The growth of private markets in recent years is both impressive and unprecedented. In fact, private markets assets under management have tripled each decade since 2000. More noteworthy is that the flow of capital across the global economy has changed dramatically to the point where public markets and private markets can be argued to be swapping roles.
Private markets have become an essential driver of growth and innovation in the companies and assets people depend on every day to support the real economy. The data increasingly bears this out—as has been widely reported, since 1996, the number of US publicly traded companies has fallen by half. At the end of last year, 85 percent of US companies with greater than $100 million in annual revenues were private, according to Capital IQ. In terms of capital formation, private markets have raised more capital than public markets in each of the last five years, prompting some to predict that by 2030, private market firms could manage more than $30 trillion in assets. And while private markets fundraising has slowed in 2022 as the macroeconomic environment has become more challenging, the asset classes' long-term trajectory looks unlikely to change.
In contrast, though public markets have long been deemed the "traditional" asset class, constituting the largest allocation in a typical investment portfolio, increasingly they have become a tool to absorb higher valuation companies and reward speculative growth. Look no further than the spree of tech initial public offerings (IPOs) from companies that have never turned a profit. In 2020 and 2021, only 20 percent of IPOs were from profitable companies—a near-record low following a decline since the late 1990s.
In many ways, public markets have decoupled from the real economy, and private markets have filled the gap.
Or look at the recent special purpose acquisition company (SPAC) craze to see evidence of how short-termism and speculation have eroded the strategic element of IPOs for corporate development. In many ways, public markets have decoupled from the real economy, and private markets have filled the gap. In fact, when a company from a more "traditional" sector lists nowadays, the statistics show it is likely to have been taken public by a private markets owner.
This is because although the roles that public and private markets play in the global economy are switching, there is no doubt that both still have relevance for companies seeking capital. Indeed, companies—and their owners—have grown increasingly sophisticated in their ability to play both markets according to their relative strengths in each economic cycle, with IPOs arguably becoming more of a tactical financial instrument for investors. Many other market participants have not adapted as quickly.
While the largest 25 institutional investors have doubled their private market allocation in recent years, the average allocation to private markets among the group is still only 9 percent of total assets—a sum incommensurate with the shift in how companies are choosing to raise capital in today’s market. Retail investors have it worst of all. They remain all but excluded from direct participation in private markets, regardless of their appetite for exposure. Though there has been some progress to expand access to private markets in recent years, the unfortunate reality is the growth of the asset class has resulted in fewer options for retail investors to invest broadly in the real economy.
Addressing these issues starts with the collective realization that, today, private markets are driving the real economy. With that understanding, investors need to carefully rethink their asset allocation. Governments need to rethink how they regulate private markets and who has access. And private markets firms need to work on developing offerings for the retail market, with the increased transparency, liquidity, and standardization that entails, while welcoming regulation that supports such goals. In the end, it is to everyone’s benefit to realize the stock market no longer offers the broad exposure to the real economy it once did, and then reassess how they participate in the real economy going forward.