Over the past few decades, structural forces have significantly reshaped the roles of public and private equity in the economy. The rise of the intangible economy has allowed many asset-light businesses to meet their capital needs through the rapidly expanding private equity industry, enabling them to stay private for much longer. As a result, the private equity opportunity set has grown substantially, while public equity has seen a sharp decline in the number of listed companies across major economies.
This shift has altered the nature of newly listed companies. Academic research reveals that today’s IPOs involve companies that are, on average, significantly older and larger than those of 20 years ago. For public market investors, this means gaining access to companies much later in their growth journey—if at all.[1]
The implications for portfolio construction are clear. With fewer listed companies, the public markets no longer fully represent the economic spectrum required for diversification. The shift toward private equity has transformed the investment landscape, leaving public equity investors grappling with a narrower and less representative market.
The number of public companies in the U.S. has plummeted from a peak of over 8,000 in the late 1990s to just above 4,000 in recent years (Figure 1). The pace of public listings has slowed to a crawl: between 1980 and 2000, an average of 310 companies went public annually in the U.S., whereas from 2001 to 2011, that number dropped to just 99[2].
This isn’t just a U.S. phenomenon. Similar declines have been observed in other major economies, with large companies in Europe and Asia now overwhelmingly dominated by those in the private space (Figure 2).
A confluence of structural and economic factors has made public markets less attractive to many businesses. Today’s knowledge-based business models are often asset-light, relying on outsourcing for manufacturing, computing, and administrative needs. This lowers the barriers to entry but also makes these companies vulnerable to competition and imitators—risks magnified by the transparency required in public markets.
At the same time, corporate investment has increasingly shifted toward intangible assets, such as R&D and intellectual property, which now outpaces tangible asset investment in economies like the U.S. and U.K.[3] Accounting standards treat these expenditures as expenses, depressing earnings and typically making such companies less appealing to public market investors.
Adding to this the perception that public markets prioritize short-term results, the substantial costs of IPOs (roughly 5% in the U.S.[4]), and rising compliance burdens, it’s therefore no surprise that some businesses are opting to stay private—or to reverse course by delisting.
Even as public markets become less desirable, businesses still need capital. Increasingly, they’re finding it in the private equity space, which has grown more than sixfold since the start of the 21st century to over $3 trillion[5] by 2018 (Figure 3). This explosive growth has positioned private equity as a true rival to public markets in providing business funding.
It is important to note that private equity is a higher risk asset class and as such, investments can negatively perform resulting in loss of capital.
| Year of IPO | $ Raised before IPO | $ Raised in the IPO | Public-to-private fund-raising ratio | |
|---|---|---|---|---|
| 2004 | $25 million | $1.9 billion | 76 to 1 | |
| 2012 | $2.4 billion | $16 billion | 6.7 to 1 | |
| Uber | 2019 | $22 billion | $8.1 billion | 0.37 to 1 |
Source: WTW
For public market investors, the shift can have significant consequences. Academic research[6] reveals that newly listed companies today are, on average, much larger and older than those of two decades ago. By the time these companies hit the public market, much of their high-growth phase is behind them—if they make it to public markets at all. Notably, private equity typically has longer holding periods (5-7+ years) and is far less liquid than public equities. Investors should be comfortable with this characteristic before seeking exposure.
Meanwhile, public markets are increasingly dominated by mature, cash-rich giants (think Big Tech) that generate substantial revenue but could soon face natural limits to growth. From a diversification perspective, the public equity market is becoming narrower, offering fewer opportunities to access the full business lifecycle.
As private equity continues to expand at the expense of public equity, we believe investors reliant solely on public markets may find themselves missing out on a significant portion of the investment opportunity set. Including private equity in investment portfolios could offer access to otherwise unattainable companies with distinct risk profiles—providing diversification and exposure to earlier-stage growth.
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TW has prepared this material for general information purposes only and it should not be considered a substitute for specific professional advice. In particular, its contents are not intended by WTW to be construed as the provision of investment, legal, accounting, tax or other professional advice or recommendations of any kind, or to form the basis of any decision to do or to refrain from doing anything. As such, this material should not be relied upon for investment or other financial decisions and no such decisions should be taken based on its contents without seeking specific advice.
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WTW has prepared this material for general information purposes only and it should not be considered a substitute for specific professional advice. In particular, its contents are not intended by WTW to be construed as the provision of investment, legal, accounting, tax or other professional advice or recommendations of any kind, or to form the basis of any decision to do or to refrain from doing anything. As such, this material should not be relied upon for investment or other financial decisions and no such decisions should be taken based on its contents without seeking specific advice.
We incorporate sustainable investment considerations, including sustainability risks, into our investment research, due diligence and manager assessments. We believe that sustainability risks and wider sustainability considerations can influence investment outcomes from a risk and return perspective. Where sustainability risks and other sustainability considerations are most likely to influence investment risk and return, we encourage and expect fund managers to have a demonstrable process in place that identifies and assesses material sustainability risks and the impact on their investment strategy and end portfolio.
This material is based on information available to WTW at the date of this material and takes no account of developments after that date. In preparing this material we have relied upon data supplied to us or our affiliates by third parties. Whilst reasonable care has been taken to gauge the reliability of this data, we provide no guarantee as to the accuracy or completeness of this data and WTW and its affiliates and their respective directors, officers and employees accept no responsibility and will not be liable for any errors, omissions or misrepresentations by any third party in respect of such data.
This material may incorporate information and data made available by certain third parties, including (but not limited to): Bloomberg L.P.; CRSP; MSCI; FactSet; FTSE; FTSE NAREIT; FTSE RAFI; Hedge Fund Research Inc.; ICE Benchmark Administration (LIBOR); JP Morgan; Markit Group Limited; Russell; and, Standard & Poor's Financial Services LLC (each a "Third Party"). Details of the disclaimers and/or attribution relating to each relevant Third Party can be found at this link https://www.wtwco.com/en-GB/Notices/index-vendor-disclaimers
This material may not be reproduced or distributed to any other party, whether in whole or in part, without WTW's prior written permission, except as may be required by law. In the absence of our express written agreement to the contrary, WTW and its affiliates and their respective directors, officers and employees accept no responsibility and will not be liable for any consequences howsoever arising from any use of or reliance on this material or any of its contents.
