and about $5 trillion for all private assets under management globally.
Also, more than half of private-equity owned firms are sold to other corporations, according to PitchBook, a research firm. Like all the startups bought by Alphabet, or SoftBank, many potential IPO candidates still end up in public hands.
U.S. stock markets have fewer companies, but they are bigger. That may mean a concentration of economic and political power, which might be as troubling as a lack of transparency and accountability in private markets. But one thing investors needn’t worry about is the death of public-company equity.